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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: earmarking for employee share schemes: specified vesting date: fall-back charge because of continued earmarking

Section 554J(6) and (7) ITEPA 2003

A fall-back charge will apply if:

  • Section 554J has prevented a relevant step from giving rise to Part 7A income, and
  • broadly speaking, earmarked shares continue to be earmarked in circumstances in which the conditions for the exclusion are no longer met.

More precisely, under Section 554J(6) a fall-back charge will apply if, at any time (‘the relevant time’) two conditions are met. These two conditions are bulleted below.

  • Any of the earmarked shares cease to be held solely with a view to the meeting of an award of relevant shares or of a sum of money calculated by reference to the market value of relevant shares which meets one of two alternative conditions.

    • The first alternative condition is that this award is to be made to A as mentioned in Section554J(1)(a) and is to meet the requirements of Section 554J(1)(b) to (e).
    • The second alternative condition is that this award is expected to be made to A as mentioned in Section 554J(1)(a) and, if this award is made, it will meet the requirements of Section 554J(1)(b) to (e).
  • Those shares continue to be held by or on behalf of P on a Section 554B basis.

On Section 554J(1)(a) to (e), see EIM45355.

In such a case, Section 554J(7) 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 shares which continue to be held as mentioned 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) and any relevant reliefs.

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