ACCA Advanced Taxation (ATX) Practice Exam

What constitutes the base cost for EMI shares at disposal when granted at a discount to the market value?

1. The market value at exercise only

2. The exercise price + market value at grant

3. The exercise price + the amount subject to income tax on exercise

4. The exercise price only

The correct answer is: The exercise price + the amount subject to income tax on exercise

In the context of Enterprise Management Incentives (EMI) shares, the base cost for disposal is determined by considering both the exercise price and any amount that becomes subject to income tax upon exercise. This is because when an employee exercises their options at a discount to the market value, the difference between the market value at the time of exercise and the exercise price represents an additional economic benefit to the employee, which is subject to income tax. Thus, when calculating the base cost for the disposal of EMI shares, it is essential to add the exercise price to the amount that is taxable. This ensures that the taxpayer can account for the portion of the value that was realized as a benefit and thus subject to income tax when they unload or dispose of those shares. The other options do not fully capture the necessary components for determining the base cost of EMI shares. For instance, using the market value at exercise alone omits the taxable component and can lead to an undervaluation of the base cost. Similarly, calculating solely based on the exercise price does not account for the overall taxable benefit derived from the difference between market value and exercise price. Including only the exercise price and market value at grant does not reflect the taxation element that arises upon exercise. By including