Deductions for grant of share options

The taxpayers were members of a group of companies whose parent Smith & Williamson Holdings Ltd (SWHL) established an employee benefit trust that gave employees the right to acquire shares in SWHL. When the trust granted share options the taxpayers paid SWHL an amount equivalent to the value of the option. That obligation was reflected in an inter-company balance owed by the taxpayers to SWHL and was settled each month.

The taxpayers prepared their accounts under international financial reporting standard (IFRS) 2 which required them 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 deductible.

The First-tier Tribunal the Upper Tribunal and the Court of Appeal...