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HMRC internal manual

Employment Income Manual

Employee Ownership Trusts – qualifying bonus payments: The participation requirement

Section 312C ITEPA 2003


It is a basic requirement of schemes which provide for awards of qualifying bonus payments, that all employees in relevant employment when awards are determined must be eligible to participate in the scheme for that award and any other award under the scheme (section 312C(1)(a)).  This includes employees who are based outside the UK.

Relevant employment means that the person is employed by the employer providing the award.  Where the employer is a member of a group, a person is in relevant employment if they are employed by any company which is a member of the group.      

It should be noted all employees must be eligible for the award at the time it is determined.  An employee who has ceased to be employed by the employer at the time the award was determined may not be entitled to the award when it is paid.  Exclusion of such employees will not result in an infringement of the participation requirement.   This allows employers discretion on the treatment of former employees. 

The employer is at liberty to set a minimum period of continuous employment before  an employee becomes entitled to participate in the scheme.  The only restriction on the duration of the minimum period is that it cannot exceed 12 months (s312C(3)). 

There may be restrictions on an employee’s participation in the scheme due to the employee being involved in disciplinary proceedings.  The participation requirement is not infringed if the employee is excluded from participating in the scheme because of disciplinary proceedings resulting in a finding of gross misconduct being taken against the employee in the 12 month period immediately before the award was determined (section 312C(4)(a)). 

If proceedings, which result in a finding of gross misconduct against or summary dismissal of the employee, are taken between the determination of the award and its payment, the employer can treat the employee as never having been eligible to participate in the award.  This will not infringe the participation requirement (section 312C(4)(c)).

The participation requirement will not be infringed if an employee’s participation in the scheme is conditional, where the employee is subject to disciplinary proceedings by the employer but no finding of gross misconduct is subsequently made (section 312C(4)(b)).   The bonus should subsequently be paid to the employee. 


Q: Can an employer withhold payment of a qualifying bonus if an employee has been made bankrupt?

A:  If the terms of the employee’s contract of employment specify that this is treated as gross misconduct or would lead to dismissal, yes.  Otherwise, no, this would breach the participation requirement.

Q:  If an employee was found guilty of gross misconduct 18 months before the award is determined, can they be excluded from the scheme?

A:  No, this would breach the participation requirement.  Employees who have been found guilty of gross misconduct can only be excluded from schemes for a maximum of 12 months before the award is determined.