What the hell is Murph talking about now?

Filings by Google’s UK subsidiary show that £33m of the funds paid to the Treasury followed a wrangle over share options handed to staff, which the US business had argued were exempt from UK tax.

The company’s accounts show that the government was only able to claw back less than £100m in corporation tax from Google for the 2005-2014 period, and not the £130m the chancellor claimed. MPs and foreign governments have criticised the deal for allowing Google to generate billions of pounds in profits from its UK business and pay little corporation tax.

Well, that’s The Guardian. And I very much doubt that anyone was trying to argue that share option grants are tax exempt. An allowable expense perhaps, but that’s something rather different. But here’s Murph:

Richard Murphy, a tax expert who advises the Labour leader, Jeremy Corbyn, on economic policy, said most major US corporations had attempted to depress their tax bills by charging subsidiaries the cost of share options to staff, and that all had been ruled out by HMRC.

He said it was unclear why HMRC had failed until now to force Google to comply. “What was already a poor deal for the government is now looking even worse,” Murphy said. “And it looks like HMRC’s mess-up. I would say it clearly shows that HMRC is under-resourced and is struggling to cope in negotiations with major corporations.”

Can’t see how it would depress tax bills really. Because what is on offer is stock in the parent company. So it’s going to be an allowable expense at some point. If not in the subsidiary then at the parent level, no?

Someone here is confused and it might well be me but don’t think so.

9 thoughts on “What the hell is Murph talking about now?”

  1. I would say it clearly shows that HMRC is under-resourced

    Isn’t it high time one of the main newspapers ran an article on how Murph is funded by the taxmans’ union?

  2. I think Murphy is misunderstanding the position.

    When a UK sub of a US topco has shares issued to UK employees, it gets a tax deduction for the value of the shares. It doesn’t need to “attempt to depress its tax bills by charging subsidiaries the cost of share options to staff” – it gets the deduction automatically, whether it charges or not.

    Typically this is RSUs, which are simply grants of shares. If the employee gets 1,000 shares worth $5 each then the UK company gets a deduction for $5,000.

    If they’re stock options, the deduction is for the difference: if the employee exercises 1,000 options at $1 each, the shares being worth $5 at the time, the company gets a deduction for $4,000.

    The topco will have to account for the value received by the employee. US GAAP (if I remember correctly) gets you to account for the spread, and so it rather conveniently follows the UK tax treatment (but not necessarily the UK GAAP or IFRS accounting).

    Topco may or may not push this charge down into the subsidiary. If it does, then the charge gets ignored for UK tax purposes so you don’t get a double deduction. If it doesn’t, the lack of charge is ignored so you still do get a single deduction. This is well-trodden ground which is explicit in the legislation, and I can’t imagine anyone trying to claim twice for the same amount.

    What they might do is have an argument about some of the edge cases. If for example topco issues options to an employee who moves around a bit, there is a question as to how much of that gets a deduction in the UK. New legislation has come out to clarify this, presumably because HMCR has, I don’t know, had some long-running disputes with major US corporates that it was losing under the old rules and so needed to re-jig the rules.

    You also get problems with lapsed options, where the original cost might have been pushed down but there’s no statutory tax deduction because the shares were never issued. The legislation doesn’t address that situation (I have direct experience of this), and so it’s not clear whether the UK company is allowed any deduction (the statutory one doesn’t apply, but does the rule that says you can’t get a deduction under basic principles where the statutory deduction is in point mean that a) you can’t get any deduction for shares other than the statutory one; or b) if you get the statutory one that’s all you get, but if you don’t you can go back to basic principles?)

    The rules for share-based payments are, in short, one of those areas where the draughtsman has considered the obvious cases, but not been aware that life can get more complicated and so has omitted to provide for non-standard situations.

  3. Surely share options are a tax allowance/tax free/tax whatever for the /employee/, not the employer. If I work for BT and get “paid” in BT shares, it goes down on my tax form as payment of so much as BT shares. The tax whatever is how much it adds to my “money” income and affects *my* tax bill, not BT’s tax bill. (Just like in one job I was “paid” in bus passes.)

  4. Pellinor: it sounds like complaining that employers get a “deduction” for paying their staff wages, as it reduces the amount of trading surplus the company has.

    Do I pay my staff £50k in used oncers, or £50k in stock? Either way my trading surplus is down £50k times number of staff, and I get taxed on the trading surplus ***AFTER*** I have paid my staff. This is just another of Murphy’s arguments to tax company turnover instead of surplus.

  5. You’re right that it’s taxable on the employee, but the company gets a deduction too. It’s value in for you, and value out for them.

    Essentially, the idea is that if a company pays you £1,000 in cash then you get taxed on £1,000, the company pays employer’s NI on it, and it deducts the total as staff costs.

    With a listed company, shares are (for tax purposes) as good as cash. So if you get £1,000 of shares you are taxed on £1,000, the company pays employer’s NI on it, and it deducts the total as staff costs. Exactly the same tax position.

  6. Thank you Pellinor; I was trying to remember all of that but you’ve saved me the trouble.

    Does anyone know how the Yanks treat options? Might help understand those damned accounts we were arguing over the other day.

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