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BIM44255 | Specific deductions: employee share schemes: providing shares to employees: Share Incentive Plans: general rules: special rules for trusts acquiring 10% of ordinary share capital

From HM Revenue & Customs · Business Income Manual

S989-S993, S998 Corporation Tax Act 2009

A special statutory deduction in computing trade profits is allowable for certain contributions to Share Incentive Plan (SIP) trusts. The deduction is dependent on the company’s contribution being used by the trustees to purchase shares:

  1. in the company or a company which controls it;

  2. from an existing shareholder which is not a company;

  3. which give the trust a holding of not less than 10% of the total ordinary share capital of the company in the 12 months immediately following the initial purchase of shares made with this money (to allow time to administer and pay for a substantial acquisition of this sort).

A deduction for the company’s contribution is given for the period of account in which the 12-month period mentioned in (3) above ends.

Shares already awarded to employees under the SIP, as long as they continue to be subject to the SIP, count towards the calculation of the 10% holding of the trust.

No deduction is allowed if the payment is made pursuant to tax avoidance arrangements entered into by the paying company. These are arrangements where the main purpose, or one of the main purposes, of the company entering into them was to obtain a deduction or an increased deduction.

The full amount of the deduction is withdrawn if:

  • less than 30% of the shares acquired with the payment have been awarded to employee beneficiaries within five years, or

  • all the shares acquired with the payment are not awarded to employee beneficiaries within ten years.

Where the deduction has been withdrawn and all of the shares acquired with the relevant payment are subsequently transferred to employees, the deduction is given again for the period in which the last of the shares is awarded to the employees.

The deduction is also withdrawn in full if the scheme does meet the necessary conditions to be a Schedule 2 SIP and a withdrawal notice issued by the Employee Shares and Securities Unit. The deduction is also withdrawn in part if:

  • shares acquired with the payment are awarded to an excluded employee (generally a non-UK resident employee); or

  • the paying company issues a plan termination notice at a time when not all of the shares acquired with the payment have been awarded to employees.

In the case of shares awarded to an excluded employee, the amount withdrawn is the proportion of the payment that the number of shares awarded to the employee bears to the total number of shares acquired with the payment. In the case of a plan termination notice, the amount withdrawn is the proportion of the payment that the number of shares not awarded bears to the total number of shares acquired with the payment.

In all cases, withdrawal is made by a notice issued by the Employee Shares and Securities Unit. The effect of a withdrawal notice is to treat the amount of the deduction or part as a trading receipt of the company for the period of account in which the withdrawal notice is issued.