BIM44411 | Specific deductions: employee share schemes: providing shares to employees: qualifying shares: cash cancelled and net settled share options: deductions allowable

S1038A(7) Corporation Taxes Act 2009

For Cash Cancelled and Net Settled cases, employees are subject to a charge under ITEPA 2003 on the whole amount of the award received, whether in cash or shares. While S1038A(2) would usually deny any deduction for amounts in respect of the shares not acquired, there is a provision at S1038A(7), which prevents S1038A(2) from denying a deduction for an amount which has been subject to an ITEPA 2003 charge.

This means that a deduction can be taken for an SBP expense, but as the ITEPA 2003 charge only arises at the point of settlement or cancellation, S1038A(7) only applies to prevent S1038A from denying a deduction at that point. At the point of settlement or cancellation deductions would be allowed for those SBP expenses arising

• specifically in respect of the options which have been cancelled or net settled, and

• which are still available for a deduction, and

• where a corresponding charge under ITEPA 2003 has arisen.

S1038A(7) does not in itself provide a deduction. Therefore, when calculating the allowable deduction available in the year of cancellation or settlement, only amounts recognised in accordance with GAAP as an expense of the year can be included. It is not possible to “roll up” SBP expenses which have been recognised in earlier periods for which a deduction has previously been denied under S1038A (but see BIM44415 for "non-legal" options).

Neither can a deduction be based on the whole amount of the SBP expense which arises under GAAP in the year of cancellation or settlement. It is likely (particularly in net settled cases) that part of the SBP expense in that period will relate to shares which in that period are still under option or have been acquired by an employee. S1038A and S1038 would still apply to deny a deduction for the part of the SBP expense arising in respect of those options.

Deductions calculated on either of these bases should be challenged and recalculated in accordance with this guidance.