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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 option schemes: specified vesting date: fallback charge because of continued earmarking

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

A fall-back charge will apply if:

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

  • Any of the earmarked shares cease to be held solely with a view to providing relevant shares or paying a sum of money pursuant to a relevant share option, and the grant of this option meets one of two alternative conditions.

    • The first alternative condition is that this grant is to be made to A as mentioned in Section554L(1)(a) and is to meet the requirements of Section 554L(1)(b) to (e).
    • The second alternative condition is that this grant is expected to be made to A as mentioned in Section 554L(1)(a) and, if this grant is made, it will meet the requirements of Section 554L(1)(b) to (e).
  • Those earmarked shares continue to be held by or on behalf of P on a Section 554B basis.

On Section 554L(1)(a) to (e), see EIM45405.

In such a case, Section 554L(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) (see EIM45095) and any relevant reliefs.