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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: earmarking for share schemes: specified vesting date: fall-back charge on vesting date

Section 554J(8) to (12) ITEPA 2003

Case 1: other income tax provisions deal with receipt of shares
Case 2: shares are no longer held because sum has been paid and dealt with under other income tax provisions
Case 3: the award is revoked
Fall-back charge on vesting date

If Section 554J has prevented a relevant step from giving rise to Part 7A income, there may be a fall-back charge on the vesting date.

But there are three cases in which this fall-back charge will not apply. In practice, taxpayers will normally arrange to come within one of these three cases.

The vesting date is a non-standard time limit which has no connection with, for example, the end of the tax year or Self Assessment.

On ‘the vesting date’, see EIM45355.

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Case 1: other income tax provisions deal with receipt of shares

In this case (Section 554J(10)):

  • A receives some earmarked shares before the end of the vesting date, and
  • this gives rise to employment income of A which is:

    • chargeable to income tax, or
    • exempt income (see EIM45455).

The fall-back charge on the vesting date does not apply to such shares.

In this context, ‘receives’ means ‘becomes beneficially entitled to’.

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Case 2: shares are no longer held because sum has been paid and dealt with under other income tax provisions

In this case (Section 554J(11)):

  • part or all of the sum mentioned in Section 554J(1)(a) (see EIM45355) is paid to A before the vesting date,
  • this payment gives rise to rise to employment income of A which is:

    • chargeable to income tax, or
    • exempt income (see EIM45455), and
  • the earmarked shares are no longer held by any person in relation to the award, whether because this payment represents the proceeds of their disposal of because the payment is made from another source.

The fall-back charge on the vesting date does not apply to such shares.

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Case 3: the award is revoked

In this case (Section 554J(12)):

  • before the end of the vesting date, the award (or any part of it) is revoked in accordance with the deferred award terms, and
  • correspondingly, earmarked shares are no longer held by any person in relation to the award.

The fall-back charge on the vesting date does not apply to those shares (because the arrangement has been unwound in accordance with the requirements of the legislation).

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Fall-back charge on vesting date

Otherwise, under Section 554J(9), a relevant step is taken with the following features.

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

    • any of the earmarked shares which have fallen outside the three special cases discussed above, and
    • any ‘relevant income’ in relation to those shares. See EIM45475.
  • 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) (see EIM45095) and any relevant reliefs.