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HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
Updated
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PAYE: employment-related securities: restricted securities: background

Part 7 Chapter 2 ITEPA 2003

Part 7 Chapter 2 ITEPA 2003 was fundamentally amended by Schedule 22 FA 2003 with effect from 1 September 2003.

Conditional shares

Before 1 September 2003, Part 7 Chapter 2 provided a charge to tax as employment income in respect of events relating to:

  • the acquisition by an employee of a beneficial interest in shares in a company
  • as a director or employee of that or another company
  • where the interest is acquired on terms that make it only conditional.

A common condition is that the beneficial interest in the share is subject to forfeiture upon the happening of a specified event, often the cessation of employment, within a specified period of time.

Restricted securities

With effect from 1 September 2003, Part 7 Chapter 2 provides a charge to tax as employment income in respect of chargeable events relating to the holding by an employee of employment- related securities that are restricted securities. The Share Schemes Manual will be amended to provide detailed guidance in due course. Broadly, events that may be a chargeable event are:

  • the employment-related securities ceasing to be restricted securities
  • the variation of any restriction relating to the employment-related securities
  • the disposal for consideration of the employment-related securities.

PAYE

Section 698 ITEPA 2003 requires the employer to operate PAYE on the amount that counts as employment income under Part 7 Chapter 2 if the relevant employment-related securities are readily convertible assets (see EIM12400).

Section 698 was fundamentally amended by Schedule 22 FA 2003 with effect from 1 September 2003. However, the new Section 698 only applies in respect of employment-related securities that are restricted securities that were acquired by the employee on or after 16 April 2003 for chargeable events occurring on or after 1 September 2003.

The original legislation at Section 698 remains effective in respect of any event giving rise to income chargeable to tax as employment income relating to conditional shares acquired by an employee before 16 April 2003 (see EIM12221).