ACCA Advanced Taxation (ATX) Practice Exam

Which two main functions does a SIP enable?

1. Purchase of shares by employees and share options

2. Free shares issuance and gross pay share purchases

3. Tax exemptions and bonus shares

4. Long-term investments and retirement benefits

The correct answer is: Free shares issuance and gross pay share purchases

The correct answer highlights two key functions provided by a Share Incentive Plan (SIP): the issuance of free shares and the opportunity for employees to purchase shares using their gross salary. SIPs are designed to support employee ownership of shares in a company while providing certain tax advantages. One of the primary benefits of a SIP is that companies can issue free shares to employees, often as an incentive for performance or loyalty. This distribution usually comes with specific conditions attached, such as the shares being held for a minimum period before the employee can sell them, promoting long-term commitment to the company. In addition to the free shares, SIPs also allow employees to purchase shares using their gross salary, which can be advantageous as it means they are not subject to Income Tax and National Insurance contributions at the time of purchase. This feature encourages employees to invest in the company's stock, further aligning their interests with that of the company's future growth and success. This understanding of SIPs focuses on the unique ways they engage employees in the company's performance, resulting in greater investment in the company's success and fostering a culture of shared ownership. Choices that mention tax exemptions and bonus shares do not encapsulate the primary functions of a SIP as thoroughly, as they may not reflect the essential characteristics of