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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 exit events: fall-back charge at end of exit period

Section 554K(7) to (11) ITEPA 2003

If Section 554K has prevented a relevant step from giving rise to Part 7A income, there may be a fall-back charge at the end of ‘the exit period’.

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

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

‘The exit period’ is the period of six months starting with the date on which the exit event occurs: Section 554K(11).

On ‘exit events’, see EIM45465.

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

In this case (Section 554K(9)):

  • A receives some earmarked shares before the end of ‘the exit period’, and
  • this gives rise to employment income of A which is:

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

The fall-back charge at the end of the exit period does not apply to such shares.

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

Case 2: other income tax provisions deal with receipt of sum

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

  • part or all of the sum of money mentioned in Section 554K(1)(a) see EIM45385 is paid to A before the end of the exit period,
  • this payment gives rise to employment income of A which is:

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

The fall-back charge at the end of the exit period does not apply to such shares.

Fall-back charge at end of exit period

Otherwise, Section 554K(8) deems a relevant step to be taken with the following features.

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

    • any of the earmarked shares which have fallen outside the two 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.

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