Remember the “spirit of the legislation”

Posted by RM2 at 15:51 on 24 Feb 2014


A recent case highlights the importance of understanding not just the small print in the tax legislation, but the purpose behind the legislation.

Corporation Tax reliefs for share schemes

Everyone knows that employee share schemes can carry tax advantages. For example, whether you use a government recognised approved share scheme (such as an EMI, CSOP, SIP, or SAYE) or Unapproved Share Option Plan (USOP), the company can (since 2003) obtain a statutory Corporation Tax deduction when employees acquire shares.

This tax deduction is given under Part 12 of the Corporation Tax Act 2009. The basic rule is that a company can, subject to certain conditions, claim for a Corporation Tax deduction when employees acquire shares. The amount claimed is equivalent to the gain the employees make when they acquire their shares (which can also be by the exercise of options). One of the conditions is that the shares must be acquired (or the options granted) “by reason of employment”.

A recent case: (Metso Paper Bender Forrest Ltd & Anor v Revenue & Customs [2013] UKFTT 674 (TC))

Mr Ritchie was a director and company secretary in a UK company and its two subsidiary companies (the UK group). Together with his family, he owned the ultimate holding company. In 2003, a buyout company (New Co) was formed by two other directors of the subsidiary companies, which bought out the UK group, and Mr Ritchie resigned his position. As part of the buyout, Mr Ritchie was granted options over shares in New Co.

In 2007, New Co was itself sold. Mr Ritchie exercised his options and sold the shares. The two subsidiary companies sought to claim a statutory Corporation Tax deduction relating to EMI options that were exercised by other employees in the group, and also in relation to Mr Ritchie’s unapproved options. The claim for Mr Ritchie’s options was disallowed, on the grounds that they were not granted “by reason of employment” but as a consequence of the buyout.

“Deemed” employment

The argument in the tribunal to support the tax deduction related to the “deeming” provision in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This says, broadly, that if you are an employee (or have ever been an employee, or are going to become an employee), shares that you acquire in your company will automatically be related to employment, and thus taxable in the same way as any other form of remuneration. The Corporation Tax relief, it was argued, is supposed to provide a symmetry between the taxation of employee remuneration by way of share schemes and the company’s corporation tax charge.

Under ITEPA, Mr Ritchie’s shares would have been treated automatically as employment related securities; therefore they were acquired “by reason of employment”; therefore there should be Corporation Tax relief.

However, the counter argument pointed out that this symmetry was not the be all and end all of the legislation. The original policy objective was not just to provide symmetry but also to encourage broader employee share ownership. The requirement that shares should be acquired “by reason of employment” was referable to that policy. No other legislation could be read into those words. As a matter of fact, Mr Ritchie’s shares were not provided by reason of employment, and therefore no Corporation Tax deduction was permitted.


Perhaps the crucial point here is that the legislation covering the Corporation Tax deduction provides “a narrow and targeted relief”. The deeming provisions in ITEPA are “far reaching, widely drawn anti-avoidance measures”. In other words, to get a tax relief, you need to follow the rules to the letter. But if you’re trying to save or avoid tax (however genuinely or legitimately), the rules will cast as wide a net as possible.

The moral of this story isn’t just that you should read the fine print in the legislation – but also that if you are seeking tax reliefs (however legitimately), you may also need to think about the purpose behind the legislation. In this case, Mr Ritchie’s options were granted because of a specific transaction undertaken, not because of his employment. Arguing that this was “deemed employment” in order to obtain a tax deduction may have been worth a try, but probably never really fell within the spirit of the legislation. The outcome may seem harsh but it highlights the need for care and specialist advice.

RM2 not only implement share plans, but also provide accomplished administration services and advisory support in relation to the share scheme implications arising from such corporate actions. If you wish to discuss any of content covered in this article, please contact us directly on 020 8949 5522, or via