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HMRC internal manual

Employment Income Manual

Employment income provided through third parties: exclusions: share schemes etc: overview: structure of this guidance

Section 554E (tax-advantaged share and share option schemes)
Section 554N (priority of Part 7 ITEPA 2003 over Part 7A rules)
Sections 554J to 554M (hedging)
Exchange of earmarked shares
Other rules in Part 7A ITEPA 2003 which are particularly relevant to employee share and share option schemes

An employee share or share option scheme may come through the Section 554A gateway. Such an arrangement will not necessarily give rise to Part 7A income, because there are a number of exclusions.

There is nothing to prevent a relevant step coming within more than one exclusion if the statutory conditions are met.

This guidance refers to ‘employee share schemes’ and ‘employee share option schemes’ for the sake of brevity. But the exclusions are not confined to arrangements for conferring shares and share options. They also cover arrangements for conferring:

  • certain other securities,
  • certain other securities options, and
  • sums of money calculated by reference to the market value of shares, other securities, share options and other securities options.

Section 554E (tax-advantaged share and share option schemes)

Section 554E prevents tax-advantaged share and share option schemes in Part7 ITEPA 2003 from giving rise to Part 7A income. See EIM45315.

It can happen that for example, because of administrative error or a takeover a scheme ceases to be one of the four tax-advantaged share and share option schemes. Such a scheme will no longer be able to come within Section 554E, but there will be no fall-back charge by virtue of Section 554E(11) if it came within one or more of the other exclusions at the time the relevant step was taken.

Section 554N (priority of Part 7 ITEPA 2003 over Part 7A rules)

In certain circumstances, Section 554N prevents Part 7A income arising if employment-related securities are acquired and are taxed by the rules in Part 7 ITEPA 2003. See EIM45325.

Sections 554J to 554M (hedging)

It is common for deferred remuneration packages to use third parties and shares for valid commercial reasons, such as corporate governance. In such circumstances, the third party may need to hedge its commitments under those schemes.

This hedging may be earmarking within Section 554B(1)(a) see EIM45095 and, assuming the other statutory conditions are met, the arrangement will come through the Section 554A gateway.

There are four exclusions to prevent such hedging from giving rise to Part 7A income: Sections554J to 554M.

Sections 554J and 554K focus on employee share schemes. Sections 554L and 554M focus on employee share option schemes.

  • Section 554J focuses on employee share schemes with a specified vesting date. See EIM45355 onwards.
  • Section 554K focuses on employee share schemes which have no specified vesting date but, instead, have specified exit events. See EIM45385 onwards.
  • Section 554L is similar to Section 554J. It focuses on employee share option schemes with a specified vesting date. See EIM45405 onwards.
  • Section 554M is similar to Section 554K. It focuses on employee share option schemes which have no specified vesting date but, instead, have specified exit events. See EIM45435 onwards.

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Exchange of earmarked shares

On, for example, the takeover or reorganisation of a company, shares that are earmarked for awards to employees may need to be exchanged for shares in a new company. See EIM45310.

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Other rules in Part 7A ITEPA 2003 which are particularly relevant to employee share and share option schemes

Sections 554H and 554Z7 are also particularly relevant to employee share and share option schemes.

Section 554H (earmarking of deferred remuneration) provides an exclusion from an earmarking charge for deferred remuneration generally. See EIM45255 onwards.

Section 554H is more restrictive than Sections 554J to 554M. But, if an arrangement does not come within any of Sections 554J to 554M, it may nevertheless come within Section 554H.

Section 554Z7 is not an exclusion. But it provides for recognition of the exercise price of share options when calculating an earmarking charge. See EIM45740 onwards.