BIM44070 - Specific deductions - employee share schemes: Contributions to QUESTs, a/c periods starting before 1 Jan 2003 - relief under FA89/S67

The purpose of FA89/S67 - FA89/S74 was to provide certainty of relief for contributions to an employee share ownership trust where the trust meets certain qualifying conditions set out in FA89/SCH5. Such trusts are commonly known as Qualifying ESOTs or QUESTs.

Before the enactment of FA89/S67 - FA89/S74 the deductibility of a payment to a trust set up to acquire and distribute shares in the company to its employees was dependent on the payment:

• not being capital in nature, and
• satisfying the wholly and exclusively for the purpose of the trade test in ICTA88/S74 (1)(a).

There was no certainty that such contributions would always satisfy these conditions. For example, where one of the objects of the setting up of the trust by a company was to enable the directors of the company to sell their shares either immediately or at some future date, payments to the trust by the company to put the trust in funds to enable it to acquire those shares would not satisfy ICTA88/S74 (1)(a) and the payments would not be deductible.

The specific statutory deduction under FA89/S67 is given for the period in which the employer’s contribution is paid to the trust, regardless of the period in which it is deducted in the company’s accounts prepared in accordance with generally accepted accounting practice.

The favourable timing of deductions under FA89/S67 for contributions to QUESTs, compared to their accounting treatment, became an added tax advantage following the introduction of UITF13 (Accounting for ESOP trusts), which is effective from 22 June 1995.

Guidance on the accounting treatment of contributions to employee share ownership trusts under UITF13 is at BIM44170 onwards.