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HMRC internal manual

Employment Income Manual

PAYE: employment-related securities: convertible securities

Part 7 Chapter 3 ITEPA 2003

Part 7 Chapter 3 ITEPA 2003 was fundamentally amended by Schedule 22 FA 2003 with effect from 1 September 2003. Broadly, the new Part 7 Chapter 3 applies if a chargeable event occurs in relation to employment-related securities that are convertible securities. Events that are chargeable events are the:

  • conversion of the employment-related securities into securities of a different description
  • disposal for consideration of the employment-related securities
  • release for consideration of the entitlement to convert the employment-related securities
  • the receipt of a benefit in money or money’s worth in connection with the entitlement to convert.

A charge may arise on acquisition. See the Employment-Related Securities Manual at ERSM40050 and ERSM40060 for more detailed guidance. PAYE

Section 699 ITEPA 2003 required the employer to operate PAYE in respect of the amount chargeable to tax by virtue of Part 7 Chapter 3 where the shares were readily convertible assets (see EIM11900). By virtue of Schedule 22 FA 2003 a new Section 698 ITEPA 2003 replaced both Sections 698 and 699 with effect from 1 September 2003.

The new Section 698 applies in respect of employment-related securities that are convertible securities irrespective of when the convertible security was acquired. Section 698 ITEPA 2003 requires the employer to operate PAYE on the amount that counts as employment income if the relevant employment-related securities are readily convertible assets (see EIM12400).

The original legislation at Section 699 applies in respect of any event giving rise to income chargeable to tax as employment income relating to convertible shares acquired by an employee where the event occurs before 1 September 2003 (see EIM11870).