BIM44305 - Specific deductions - employee share schemes: Providing shares under FA03/SCH23, a/c periods from 1 Jan 2003 - the relevant business requirement

Key requirements for relief to be given under FA03/SCH23/PARA3 (see BIM44270) are that:

• the business for the purposes of which the share options were granted or the share awards were made must be carried on by the employing company (or a successor company), and
• the employing company (or a successor company) must be chargeable to corporation tax on its profits from that business.

In practice there are very few circumstances in which these requirements will not be satisfied. It will be very unlikely that the company, by reason of employment with which the employee was given a share award, is not carrying on the business for the purposes of which the share award was made.

Employing company

The employing company is the company by reason of employment with which the employee was granted the share options or awarded the shares.

Successor company

A successor company is a company:

• in the same group as the employing company, and
• to which the relevant business (or substantially all of it) is transferred between the date the share options were granted or share awards were made and a later relief-triggering event (FA03/SCH23/PARA23), see BIM44300.

Employees employed by service companies

If an employee is employed by a service company which provides services to other companies, and is given a share award by reason of employment with the service company, the business for the purposes of which the share award was made will be the service-providing business carried on by the service company, not any other businesses carried on by other companies to which the service company may provide its employees’ services. An example of this is where a group contains a central employing company which holds the service contracts of all group employees.

Relevant business requirement not satisfied

In the unlikely event that the relevant business requirement in FA03/SCH23/PARA3 is not satisfied, relief under FA03/SCH23 is not available to any company.

Any tax deductions for the costs of providing the shares to employees must be considered under general tax principles. For companies carrying on a trade or Schedule A business, general tax principles include:

• the requirement that deductions are only allowable for expenditure which is wholly and exclusively for the purposes of the company’s trade or business (ICTA88/S74 (1)(a)), which may not be the case if the business for the purposes of which the share options were granted or share awards were made is not being carried on by the employing company;
• the anti-avoidance legislation in FA03/SCH24 if the shares are being provided to employees through an Employee Benefit Trust or other third party.