In Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another EWCA Civ 663, the UK Supreme Court ruled last month that future cash-flow projections can continue to include the tax benefits of restricted stock expenses, as is the current practice for most UK business valuations.
The Supreme Court was asked to consider whether accounting debits relating to the grant of share options to employees are a deductible expense for corporation tax purposes. The appeal of this decision was heard in late January.
The taxpayers were wholly-owned subsidiaries of a holding company, Smith & Williamson Holdings Ltd (SWHL). In 2003, SWHL settled an employee benefit trust, which gave employees a contractual right to acquire shares in SWHL for a specified price. When options were granted, SWHL recognised a monthly charge to group companies equal to the fair value of the options, pursuant to International Financial Reporting Standard 2 (IFRS 2). SWHL then reduced their trade profits accordingly for the purposes of corporation tax.
This worked until HMRC refused the corporation tax deduction and issued “closure notices” disallowing the deductions.
Now, business valuation experts can continue to treat the issuance of share options to employees as an expense for tax purposes in both current and forecasted periods, which may reduce trade profit projects.
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