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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: amount of Part 7A income: residence issues

Section 554Z4 ITEPA 2003

Value of relevant step ‘for’ which tax year?
Is A non-UK resident in that tax year?
Is that tax year a split year as respects A?
Relationship with Section 554Z2
Example: non-UK resident, UK duties
Example: relevant step after A has emigrated

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Value of relevant step ‘for’ which tax year?

You need to determine the particular tax year or years which the value of the relevant step is ‘for’.

To do this, you apply Sections 16(1) to (4) and 17(1) to (3) ITEPA 2003 as if the value of the relevant step was general earnings. See EIM40008 onwards.

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Is A non-UK resident in that tax year?

If the value of the relevant step (or a part of it) is ‘for’ a tax year in which A is non-UK resident, you reduce the value (or that part of it) to the extent that it is not in respect of UK duties (that is, duties performed in the United Kingdom).

You determine that extent on a just and reasonable basis.

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Is that tax year a split year as respects A?

If the value of the relevant step is ‘for’ a tax year which is a split year as respects A, you reduce it by so much of it as is both:

  • attributable to the overseas part of the tax year, and
  • not in respect of UK duties.

Similarly, if part of the value of the relevant step is ‘for’ a tax year which is a split year as respects A, you reduce that part by so much of it as is both:

  • attributable to the overseas part of the tax year, and
  • not in respect of UK duties.

You determine on a just and reasonable basis:

  • how far a part of the value of the relevant step is attributable to the overseas part of the tax year, and
  • how far a part of the value of the relevant step is not in respect of UK duties.

To the extent that a part of the value of the relevant step is attributable to the overseas part of the tax year, you determine on a just and reasonable basis how far it is not in respect of UK duties.

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Relationship with Section 554Z2

Section 554Z4 ITEPA 2003 determines the particular tax year or years which the value of the relevant step is ‘for’. It may thus affect the amount of A’s Part 7A income.

It does not change the tax year for which the value of the relevant step counts as employment income under Section 554Z2. It therefore does not affect the timing of the charge.

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Example: non-UK resident, UK duties

A is non-UK resident in 2011-12, but carries out duties of the employment in the United Kingdom in that year.

A relevant step is taken in A’s favour in 2011-12, giving rise to Part 7A income.

Under Section 554Z2 the value of the relevant step counts as A’s employment income for 2011-12 even though A is not resident in the United Kingdom in that tax year.

Under Section 554Z4, the value of the relevant step is attributed to 2011-12.

But you reduce this value on a just and reasonable basis to the extent that it is not in respect of duties performed in the United Kingdom.

This is essentially no different from the position where an employee receives earnings in a tax year in which the employee is not resident in the United Kingdom.

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Example: relevant step after A has emigrated

A was always resident in the United Kingdom until 5 April 2012. A commenced employment with B Ltd in 1995 and carried out the duties of the employment in the United Kingdom until 5 April 2012.

In 2006, 2007 and 2010 B Ltd paid £1.5 million in total into an EBT.

On 6 April 2012 A moved permanently abroad and took on a new role in B Ltd in which the duties were performed wholly outside the United Kingdom.

On 31 March 2013 the EBT advanced a loan of £0.8 million to A.

It is agreed that this is an arrangement that comes through the Part 7A gateway and the advance of the loan is a relevant step within Section 554C (see EIM45060).

As the advance of the loan is a step that involves a sum of money, the starting point for working out the value that counts as employment income is the full amount of the sum involved, namely £0.8 million (see EIM45710).

As A is non-UK resident and performing the duties of the employment overseas in the tax year in which the relevant step is taken, you need to establish what year or years the step is ‘for’ in order to decide if the value of the relevant step is to be reduced under Section 554Z4.

In this case, the evidence points towards the full value of the relevant step relating to the years when the employer funded the EBT. A was UK resident and performing the duties of the employment in the United Kingdom in those years. Accordingly there is no reduction under Section 554Z4 and the full amount of the loan of £0.8 million counts as employment income.