Employers that settle employee share awards using a net settlement method (i.e. using a reduced number of shares) are advised to review new guidance published by HMRC this summer on the corporation tax treatment of these awards.  Employers are also advised that the guidance also impacts the corporation tax position for share awards that are cancelled in return for a cash payment.

Impact on net settled awards

The guidance, published in HMRC’s Business Income Manual, has raised concerns as it appears to restrict the relief for net settled awards.  HMRC have now in essence specified that, in relation to the portion of the award that is effectively cash settled under a net settlement arrangement, the amount that can benefit from corporation tax relief is limited to the amount of the accounting charge attributable to that portion.  HMRC give worked examples of the way it expects the deduction to work. 

As such, there appears to be a misalignment between the amount of the relief that may be claimed for the cash settled portion and the amount of the relief that may be claimed for the share settled portion (being, generally, the amount on which the employee will be subject to income tax, which is based on the value delivered to the employee, under the statutory corporation tax deduction rules that generally apply where shares are acquired by the employee).  It seems that the approach also does not take into account the adjustments that companies need to make when they deliver awards in a different form to what was originally intended and accounted for.

The net settlement method is most commonly used by some employers to assist with settling the employment taxes due on non tax-advantaged share awards.  Instead of issuing the full number of shares due at vesting or exercise, the company issues a reduced number of shares and settles the remainder in cash, the remainder being equal in value to the PAYE and NICs liabilities arising on the full award that has vested or been exercised.  The cash portion is typically directed straight to HMRC via the payroll process. The method reduces the number of shares needed to settle the award, and is an alternative to issuing the full number of shares and then selling a portion of those shares under the ‘sell-to-cover’ method.  However the new guidance may cause some employers to reconsider their use of this method.

Next steps

Employers using the net settlement method or cancelling share awards for cash are recommended to review their position in light of the new guidance and seek advice if necessary.  Companies that consider taking an alternative filing position contradictory will need to consider whether it is disclosable to HMRC under the UTT (Uncertain Tax Treatment) provisions. 


If you would like to discuss this development, please contact Kathy Granby or Matthew Rowbotham.