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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: employee share scheme: using options to hedge share awards

Section 554B ITEPA 2003

Example: using options to hedge share awards

Suppose that the trustees of an employee share scheme hedge their contingent commitment to award shares by buying a call option.

This option gives the trustees the right to buy shares (if they are needed) without imposing on them the obligation to buy shares (if they are not).

The call option itself will never be transferred to employees. And the trustees will not necessarily exercise it. But, if they do, the shares thus acquired will be assets ‘arising or deriving (directly or indirectly) from’ the call option.

So, is the purchase of the call option in itself an act of earmarking and thus a relevant step within Section 554B?

This will all depend on the facts.

Purchasing an option could indeed involve earmarking and thus be a relevant step within Section 554B(1)(a)(ii). See EIM45095.

If the cash required to buy the shares using the call option were set aside, then that might be a separate earmarking.

But, provided that the trustees do not know that specific numbers of shares are destined for specific employees, you should accept that there has been no earmarking, either of the option, or of the cash.

In other words, if the trustees decide to hedge their contingent commitment to award shares, for Section 554B purposes it makes no difference whether they use shares or options as their hedge.