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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: relevant step taken after acquisition of employment-related securities

Section 554N ITEPA 2003

Scenario 1: Acquisition of securities or interests in securities: consideration not less than market value
Scenario 2: Acquisition of securities or interests in securities: general earnings
Relevant consideration
MV
Scenario 3: Acquisition of securities or interests in securities: chargeable event within Section476
Exclusion

There are three scenarios in particular in which Section 554N can prevent Part 7A from applying to a relevant step taken after the acquisition of ‘securities’ or ‘interests in securities’ (within the meaning of Section420 ITEPA 2003).

For other scenarios within Section 554N in particular, scenarios in which Section 554N can cover a relevant step whereby a person acquires employment-related securities or where a chargeable event occurs in relation to the employment-related securities see EIM45325.

See generally the Employment-Related Securities Manual.

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Scenario 1: Acquisition of securities or interests in securities: consideration not less than market value

Under Section 554N(7)(a), three conditions must be met. They are bulleted below.

  • A security or an interest in a security (‘the relevant asset’) is acquired.
  • A gives ‘relevant consideration’ for the relevant asset.
  • RC ≥ MV, where

‘RC’ is the amount of the relevant consideration, and

‘MV’ is the market value of the relevant asset at the time of the acquisition.

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Scenario 2: Acquisition of securities or interests in securities: general earnings

Under Section 554N(7)(b), four conditions must be met. They are bulleted below.

  • A security or an interest in a security (‘the relevant asset’) is acquired.
  • The acquisition gives rise (or would give rise) to general earnings of A (or an amount treated under Section 226A (employee shareholder shares) as earnings of A) from A’s employment with B.

For this purpose, you ignore any relevant consideration given for the relevant asset.

On general earnings, see EIM00511 onwards.

  • E ≥ MV, where

‘E’ is the amount of the earnings (plus any consideration which A has given for the relevant asset), and

‘MV’ is the market value of the relevant asset at the time of the acquisition.

  • The earnings are not exempt income see EIM45455.

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Relevant consideration

Relevant consideration means consideration which:

  • is given before, or at or about, the time of the acquisition, and
  • is money or money’s worth.

But relevant consideration does not include:

  • a promise to do anything, or
  • the performance of any duties of, or in connection with, an employment.

‘Relevant consideration’ is defined in Section 554N(8).

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MV

Generally, under Section 554Z(4), you apply the capital gains tax rules to calculate MV.

But, if Section 437(1) ITEPA 2003 (market value of convertible securities) applies to the acquisition, you apply the rule in Section 437(1) to calculate MV.

Similarly, if Section 452(1) ITEPA 2003 (market value of shares in research spin-out companies) applies to the acquisition, you apply the rule in Section 452(1) to calculate MV.

These two special rules are laid down by Section 554N(9).

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Scenario 3: Acquisition of securities or interests in securities: chargeable event within Section476

Under Section 554N(10), three conditions must be met. They are bulleted below.

  • A security or an interest in a security (‘the relevant asset’) is acquired.

If you are considering a case in which cash is acquired, see ERSM110020.

  • The acquisition is pursuant to an employment-related securities option acquired by reason of A’s current, former or prospective employment with B.

An ‘employment-related securities option’ is a ‘securities option’ (as defined in Section 420(8) ITEPA 2003) to which Part 7 Chapter 5 ITEPA 2003 applies. On ‘securities options’, see ERSM110010.

  • The acquisition is a chargeable event for the purposes of Section 476 ITEPA 2003 (securities options: charge on post-acquisition chargeable events), or would be but for Section 474(1).

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Exclusion

In any of those three scenarios, under Section 554N(11) a relevant step taken after the acquisition does not give rise to Part 7A income if two conditions are met. These are bulleted below.

  • The subject of the relevant step is the relevant asset.
  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.