BIM44414 - Specific deductions: employee share schemes: providing shares to employees: qualifying shares: payment made in excess of fair value ("EFV")

When an employer cancels a share option, they may choose to pay the employee an amount in excess of the fair value of the share options at cancellation.   

A charge under ITEPA 2003 will apply to the whole amount of the payment.   

Under GAAP, the amount paid equal to the fair value of the options at cancellation is normally debited to equity, as it is for other Cash Cancelled options, and the calculation for that element would follow that for the Cash Cancelled cases (see BIM44411).

The amount of the payment which is in excess of the fair value (the EFV) should be recognised as an expense in the Profit and Loss Account. As the debit in the Profit and Loss account relates to a payment to an employee in respect of their employment, the deduction would be allowed under general principles.  

However, it is possible that some employers will debit the whole of the payment to equity and there will be no debit in the Profit and Loss account for the EFV. Or the EFV might be included in the SBP expense, rather than as a separate entry, and we would not be able to distinguish it from the SBP expense.  

Debiting the whole amount of the payment to equity is not the accounting treatment we would expect to see and including EFV in the SBP expense is likely to be more common. If there are any areas of doubt, the case should be referred to BAI Business Profits Team 

Where an amount is paid in excess of fair value in respect of a cancelled share option, the calculation method would be similar to that for other cash cancelled options (see BIM44412), but the maximum deduction allowed will be the lower of:  

  • the amount of the SBP expense recognised in the period of cancellation which relates to the options which have been cash cancelled, excluding any amount which has been included in the SBP expense relating to the fair value on cancellation
  • the amount on which the employee has incurred the ITEPA liability, capped at the fair value of the option at cancellation   

Example 1: cancellation of an option where the Fair Value at grant is less than the Fair Value at cancellation

  • an option is cancelled with a Fair Value at cancellation of £1000 
  • the Fair Value of the option at grant was £900
  • the SBP expense recognised in the period of the cancellation is £200 which does not contain any amount relating to the EFV paid
  • the employer decides to pay the employee £1,150 for the cancellation of the option, which is the amount on which the ITEPA charge to the employee is based

The amount available for deduction in the period of cancellation is £200.

If the employer has recognised the EFV of £150 as a separate line item in the Profit and Loss Account, an additional deduction could be taken for that amount under general principles.  This deduction will not be disallowed by S1038A(2) by virtue of S1038A(7) CTA 2009 because it is an amount which is subject to a charge under ITEPA 2003 (see BIM44411).

If the whole of payment for the cancelled option has been debited to equity, no further deduction will be available.  

If SBP expenses in earlier periods are available for deductions to be taken, the total deduction would be capped at £900, being the total amount of the SBP expense available.

Example 2: cancellation of an option where the Fair Value at grant is more than the Fair Value at cancellation

  • an option is cancelled with a FV at cancellation of £800 
  • the FV of the option at grant was £900   
  • the SBP expense recognised in the period of the cancellation is £200 and does not contain any amount relating to the EFV paid.
  • the employer pays the employee £950 on cancellation of the option which is the amount on which the ITEPA charge to the employee is based

The amount available for deduction would still be £200 and a further deduction of £150 could still be available under general principles, if the EFV has been debited separately to the Profit and Loss account

However, if earlier periods are available for deductions to be taken, the total deduction would be capped at £800, as this is the amount subject to a charge under ITEPA which relates to the fair value at cancellation. A deduction for the additional £150 EFV payment would remain available under general principles.

Example 3: the amount EFV payment is included in the Share Based Payment Expense for the period

Using example 2, if the £150 paid in excess of fair value had been included in the SBP expenses in the period of cancellation, the amount allowed as a deduction in that period would still be only £200 as this is the amount relating to the fair value of the option at grant.  

The total amount available for all periods, including any earlier periods available, would still be £800 being the amount charged to ITEPA in respect of the fair value paid.

Although the £150 EFV payment is not recognised as a separate item in the Profit and Loss Account, a separate deduction would be available under general principles.