Statutory corporation tax deduction announced for employee share schemes
The Chancellor announced in the Pre-Budget Report on 27 November 2002 that a statutory corporation tax deduction would be introduced for companies in respect of the cost of providing shares for employee share schemes. The new legislation will apply to accounting periods beginning on or after 1 January 2003.
Until now, employers wishing to claim a corporation tax deduction have had to rely on a mixture of statutory provisions and case law.
The new statutory deduction will be available for employee share schemes where the employees are subject to UK tax when the shares are issued and allotted or transferred to them (or would be if the shares were not acquired pursuant to an Inland Revenue approved scheme or Enterprise Management Incentives (EMI)). The Government suggests that the introduction of the statutory deduction will not only provide certainty to companies in respect of their employee share schemes, but will also reduce the cost to companies of establishing such schemes by making it unnecessary to set up a trust in order to generate a corporation tax deduction.
The rules relating to Qualifying Employee Share Ownership Trusts (QUESTs) will be changed to remove duplication. Companies using QUESTs in conjunction with SAYE schemes will continue to receive a corporation tax deduction under the new rules.
The Pre-Budget Report also contained details of an anti-avoidance measure that is to be introduced in relation to employee benefit trusts (EBTs). EBTs are used by employers to provide remuneration and other benefits indirectly to employees and the Inland Revenue believe that some EBTs are being used to avoid paying income tax and national insurance contributions (NIC). The anti-avoidance provisions will defer the contributor's corporation tax deduction until a payment is made out of the EBT in a form that gives rise to a liability to income tax and NIC. Draft legislation has been published which will form part of the Finance Bill 2003 and will apply to the computation of profits for accounting periods ending on or after 27 November 2002 in respect of deductions for employee benefit contributions made on or after 27 November 2002. However, this legislation will not apply to companies providing share-related benefits through a trust which operates in conjunction with an employee share scheme, provided the shares are qualifying shares.
The information provided by the Inland Revenue about the new statutory deduction does not refer to the position of companies with employees who are not UK resident for tax purposes and who are taxable under Schedule E Case II or Case III, but the Inland Revenue has confirmed that the intended effect of the proposed legislation is to enable companies to obtain the deduction for these employees. As regards options granted by a UK parent company to employees in overseas subsidiaries, they will not trigger a corporation tax deduction for the UK parent since, in the view of the Inland Revenue, the employment costs will be borne by the overseas subsidiary. The availability of any corporation tax deduction in the subsidiary will depend on where the subsidiary is located and the applicable tax rules in the relevant jurisdiction. The Inland Revenue expect that any costs incurred in the UK parent company will be recharged under the transfer pricing rules within the international group.
The legislation relating to the statutory corporation tax deduction will form part of the Finance Bill 2003 and, according to the Inland Revenue, will be published "shortly".
For more information about the proposed corporation tax deduction or about employee share schemes generally please contact Kate Kelleher (share schemes partner) in the London office at kate.kelleher@cms-cmck.com or on +44 (0)20 7367 2860.
