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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 and share option schemes etc: meaning of 'specified date'

Sections 554H(1), 554J(1) and 554L(1) ITEPA 2003

Example: formula including undefined terms
Example: formula including hypothetical condition
Guidance on Sections 554H, 554J and 554L

This page explains the term ‘specified date’ in:

  • Section 554H (earmarking of deferred remuneration’),
  • Section 554J (earmarking for employee share schemes: specified vesting date), and
  • Section 554L (earmarking for employee share option schemes: specified vesting date).

Sections 554H(1)(c), 554J(1)(c) and 554L(1)(c) each include a ‘vesting date’ condition. These ‘vesting date’ conditions are drafted in similar terms.

Section 554H(1)(c) provides:

[This section applies if] the deferred remuneration is awarded on terms (“the deferred remuneration terms”) the main purpose of which is to defer the provision to A of the deferred remuneration to a specified date (“the vesting date”) which is after the award date, while providing that the award of the deferred remuneration is revoked if specified conditions are not met on or before the vesting date …

Section 554J(1)(c) provides:

[This section applies if] the award of the relevant shares or sum of money would be on terms (“the deferred award terms”) the main purpose of which is to defer the receipt of the shares by A, or the payment of the sum of money to A, to a specified date (“the vesting date”) which is after the date (“the award date”) on which the award is made, while providing that he award is revoked if specified conditions are not met on or before the vesting date …

Section 554L(1)(c) provides:

[This section applies if] the grant would be made on terms (“the deferred grant terms”) the main purpose of which is to ensure that the relevant share option is not exercisable by A before a specified date (“the vesting date”) which is after the date (“the grant date”) on which the grant is made, while providing that the relevant share option is not to be exercisable at all by A if specified conditions are not met on or before the vesting date …

Each of these ‘vesting date’ conditions uses the key phrase ‘specified date’.

‘A specified date’ refers to ‘a date which has been specified in the terms’ not ‘a date which will be specified at some point in the future’.

If the terms specify a particular calendar date, that will obviously be a ‘specified date’.

But that is not the only way in which a date can be ‘specified’ for the purposes of Section554H, 554J or 554L. A date will be a ‘specified date’ for those purposes if the terms identify it clearly and unambiguously. In practice, for commercial reasons, the date will usually be ‘specified’ by means of a formula.

Once it is clear that a formula prescribes a specified date, you will need to consider whether the terms of the formula also ensure that the specified date will meet the five year time limit in Section 554H(1)(d) or the ten year time limit in Section 554J(1)(d) or 554L(1)(d) (as applicable) for the vesting date.

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Example: formula including undefined terms

An award of deferred remuneration is made to an employee on 1 June 2011. The award is contingent; it is dependent on a performance condition being met for a defined performance period, namely the three year period ending 31 March 2014.

The terms of the award do not fix a particular calendar date to be the vesting date. Instead, the terms of the award provide that the extent to which the performance condition has been met will be calculated ‘as soon as practicable’ after the end of the performance period.

The detailed terms of the award stipulate that ‘as soon as practicable’ means a date that is as soon as practicable after the company accounts for the year to 31 March 2014 have been finalised and in any case no later than three months after finalisation of the accounts.

This formula meets the vesting date condition.

Whether vesting has actually taken place ‘as soon as practicable’ after the end of the performance period will be a question of fact.

Calculation of an award and the consequent vesting of that award normally takes place shortly after the company’s accounts have been finalised for the final year of the performance period. In those circumstances, you should accept that the award has been made ‘as soon as practicable’ and that the vesting date condition has been met.

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Example: formula including hypothetical condition

Investor protection rules forbid companies and their executives to engage in transactions in their securities during a period when there is a risk of market manipulation for example, during a takeover battle.

To cater for this possibility, the terms of the award provide that, if the vesting date falls during such a period, then the vesting date is postponed until the end of that period.

At the time when the award is made, it is clearly impossible for anyone to know whether this hypothetical condition will be met.

But that does not stop the formula ‘specifying’ a date. Whether the hypothetical condition has been met will be a question of fact.

You will also need to consider carefully whether or not the five or ten year time limit condition is also met where the formula potentially extends the vesting date in this way.

In practice, where the vesting date falls comfortably before the five or ten year anniversary (as applicable) of the award, you can accept that the specified date meets the time limit condition.

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Guidance on Sections 554H, 554J and 554L

On Section 554H, see EIM45255 onwards.

On Section 554J, see EIM45355 onwards.

On Section 554L, see EIM45405 onwards.