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HMRC internal manual

Employment Income Manual

Employment income provided through third parties: exclusions: earmarking of deferred remuneration: conditions

Sections 554H(1) and (2) ITEPA 2003

The award of deferred remuneration
Possibility of partial revocation
The relevant step
Connection with tax avoidance arrangement

Employers and employees may enter into deferred remuneration arrangements that is, conditional arrangements to defer awards of remuneration for commercial reasons. For example, such arrangements may be imposed by the FSA Remuneration Code.

A step within Section 554B may bring a deferred remuneration arrangement through the Section 554A gateway. There will be no Part 7A income if all the conditions of Section554H are met.

The award of deferred remuneration must pass seven tests and the relevant step must pass three tests. If these tests are passed, the relevant step does not give rise to Part 7A income.

For examples illustrating these tests, see EIM45260.

Deferred remuneration arrangements which take the form of share or share option schemes can come within Section 554H. There are other exclusions specifically relating to share and share option schemes: see EIM45305 onwards.

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The award of deferred remuneration

Under Section 554H(1), seven tests apply to the award of deferred remuneration. They are bulleted below.

  • On a date (the award date’) A is awarded remuneration (‘the deferred remuneration’) in respect of A’s employment with B. The person awarding the deferred remuneration does not necessarily have to be B.
  • The main purpose of the award is not the provision of ‘relevant benefits’.

‘Relevant benefits’ has the same meaning as in Part 6 Chapter 2 ITEPA 2003 (EFRBS), except that, here, ‘relevant benefits’ can include benefits charged to tax under Part 9 ITEPA 2003 (pension income). See EIM15021.

  • The deferred remuneration is awarded on terms whose main purpose is to defer the provision to A of the deferred remuneration to a specified date (‘the vesting date’) which is after the award date.

On ‘specified date’, see EIM45485.

  • These terms also provide that the award is revoked if specified conditions are not met on or before the vesting date.
  • The vesting date is not more than five years after the award date.
  • As at the award date, there is a reasonable chance that the award of the deferred remuneration will be revoked because not all the specified conditions will be met on or before the vesting date.
  • If any person provided the deferred remuneration to A on the award date, that action would rank as a payment of PAYE employment income of A in respect of A’s employment with B.

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Possibility of partial revocation

To come within Section 554H(1), an award must pass the ‘reasonable chance’ test set out above.

Under Section 554H(2), the terms of the award may also (but do not have to) provide that the award of the deferred remuneration is partly revoked if certain conditions are not met on or before the vesting date.

Therefore, if:

  • an award of deferred remuneration passes the seven tests set out above, and
  • the award is made on terms which provide that the award will be lost in part if the specified conditions are not met completely,

then the award will come within Section 554H(1).

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The relevant step

Under Section 554H(1), three tests apply to the relevant step. They are bulleted below.

  • Before the end of the vesting date, a person (‘P’) takes a relevant step within Section554B which would give rise to Part 7A income but for Section 554H.
  • When the relevant step is taken, the sum of money or asset which is the subject of the step:

    • represents some or all of the deferred remuneration, and
    • does not represent anything else.
  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

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Connection with tax avoidance arrangement

Ordinary commercial arrangements should pass the anti-avoidance test bulleted above.

But you must examine an arrangement critically, if it purports:

  • to come within Section554H, and
  • to defer tax liability beyond the statutory time limits.

Such an arrangement may well fail the anti-avoidance test.

This is an illustrative example. The anti-avoidance test is broad. It may catch other avoidance transactions.