UK: Weekly Tax Briefing

Last Updated: 1 August 2000

Finance Act 2000

The Finance Bill is expected to receive Royal Assent on 28 July 2000.

Share-Based Payment - Corporation Tax Treatment

ASB proposals

Last week, the Accounting Standards Board (ASB) issued a Discussion Paper on ‘Share-based Payment’. The Paper discusses the accounting treatment of transactions whereby entities purchase goods or services from other parties, such as suppliers and employees, by issuing to them shares or share options. In particular, the Paper focuses on accounting for employee share options.

The ASB’s Foreword to the Discussion Paper notes that implementing the proposals would result in a significant change to accounting practice, particularly for employee share schemes. At present, where a company purchases employee services by issuing share options, in many cases no expense is recognised in the company’s profit and loss account (P&L). In contrast, applying the proposals in the Paper would result in a charge to the profit and loss account.

A full discussion of this Paper would be outside the scope of Weekly Tax Briefing. The ASB’s proposals include the following.

  • Transactions involving share-based payment should be measured at the fair value of the shares or share options at ‘vesting date’.
  • An option-pricing model should generally be applied to measure the fair value of options.
  • The estimated charge should be accrued over the performance period on the basis of the fair value of the shares or options at each period end. Therefore, the charge for the period would be in part a charge relating to that period’s services and in part a revision of the opening accrual. The charge should be finalised on ‘vesting date’.

‘Vesting date’ is the date upon which the other party, having performed all of the services or provided all of the goods necessary, becomes unconditionally entitled to the shares or options.

Tax angles

There is no corporation tax deduction, on general principles, for issuing shares to employees, because no expense has been incurred by the company. (The cost is borne by the existing shareholders in the form of a dilution of the value of their interests.) Similarly, if a dotcom (for example) issues shares to suppliers in return for services rendered, no corporation tax relief is available. Therefore, if the ASB’s proposals were implemented, the new charge to the P&L would need to be disallowed.

There is an exception from this general tax rule for the new All Employee Share Ownership Plans (AESOPs) being introduced by the Finance Act 2000. Under the AESOP regime, a deduction is available for the market value, at the time they are acquired by the AESOP trustees, of free shares and of matching shares (ie, matching by the company of shares purchased by employees). Note that the Finance Act 2000 method for measuring the AESOP deduction is different from the ASB’s proposed method of measuring the P&L charge and that the two methods will not necessarily give the same results. Note also that share-based payments to suppliers will not qualify for AESOP treatment.

Also, a tax deduction can sometimes be obtained by contributing cash to an employee trust; the trust then either acquires shares in the market or subscribes for newly issued shares (in which case there is no cash cost to the company). If an employee trust is used, a deduction depends on the contribution to the trustees being within s67 Finance Act 1989 (payment to qualifying employee share ownership trusts) or meeting the ‘case law’ tests - ie, broadly, the payment must be revenue not capital and must be incurred for the purposes of the trade. Broadly speaking, the timing of the deduction follows UITF Abstract 13. The ASB’s Discussion Paper does not address such arrangements.

Conclusion

Employee share schemes can be a powerful way to attract, retain and motivate staff. However, as well as the human resources issues, there are important tax and accounting issues to be considered. Above all, the particular arrangement needs to be tailored to fit, and indeed enhance, the commercial strategy of the company. For further information, please speak to your usual KPMG tax contact.

Barter transactions

The ASB has also issued proposals on the accounting treatment of barter transactions.

Companies such as dotcoms and publishers may agree to swap advertising space without any cash changing hands. These transactions have prompted the question of what the accounting treatment should be.

The ASB’s Urgent Issues Task Force (UITF) has reached a consensus that the transaction should not be recognised unless there is persuasive evidence of the value at which the advertising space would have been sold if the barter transaction had not taken place. (The UITF thinks that it will be rare for this condition to be satisfied.) If, applying this criterion, the transaction should be recognised, the value should be recorded in the accounts in both turnover and costs. The UITF has asked for comments to be received by 8 September.

If the UITF’s proposed treatment is adopted in the accounts, the effect on the profit for corporation tax purposes should be zero, as there should be no timing differences between income and expenses regardless of the period in which the advertising space is made available.

However, the proposed accounting treatment for barter transactions differs from the VAT treatment. Barter transactions such as supplies of advertising are subject to VAT and will count towards taxable turnover for VAT purposes, whether or not they are recognised in turnover in the accounts; there are specific VAT rules for different types of barter transactions. This difference in treatment could result in confusion and possible underdeclarations of VAT.

For further information, please speak to your usual KPMG tax contact.

Press releases

- w/e 21.7.00

17 July 2000 - Inland Revenue - Open Government - Internal manuals go on the Internet

The Inland Revenue has announced plans for publishing its main internal operational manuals on its website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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