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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: exercise of share options: fall-back charge

Section 554Z7 ITEPA 2003

If:

  • Section 554Z7 has reduced Part 7A income (see EIM45745), and
  • the relevant step under review is an actual step within Section 554B (see EIM45740),

there are two cases in which there will be a fall-back charge.

Expected grant delayed

There will be a fall-back charge if the four conditions in Section 554Z7(5) are met. These conditions are bulleted below.

  • The relevant step is taken in relation to an expected grant of a relevant share option. See EIM45740.
  • The grant is not made before the end of the date (‘the final grant date’) falling immediately after the period of three months starting with the date on which the relevant step is taken.
  • As at the end of the final grant date, any of the earmarked shares continue to be held by or on behalf of the relevant third person (P) solely with a view to providing shares or paying a sum of money.
  • These shares are to be provided (or this money is to be paid) pursuant to:

    • a relevant share option granted to A under B’s employee share scheme as mentioned in Section 554Z7(1)(c) in relation to which the requirements of Section 554Z7(1)(d) are met, or
    • a relevant share option which is expected to be granted to A under B’s employee share scheme as mentioned in Section 554Z7(1)(c) and in relation to which the requirements of Section 554Z7(1)(d) would be met.

If those conditions are met, Section 554Z7(7) 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 final grant date.
  • The subject of the relevant step is the earmarked shares which continue to be held as discussed above.
  • The relevant step gives rise to Part 7A income.

The relevant step is subject to the exclusion in Section 554A(4) and any relevant reliefs.

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

On Section 554Z7(1)(c) and (d), see EIM45740.

Continued earmarking etc

There will be a fall-back charge if the two conditions in Section 554Z7(6) are met. These conditions are bulleted below.

  • At any time after the relevant step is taken, any of the earmarked shares ceases to be held by or on behalf of P solely with a view to providing shares, or paying a sum of money, pursuant to:

    • a relevant share option granted to A under B’s employee share scheme as mentioned in Section 554Z7(1)(c) in relation to which the requirements of Section 554Z7(1)(d) are met, or
    • a relevant share option which is expected to be granted to A under B’s employee share scheme as mentioned in Section 554Z7(1)(c) and in relation to which the requirements of Section 554Z7(1)(d) would be met.
  • At that time, the shares continue to be held by or on behalf of P on a Section 554B basis.

If those conditions are met, Section 554Z(7) deems a relevant step to be taken with the following features.

  • The relevant step is within Section 554B.
  • It is taken at the time mentioned above.
  • The subject of the relevant step is the earmarked shares which continue to be held as discussed above.
  • The relevant step gives rise to Part 7A income.

The relevant step is subject to the exclusion in Section 554A(4) and any relevant reliefs.

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

On Section 554Z7(1)(c) and (d), see EIM45740.