Connected Party

There are a number of ways that parties can be connected for tax purposes.  In general this include where the parties are closely related (spouses, children, parents etc.), as well as business relationships such as partners in a partnership and those who jointly control a company.

Deferred Tax

An account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values.  Companies may be eligible for a tax deduction for share-based payments but the timing may be different to the charge recognised in the company accounts, hence the impact on deferred tax.


Under FRS 20, companies are required to include certain disclosures in their financial statements relating to the share-based payments.  These should allow the readers of the accounts to understand what share-based payments were made and how much they were worth.

Employee Share Schemes/Options

A common way to incentivise employees is to offer them share options in the company they work for.  These provide that the employees can acquire the shares at some time in the future for a set price.  Depending on whether these schemes are approved by HMRC there will be different tax implications but it will always be necessary to know the share price so as to quantify any tax liability.

Fair Value

For equity-settled transactions, entities are required to measure the goods or services received at their fair value, unless that fair value cannot be estimated reliably in which case that fair value should be estimated by reference to the fair value of the equity instruments granted.

It is typically not possible to estimate the fair value of employee services received so the fair value of the equity instruments granted is used instead. This is based on market prices and should take into account the terms and conditions upon which the instruments were granted. In the absence of market prices, a valuation technique (such as an option pricing model) will need to be used.

FRS102 / FRS20 / IFRS2

Accounting standard which specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments

Limited by Shares

This means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company.

Pricing Model

A model used to attempt to set a current theoretical value on share options.  Examples include the Binomial model, Black-Scholes model and Monte Carlo model.

Private Company Shares

A private limited company  is generally limited by shares. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company (plc).

Share-Based Payments

These relate to cases where payment for service (or goods) has been made in the form of shares in the company.  It includes all types of executive share option and share purchase plans and employee share option and share purchase schemes, including Save-As-You-Earn (SAYE) plans and similar arrangements

Share Valuation

In the case of private company shares there is often no ready market for the sale of such shares.  Therefore, where it is necessary to know what those shares are worth, a share valuation can be carried out.  In general, this aims to quantify the price which the shares might reasonably be expected to fetch if sold in the open market at that time assuming a willing buyer and willing seller.