Under FRS 102 paragraphs 9.33 to 9.38, a company that sponsors an employee benefit trust usually treats the trust as an extension of its own business. Cash paid into the trust is not an expense when paid; the trust’s assets and liabilities appear in the company’s own individual balance sheet, and any of the company’s own shares held by the trust are deducted from equity until they vest unconditionally in employees.

Why does an EBT appear on the sponsoring company’s balance sheet?

FRS 102 calls an employee benefit trust an intermediate payment arrangement. Paragraph 9.33 describes the usual features: the trust is set up by a sponsoring entity, it is mostly used to pay employees, the identity of the eventual recipients and the amounts are not fixed at the outset, and the sponsor often has the right to appoint or veto trustees. It gives employee share ownership plans and employee benefit trusts used for employee shareholdings as examples.

The trustees must act in the interests of the beneficiaries, and the sponsor has no legal right to direct them. FRS 102 nonetheless looks at substance. Paragraph 9.33 says most such trusts are designed to serve the purposes of the sponsoring entity, with minimal risk of conflict between the trustees’ duties and the sponsor’s interests, so that nothing gets in the way of the sponsor’s wishes in practice. Where that is so, the sponsor has de facto control, and the accounts follow that control rather than the legal form of the trust.

This is different from consolidation. Paragraph 9.12 says a special purpose entity that is an intermediate payment arrangement is accounted for under paragraphs 9.33 to 9.38, and paragraph 9.35 requires the trust’s assets and liabilities to be recognised in the sponsor’s own individual financial statements. A company with no subsidiaries still brings its EBT on to its balance sheet. Group consolidation more generally is covered in consolidated accounts under FRS 102.

Is a payment into the trust an expense?

Not normally. Paragraph 9.34 sets a rebuttable presumption that when a sponsor pays cash or transfers assets to an intermediary it has exchanged one asset for another, and that the payment is not an immediate expense. To rebut it at the time of payment, the company must show either that it will not obtain future economic benefit from the amounts transferred, or that it does not control the right or other access to the future economic benefit it expects to receive.

In practice the presumption is hard to rebut for a typical discretionary trust funded to reward the sponsor’s staff. The employee cost is instead recognised when employees earn it, under Section 28 for cash benefits or Section 26 for share based payments. A footnote to Section 28 makes the point directly: if the employer is a sponsoring entity, a payment to an employee benefit fund does not extinguish the employer’s liability.

How are the company’s own shares held by the trust shown?

Many EBTs exist to hold the sponsor’s shares, buying them from leavers and passing them to employees under share schemes. Paragraph 9.36 says that where the sponsor controls the trust, it is for practical purposes in the same position as if it had bought the shares directly. Paragraph 9.37 then requires:

  • the consideration paid for the sponsor’s own shares to be deducted from equity until the shares vest unconditionally with employees;
  • consideration paid or received for purchases and sales of those shares to be shown as separate amounts in the statement of changes in equity;
  • no gain or loss in profit or loss or other comprehensive income on the purchase, sale, issue or cancellation of the shares;
  • dividend income on those shares to be excluded from profit or loss and deducted from the total dividends paid.

This mirrors the treatment of treasury shares, although legally the shares remain in issue and are owned by the trustees.

What about cash, loans and other assets in the trust?

Paragraph 9.37(c) requires the trust’s other assets and liabilities to be recognised as assets and liabilities of the sponsor. That includes cash held by the trustees, loans the trust has made to employees, investments other than the sponsor’s shares and any borrowing by the trust. Paragraph 9.37(e) requires finance costs and administration expenses to be recognised on an accruals basis, not when the sponsor sends funding to the trust.

Paragraph 9.35 says an asset stops being recognised by the sponsor when, for example, it vests unconditionally with identified beneficiaries. A sub fund earmarked for an employee but still subject to trustee discretion, or a loan to an employee that remains repayable, therefore stays on the sponsor’s balance sheet.

Paragraph 9.33A gives one situation where the company does not control the trust: where the company is, for example, a cooperative owned by its employees, all of its shares are held in a trust for their benefit, the shares never vest in individual employees and dividends are paid out solely under the trust deed. Employee ownership trusts are a separate arrangement with their own tax rules; see employee ownership trusts.

How does it work in numbers?

Illustration only. A company pays £100,000 into its EBT. The trustees buy 10,000 of the company’s shares from a retiring director for £60,000 and keep £40,000 in the bank. At the year end nothing has been awarded to employees.

Item in the company’s own accounts Effect
Company bank account Down £100,000
Cash held by the EBT, shown as a company asset Up £40,000
Own shares held by the EBT, deducted from equity £60,000 deduction
Profit and loss account No charge

The following year the company awards a £30,000 cash bonus for that year’s work, paid through payroll from the trust’s cash. The company recognises a £30,000 employee cost as the work is done, and the trust cash shown in its balance sheet falls when the bonus is paid. If shares are later transferred to employees and vest unconditionally, the £60,000 deduction is no longer shown against equity for those shares.

What must be disclosed?

Paragraph 9.38 requires enough information for users to understand the significance of the trust, including:

  1. a description of its main features, including how it makes payments and distributes shares;
  2. any restrictions on its assets and liabilities;
  3. the amount and nature of assets and liabilities not yet vested unconditionally with beneficiaries;
  4. the amount deducted from equity and the number of shares held that have not vested;
  5. for listed or publicly traded sponsors, the market value of unvested shares held;
  6. the extent to which shares are under option to employees or have been conditionally gifted;
  7. the amount deducted from aggregate dividends paid.

How does the accounting line up with corporation tax?

The tax rules for contributions sit in section 1290 of the Corporation Tax Act 2009. A deduction for employee benefit contributions is allowed for a period only so far as qualifying benefits are provided, or qualifying expenses paid, out of the contributions during the period or within nine months after it. Any disallowed amount becomes deductible in a later period when benefits are provided, but section 1290(1A) blocks a deduction for a period starting more than five years after the end of the period in which the contribution was made. Where the benefit gives rise to both employment income tax and National Insurance, the deduction also depends on those charges being paid.

Because FRS 102 already keeps the contribution off the profit and loss account, the accounting expense and the tax deduction often fall in similar periods, but the tests are different and need checking separately. The employee benefit trusts tax guide covers the deduction rules, the disguised remuneration charge and inheritance tax.

Do micro entities follow the same rules?

Yes, in substance. FRS 105 paragraphs 7.5 to 7.8 repeat the rebuttable presumption, the extension of business approach, the deduction of own shares from equity, the ban on gains and losses on own shares, accruals for finance and administration costs and the exclusion of dividends on own shares. See FRS 105 micro entity accounts.

The most common errors are expensing contributions as paid, leaving the trust off the balance sheet because the trustees legally own its assets, and failing to deduct shares held by the trust from equity.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.