Nature of accounting debit

Were share options deductible trading expenses?

The taxpayers were members of a group of companies whose parent S established an employee benefit trust that gave employees the right to acquire shares in S. When the trust granted share options the taxpayers paid S an amount equivalent to the value of the option. That obligation was reflected in an inter-company balance owed by the taxpayers to S and was settled each month. For the accounting years ended 30 April 2010 to 2012 the taxpayers prepared their accounts under international financial reporting standard (IFRS) 2. This required the taxpayers to recognise an accounting credit on the balance sheet and treat it as a capital contribution from the parent company.

The taxpayers claimed deductions against trading profits corresponding to accounting debits in their income statement for the grant of share options to their employees. HMRC said these were not...