Part 12 of the Corporation Tax Act 2009 gives a company a statutory deduction when an employee acquires qualifying shares because of their employment. For ordinary unrestricted shares the deduction is the market value of the shares when acquired, less anything paid for the shares and any option, and it is given for the accounting period in which the employee acquires them. The accounting charge for share awards and options is disallowed and replaced by this deduction.

What does Part 12 cover?

Section 1001 sets out the structure: Chapter 2 gives relief where shares are acquired because of employment, Chapter 3 where shares are acquired under an option obtained because of employment, Chapters 4 and 5 give additional relief for restricted and convertible shares, and Chapter 6 deals with the interaction with other deductions.

HMRC’s Business Income Manual at BIM44265 says the deduction applies however the company structures and funds the arrangement. It does not matter whether a trust is used, whether new shares are issued or existing shares are bought in the market, or whether the shares come from an award or an option. It also covers people who are not current employees, such as directors, former employees and relatives, if they acquire the shares because of someone’s office or employment with the company. The accounting side is covered in FRS 102 Section 26.

Which shares qualify for the deduction?

BIM44290, summarising section 1008 (awards) and section 1016 (options), says the shares must be ordinary shares, fully paid up and not redeemable. If they are not of a class listed on a recognised stock exchange, the company whose shares they are must either not be under the control of another company, or be controlled by a listed company that is not a close company.

BIM44295 adds an employment link. The shares must be in the employing company, its parent (the employing company being a 51% subsidiary), a member of a consortium owning the employing company or its parent, or a company in the same commercial association of companies. A consortium here means five or fewer companies that together own 75% of the ordinary share capital, each owning at least 10%.

Timing is different for the two sets of conditions. BIM44285 explains that the share type conditions are tested when the employee acquires the shares, while the company conditions are tested when shares are awarded or, for options, when the option was granted. BIM44450 lists shares that never qualify: partly paid, redeemable and preference shares, unlisted shares in a subsidiary (unless the parent is listed and not close), and shares without the required link. Their cost is then dealt with under general principles and the employee benefit trust rules.

Which company gets the deduction?

Under section 1007 the deduction belongs to the employing company, for a business it carries on and in respect of which it is within the charge to corporation tax (or would be but for the foreign branch exemption in section 18A). BIM44300 explains that for options this is the company by reason of employment with which the option was first granted. If the business, or substantially all of it, moves to another group company between grant and exercise, that successor company takes the deduction.

The employee’s income tax position also has to fit. BIM44320 requires the employee to be chargeable to income tax on the acquisition, or not chargeable only because of residence or where the duties were performed. For options, exemption under a tax advantaged CSOP, SAYE or EMI scheme also satisfies the test, so options under EMI and a CSOP still attract the corporation tax deduction. The conditions are treated as not met where a main purpose of the arrangements was avoiding tax or National Insurance.

How much is the deduction and when is it given?

Section 1013 gives the relief for the accounting period in which the shares are acquired, as a deduction in calculating the profits of the qualifying business. If the employer is a company with investment business, the relief is treated as management expenses instead.

For options over shares that are neither restricted nor convertible, section 1018 sets the amount as the market value of the shares when acquired, less the total consideration given for the option and the shares. The consideration does not include the employee’s work, nor any employer National Insurance the employee has agreed to bear by agreement or election. BIM44315 confirms that market value means the price the shares might reasonably fetch on the open market, and that in practice the deduction broadly equals the amount on which the employee is, or would be but for an exemption, taxable.

For restricted or convertible shares, the deduction for the acquisition period is the amount taxable as employment income on acquisition. BIM44385 explains that further deductions follow when restrictions are lifted or varied, when the shares are sold with restrictions attached, or on death, matching the employee’s later income tax charges.

What happens to the accounting charge?

Section 1038 disallows any other deduction relating to the provision of the shares or anything connected with it, and for shares acquired under an option, any deduction relating to the option. This applies even where the Part 12 relief works out at nil and whether the accounting period falls before or after the acquisition. For employee share schemes it specifically includes amounts the employer pays for the employee’s participation.

Section 1038(6) preserves deductions for setting up the scheme, the costs of administering it, borrowing costs for the scheme, and fees, commission, stamp duty, stamp duty reserve tax and similar costs of acquiring the shares. BIM44265 summarises the result as two steps: add back the share related charge in the accounts, then deduct the statutory amount.

How does this work for a typical option?

Illustration only. An unlisted trading company that no other company controls grants an employee an unapproved option over 10,000 ordinary shares at an exercise price of £1, with nothing paid for the option. The FRS 102 charge of £6,000 is spread as £2,000 a year over a three year vesting period. In year 4 the employee exercises when the shares are worth £5 each.

  • Years 1 to 3: add back £2,000 a year in the tax computation; no deduction.
  • Year 4: deduction of 10,000 x (£5 less £1) = £40,000.
  • The employee is taxed on £40,000 as employment income, so the valuations should agree.

See unapproved share options for the employee’s side. If an unlisted company had bought the employer before exercise and the options were exercised after control passed, BIM44290 notes the shares would not be qualifying shares and no Part 12 deduction would be available.

What mistakes do companies make?

  • Deducting the share based payment charge as it accrues instead of adding it back.
  • Claiming the deduction when the option is granted or vests rather than in the period of acquisition.
  • Missing that shares in an unlisted subsidiary of an unlisted parent do not qualify; this also affects whether the shares are readily convertible assets for PAYE.
  • Reducing the deduction for employer National Insurance the employee has agreed to bear.
  • Using a market value different from the one used for the employee’s income tax. SVM110160 says the two values should match, and BIM44325 notes that HMRC’s Shares and Assets Valuation team can carry out a post transaction valuation check; see valuing shares for employee schemes.
  • Claiming in the wrong group company after a business transfer between grant and exercise.

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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.