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HMRC internal manual

Employment Income Manual

Employee Ownership Trusts: qualifying bonus payments: definition

S312B ITEPA 2003

There are a number of important conditions which need to be met if a payment made by an employer can be considered to be a qualifying bonus payment. Some of these conditions apply to the payment itself but some of the conditions apply to the employer. There are also provisions in relation to the periods over which these conditions must be met.

The payment cannot consist of regular salary or wages (section 312B(1)(a)) nor can it be excluded income, which is defined in section 312H.

The payment has to be awarded under a scheme which meets the participation and equality requirements in section 312C.

Where the payment is made to a former employee, it must be made in the 12-month period beginning when the employment ceased (section 312B(1)(h)).

For the purposes of Chapter 10A, references to payments to employees or former employees do include payments to the personal representatives of an employee or former employee who has died. In this case, the payment must be made within 12 months of the date of death (s312I(4)).

The employer has to meet the trading requirement in section 312D throughout the qualifying period. A qualifying period is defined in section 312B(2) as the period of 12 months ending with the day on which the payment is made.

The employer has to meet the indirect employee ownership requirement in section 312E throughout the qualifying period. Section 312B(3) allows for a shorter qualifying period where the controlling interest and all-employee benefit requirements of section 312E were first met during the 12-month period prior to the date on which the payment is made. The concepts are discussed in EIM03056 and EIM03057. The qualifying period does not, however, include any time when these requirements were not met. 


Q:  If an employee ownership trust acquires 60% of the shares in a trading company on 1 July 2014 and satisfies all the conditions relating to the qualifying bonus, will the company be able to pay the bonus tax-free at some point after 1 October 2014 but before 1 July 2015, or will they have to wait to make a payment after that date?

A:  For the bonus to qualify for tax-free treatment, the indirect-ownership requirement must be met both at the time the payment is made and throughout the qualifying period. The qualifying period would normally be the period of 12 months leading up to the date of payment. However, if the employer meets the indirect-ownership requirement for the first time during the 12 months leading up to the payment, then the qualifying period would run from that point until the date of payment.

So in the circumstances described above, as long as the indirect-ownership requirement continued from 1 July 2014 onwards, the employer could make a tax-free payment of a qualifying bonus at any time from 1 October 2014 to 30 June 2015.

The employer has to meet the office-holder requirement in section 312F at the time the payment is made and on at least the requisite number of days in the qualifying period. It does not matter if those days are not consecutive. The requisite number of days is defined in section 312B(4). Where the qualifying period is 12 months, the requisite number is the number of days in that period reduced by 90. Where the qualifying period is shorter than 12 months because the employer first met the indirect employee ownership requirement in that period, the total number of days in the shorter period is reduced by the corresponding fraction of 90 days.

The employer cannot be a service company per section 312G.