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HMRC internal manual

Employment Income Manual

Employment income provided through third parties: exclusions: tax-advantaged share and share option schemes

Section 554E ITEPA 2003

Steps taken under tax-advantaged share and share option schemes
Steps taken in connection with tax-advantaged schemes
Steps taken in connection with EMI arrangements
Facilitation steps: the fall-back charge

Section 554E stops Part 7A income arising as a result of:

  • Certain steps taken under tax-advantaged share and share option schemes and arrangements, and
  • Certain steps taken to facilitate such schemes and arrangements.

A fall-back charge may apply if a facilitation step is taken within Section 554B and the relevant third person taking the step (P) ceases to meet the conditions needed for exclusion.

Section 554E can cover not only relevant steps within Section 554B but also relevant steps within Sections 554C and 554D.

Before 6 April 2014:

  • ‘Schedule 2 SIPs’ were called approved SIPs,
  • ‘Schedule 3 SAYE option schemes’ were called approved SAYE option schemes, and
  • ‘Schedule 4 CSOP schemes’ were called approved CSOP schemes.

Steps taken under tax-advantaged share and share option schemes

A relevant step taken under one of the schemes listed below will not give rise to Part 7A income.

  • A Schedule 2 SIP see ESSUM20000 
  • A Schedule 3 SAYE option scheme see ESSUM30000 
  • A Schedule 4 CSOP scheme see ESSUM40000 

Steps taken in connection with tax-advantaged schemes

Also, the general rule is that a relevant step will not give rise to Part 7A income if P takes it solely for one of the following purposes.

  • Acquiring or holding shares to be awarded under a Schedule 2 SIP.
  • Providing shares pursuant to an award of shares under a Schedule 2 SIP.
  • Acquiring or holding shares to be provided pursuant to options granted under a Schedule 3 SAYE option scheme.
  • Providing shares pursuant to an option granted under a Schedule 3 SAYE option scheme.
  • Acquiring or holding shares to be provided pursuant to options granted under a Schedule 4 CSOP scheme.
  • Providing shares pursuant to an option granted under a Schedule 4 CSOP scheme.

On steps taken ‘solely for the purposes of …’, see EIM45320.

But there are two cases in which this general rule does not apply.

First, it will not apply if there is a connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

Second, it will not apply if (immediately before or after the relevant step is taken) H > X, where:

‘H’ is the total number of shares of any type held, in relation to the tax-advantaged scheme under review, by the person taking the step (P) and any other persons for the purposes listed above, and

‘X’ is the maximum number of shares of that type which one might reasonably expect to be required, in relation to the tax-advantaged scheme under review, for those purposes over the period of ten years starting with the day on which the relevant step is taken.

On ‘the maximum number one might reasonably expect’, see EIM45470.

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Steps taken in connection with EMI arrangements

The general rule is that a relevant step will not give rise to Part 7A income if P takes it solely for one of the following purposes.

  • Granting qualifying options under an EMI arrangement see ESSUM50000.
  • Acquiring or holding shares to be provided pursuant to qualifying options granted under an EMI arrangement.
  • Providing shares pursuant to qualifying options granted under an EMI arrangement.

On steps taken ‘solely for the purposes of …’, see EIM45320.

But there are two cases in which this general rule does not apply.

First, it will not apply if there is a connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

Second, it will not apply, if (immediately before or after the relevant step is taken) H > X, where:

‘H’ is the total number of shares of any type held, in relation to the EMI arrangement, by P and any other persons for the purposes listed above, and

‘X’ is the maximum number of shares of that type which one might reasonably expect to be required, in relation to the EMI arrangement, for those purposes over the period of ten years starting with the day on which the relevant step is taken.

On ‘the maximum number one might reasonably expect’, see EIM45470.

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Facilitation steps: the fall-back charge

Suppose that:

  • P takes a relevant step within Section 554B which would give rise to Part 7A income, and
  • Section 554E prevents it from giving rise to Part 7A income because P takes it to facilitate a tax-advantaged scheme or arrangement, as explained above.

There will be a fall-back charge if P ceases to meet the conditions for the exclusion.

The fall-back charge will apply if, at any time (‘the relevant time’) the sum of money or asset (or any part of it):

  • ceases to be held by or on behalf of P solely for purposes listed above, but
  • continues to be held by or on behalf of P on a Section 554B basis.

If that happens, then Section 554E deems a relevant step to be taken:

  • within Section 554B,
  • at the relevant time,
  • of which the subject is the sum of money or asset (or the part of it) which has started to be held for other purposes,
  • giving rise to Part 7A income.

The relevant step is subject to the exclusion in Section 554A(4) and any relevant reliefs.

On Sections 554A(4) and 554B, see EIM45095.