EIM45110 - Employment income provided through third parties: relevant steps: Section 554B: meaning of 'earmarked' in Section 554B(1)(a)

Section 554B ITEPA 2003

Preparatory
Simultaneous steps
Particular employee
Example: no particular employee

Example: no particular employee yet
Example: employee share plan
Ascertainable amount

‘Earmarked’ in Section 554B(1)(a) is a statutory term. It is undefined.

Parker LJ warned in Macdonald v Dextra Accessories Ltd and others (77TC146 at 187 paragraph [63]):

Whilst the placing of a gloss on statutory words may be useful as illustrating the idea which the words express (see per Lord Radcliffe at Hochstrasser (HMIT) v Mayes [1960] AC 376 at p391), care must in my judgment be taken not to fall into the trap of substituting the gloss for the statutory words and thereby attempting in effect to rewrite the statute.

This guidance therefore does not attempt to define ‘earmarking’.

Part 7A ITEPA 2003 sets limits on the scope of ‘earmarking’.

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Preparatory

Section 554B(1)(a) refers to a sum of money or asset being earmarked ‘with a view to a later relevant step being taken’.

Therefore, ‘earmarking’ is not a free-standing action. It is a preparatory step for a later relevant step within Section 554C or 554D.

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Simultaneous steps

Suppose a sum of money or asset is earmarked with a view to a relevant step within Section 554C or 554D being taken at the same time.

Then it is not earmarked with a view to a later relevant step being taken. And so this act of earmarking is not a relevant step within Section 554B.

Whether a sum of money or asset is earmarked with a view to a later relevant step being taken will be a question of fact in every case.

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Particular employee

A relevant step within Section 554C or 554D has to be a step in favour of a ‘relevant person’. ‘Relevant person’ is defined by reference to ‘A’: see EIM45090.

If a relevant third person ‘earmarks’ a sum of money or asset, and the conditions in Section 554B(1)(a) are met, then that person takes a relevant step within Section 554B.

This feeds into Section 554A. One of the conditions for an arrangement to pass through the Section 554A gateway is that a relevant third person takes a relevant step. And Section 554A(1)(a) to (c) conditions 1 to 3 for an arrangement to pass through the Section 554A gateway refer to a specific employee (or former or prospective employee), ‘A’. See EIM45025.

Therefore, it has to be possible to pick out a particular individual, A. Otherwise, conditions 1 to 3 in EIM45025 cannot be met, and neither is it possible to identify (even vaguely) a later relevant step within Section 554C or 554D.

So, if it is not (yet) possible for anyone to pick out A, then there has not (yet) been any earmarking.

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Example: no particular employee

Suppose the following facts.

  • B has contributed a sum of money to a discretionary trust.
  • The terms of the trust specify a number of potential beneficiaries.
  • The trustees have not yet taken any action of any kind towards benefiting a particular beneficiary or particular beneficiaries and no sum or asset has started to be held with a view to a later step in favour of a particular beneficiary or particular beneficiaries.

In this case, it will not be possible to pick out A and therefore the trustees will not yet have earmarked any of the sum.

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Example: no particular employee yet

Suppose the following facts.

  • B has contributed sums of money and assets to an EBT.
  • B sets up an incentive plan for its salespeople. The salesperson who brings in the most sales revenue during the current accounting period of B will receive a bonus of £100,000.
  • When the incentive plan is set up, the EBT puts £100,000 on short-term deposit to pay the future bonus.

Has the EBT earmarked £100,000 in favour of a particular employee, namely the salesperson who will bring in the most sales revenue?

The answer is No. At the time when the EBT puts £100,000 aside, there is not yet any individual who satisfies the description ‘the salesperson bringing in the most sales revenue’. So, it is not (yet) possible for anyone to pick out A and the EBT has not yet taken a relevant step within Section 554B.

When it has been established which salesperson has brought in the most sales revenue, it will be possible to pick out this individual. At that point, the EBT will take a relevant step within Section 554B.

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Example: employee share plan

In general, there will be no earmarking where:

  • there is a pool of shares and a pool of employees,
  • the trustee has not made the awards to the employees, and
  • the trustee does not know the number of shares to be awarded to any employee.

So, for example, no earmarking will have occurred if:

  • the trustee only knows that a specified number of shares have been granted to a specified number of employees of a particular company, or
  • the trustee only knows that a specified total number of shares have been granted to a group of named employees and does not know how many of those shares have been awarded to particular individuals.

But see EIM45100 for the approach to take where there appears to be manipulation of an apparent lack of knowledge on the part of the trustee.

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Ascertainable amount

The amount of Part 7A income is defined by reference to the value of the relevant step. See EIM45705 and EIM45710.

Therefore, it must be possible to quantify this value.

Therefore, if:

  • P takes an action of some kind in relation to a sum of money or asset, but
  • it is not possible to quantify its value as explained in EIM45710,

then P has not ‘earmarked’ the sum or asset.

There is a difference between ‘not possible’ and ‘very difficult’. The next two bullet points should help you draw the line.

  • If it is possible to value the relevant step but only by going to the tribunal and the courts, because the facts are murky and the law is unclear and the other conditions are met, then P has earmarked the sum or asset.
  • If it is not possible, even in principle, to value the relevant step, then P has not earmarked the sum or asset.

But if the subject of the relevant step has simply not yet been valued, then that does not mean that P has not earmarked the sum or asset concerned.