Net Settling for Tax
Updated: Oct 16, 2019
Clients were treated to a number of interesting sessions at the recent Howells Global Group hosted by PwC. There was one important change to highlight. It appears that there is a potential downside to operating a net settling arrangement for tax.
Under such an arrangement the company would settle a participant’s award net of the tax payable by the participant. The company would then pay over the tax monies to HMRC as a cash cost. By doing this the company avoids the dilution associated with the shares and the transaction costs involved in selling sufficient to cover the tax.
Corporation Tax Problem
It now seems that there could be a significant corporation tax problem with this.
The problem is that, under IFRS2 revisions, which applied from 1 January 2018, the additional cost of the cash payment to HMRC is to be accounted for “via equity”. This means that the cost would not be charged to a company’s P&L accounts and therefore no corporation tax deduction would be available.
Clients may wish to seek more advice from their auditor/corporation tax advisor or you can read the PwC update here.
We understand that HMRC are taking this point.