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HMRC internal manual

Employment Income Manual

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

Section 554H(3) to (6) and (12) ITEPA 2003

If the conditions of Section 554H are met (see EIM45255), it will prevent the relevant step under review from giving rise to Part 7A income.

But this exclusion will be lost if (to summarise) the sum of money or asset continues to be earmarked as outlined below.

Continued earmarking

Under Section 554H(5), the shelter of Section 554H is withdrawn if, at any time (‘the relevant time’), two things both happen to any sum of money or asset which:

  • is held by or on behalf of the person taking the step (P) on a Section554B basis (seeEIM45095), and
  • represents any of the ‘earmarked deferred remuneration’.

The first is that it ceases to represent the earmarked deferred remuneration (or part of it). This could be, for example, because the remuneration is to be provided to A in another way or because its award has been revoked.

The second is that it continues to be held by or on behalf of P on a Section 554B basis.

In that case, Section 554H(6) deems a relevant step to be taken with the following features.

  • The relevant step is within Section 554B.
  • It is taken at the relevant time.
  • The subject of the relevant step is:

    • the sum of money or asset just discussed, and
    • a just and reasonable proportion of any ‘relevant income’.
  • The relevant step gives rise to Part 7A income.

The relevant step gives rise to Part 7A income subject to the exclusion in Section 554A(4) (seeEIM45095) and any relevant reliefs.

Note that, if P reinvests the sum of money or asset (or part of it) at A’s direction or request, it will still represent the earmarked deferred remuneration (or part of it). So, such reinvestment will not take the sum or asset outside the shelter of Section 554H.

See the guidance on earmarking and the necessity to be able to identify a particular employee at EIM45110. It follows that a sum of money or asset which is held in favour of a relevant person in respect of one employee will not continue to be earmarked if it remains held, but in favour of a relevant person in respect of a different employee.

Suppose, for example, that a sum of money is earmarked and represents deferred remuneration awarded to employee A1. If:

  • the award to A1 is revoked, and
  • the sum of money remains held but now represents deferred remuneration to employee A2 (and A2 is not a relevant person in respect of A1),

then the sum of money has not continued to be held for the purposes of Section 554H(5).

Earmarked deferred remuneration

‘Earmarked deferred remuneration’ means the deferred remuneration so far as, when the relevant step sheltered by Section 554H is taken, the deferred remuneration is represented by the sum of money or asset which is the subject of that step (Section 554H(4)).

Relevant income

Under Section 554H(12), any income which passes the following three tests is ‘relevant income’ for the purposes of this continued earmarking charge.

  • Before the relevant time, the income arises directly or indirectly from a sum of money or asset held by or on behalf of P representing any of the earmarked remuneration.
  • Before the relevant time, the income is the subject of a relevant step within Section554B taken by P which would give rise to Part 7A income but for Section 554Q (income arising from earmarked sum or asset see EIM45245).
  • At the relevant time, the income continues to be held by or on behalf of P on a Section554B basis (see EIM45095).