Employee Ownership Trusts – qualifying bonus payments: Introduction
Chapter 10A Part 4 ITEPA 2003
Bonus payments made to employees are normally taxable under section 62 ITEPA 2003. Chapter 10A Part 4 ITEPA 2003 provides a limited exemption from this by allowing qualifying bonus payments of up to £3600 to be made tax free by certain companies in relation to payments made after 1 October 2014. Please note that this exemption does not extend to NICs, which follow the normal treatment for earnings.
In order to make qualifying bonus payments free of tax, certain conditions must be satisfied. Some of these conditions relate to the nature of the payment, the calculation of the payment and the terms of the bonus scheme, some are conditions detailing the eligibility to participate in the bonus scheme, some are conditions surrounding the structure of the company paying the bonus.
These conditions are set out in Chapter 10A, which is structured as follows:-
Section 312A – this provides the limited exemption to tax and sets out provisions in relation to payments of more than one qualifying bonus to an employee – see EIM03051
Section 312B – this defines a qualifying bonus payment by listing the conditions required, including reference to subsequent sections of the Chapter. It also includes a definition of a qualifying period – see EIM03052
Section 312C – this sets out requirements for all persons in relevant employment to be eligible to participate in the bonus scheme and for every employee who participates in the scheme to do so on the same terms. These are known as the participation and eligibility requirements – see EIM03053 and EIM03054
Section 312D – this sets out the requirement for the company’s activities to be substantially trading activities – see EIM03055
Section 312E – this sets out the requirement for the company to be controlled for the benefit of the employees in terms of the provisions of the Taxation of Capital Gains Act 1992 (TCGA). This is known as the indirect employee ownership requirement which comprises two separate requirements – the controlling interest requirement and the all-employee benefit requirement. See EIM03056 and EIM03057
Section 312F – this provides a limit to the total proportion of employees of the company who are either directors or office holders or employees connected with those directors or office holders. Where this proportion is exceeded, the company will be unable to make qualifying bonus payments – see EIM03058
Section 312G – this defines what service companies are for the purposes of determining whether a bonus meets the conditions for treatment as a qualifying bonus – see EIM03059
Section 312H – this prevents the replacement of an amount of taxable general earnings or employment income with a qualifying bonus – see EIM03060
Section 312I – this provides guidance on interpreting some of the provisions of Chapter 10A
Where a qualifying bonus is paid to an employee, there is no requirement for an employer to report the value of that benefit to HMRC unless, in the event that the amount of the exemption is limited, the payment is in excess of that limit.
Employers will be expected to demonstrate that the qualifying bonus payment meets the relevant conditions set out in legislation if required.
EIM03051Employee Ownership Trusts – qualifying bonus payments: The exemption to tax
EIM03052Employee Ownership Trusts – qualifying bonus payments: Definition
EIM03053Employee Ownership Trusts – qualifying bonus payments: The participation requirement
EIM03054Employee Ownership Trusts – qualifying bonus payments: The equality requirement
EIM03055Employee Ownership Trusts – qualifying bonus payments: The trading requirement
EIM03056Employee Ownership Trusts – qualifying bonus payments: The indirect employee-ownership requirement – the controlling interest requirement
EIM03057Employee Ownership Trusts – qualifying bonus payments: The indirect employee-ownership requirement – the all-employee benefit requirement
EIM03058Employee Ownership Trusts – qualifying bonus payments: The office-holder requirement
EIM03059Employee Ownership Trusts – qualifying bonus payments: Service companies
EIM03060Employee Ownership Trusts – qualifying bonus payments: Excluded payments