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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: relevant steps: Section 554B: earmarking etc of sum of money or asset

Sections 554B and 554Z17(1) ITEPA 2003

Earmarked
Otherwise held
The later relevant step
‘Held on a Section 554B basis’
Steps within Sections 554Z18 and 554Z19
Factors not taken into account for the purposes of Section 554B(1)(a) and (b)
Section 554A(4) exception: actions on or after A’s death

Certain preparatory steps rank as relevant steps within Section 554B.

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Earmarked

A relevant third person (P) takes a relevant step within Section 554B(1)(a) if:

  • a sum of money or asset is held by or on behalf of P,
  • P earmarks it - no matter how informally, and
  • P does this with a view to a later relevant step being taken as set out below.

This later relevant step:

  • is a step within Section 554C or 554D (see EIM45060 onwards),
  • is in relation to:

    • that sum of money or asset, or
    • any sum of money or asset which may arise or derive (directly or indirectly) from it.

‘Earmarking’ in Section 554B(1)(a) is a statutory term. See EIM45110.

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Otherwise held

P takes a relevant step within Section 554B(1)(b) if:

  • a sum of money or asset otherwise starts being held by or on behalf of P, and
  • this is specifically with a view (so far as P is concerned) to a later relevant step being taken as set out below.

It does not matter whether or not the sum of money or asset has previously been held by or on behalf of P on some different basis.

Section 554B(1)(b) can apply even if P does not take any action at all. But there does have to be a specified employee: see EIM45110.

For example, Section 554B(1)(b) will apply if P is the trustee of a trust where the sole beneficiary is A and therefore no active earmarking is necessary in order for it to be clear that A is the specified employee in relation to the later relevant step. For this purpose, A includes references to any person linked with A (as is the case for relevant steps within Section 554C and 554D).

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The later relevant step

The later relevant step:

  • is a step within Section 554C or 554D (see EIM45060 onwards), and
  • is in relation to:

    • that sum of money or asset, or
    • any sum of money or asset which may arise or derive (directly or indirectly from it).

The later relevant step does not necessarily have to be taken by P.

The later relevant step can be taken:

  • on the meeting of a condition,
  • following the meeting of a condition, or
  • otherwise.

On the application of Section 554B when one of the exclusions in Section 554E onwards will apply to the later relevant step, see EIM45115.

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‘Held on a Section 554B basis’

Part 7A ITEPA 2003 refers in several places to a sum of money or asset being ‘held on the basis mentioned in Section 554B(1)(a) or (b)’.

This means ‘held by or on behalf of P as discussed above in relation to the same current, former or prospective employee’.

When this guidance refers to a sum of money or asset being ‘held on a Section 554B basis’, it means ‘held on the basis mentioned in Section 554B(1)(a) or (b)’.

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Steps within Sections 554Z18 and 554Z19

A step within Section 554Z18 or 554Z19 is deemed to be a relevant step within Section 554B if it otherwise would not be.

On Sections 554Z18 and 554Z19 (undertakings given by employers etc in relation to retirement benefits etc: earmarking etc and provision of security), see EIM45150 and EIM45155 respectively.

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Factors not taken into account for the purposes of Section 554B(1)(a) and (b)

For the purposes of Section 554B(1)(a) and (b), it does not matter if details of the later relevant step have not been worked out for example:

  • the sum of money or asset which will or may be the subject of the step, or
  • how or when or by whom or in whose favour the step will or may be taken.

If a condition has to be met before the later relevant step is taken, it does not matter if that condition might never be met.

It does not matter if A (or any person linked with A) has no legal right to have a relevant step taken in relation to any sum of money or asset mentioned above.

On persons ‘linked’ with A, see EIM45860.

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Section 554A(4) exception: actions on or after A’s death

Under Section 554A(4), a relevant step within Section 554B does not give rise to Part 7A income if it is taken on or after A’s death.