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HMRC internal manual

Employment Related Securities Manual

Securities Options: earn-outs: overview of liability

During the passage of the Schedule 22 Finance Act 2003 through Parliament the Paymaster General, Dawn Primarolo, said:

“A point to emphasise here is that the rules introduced by Schedule 22 seek to tax value obtained by reason of employment.”

Where an earn-out operates entirely to cover further proceeds of sale, with no element of remuneration, then Income Tax and National Insurance Contributions (NICs) should not be payable.

But where an earn-out includes an element that passes value to a prospective employee of the acquiring company as reward for services over a performance period, then that remuneration element should be within the charge to Income Tax and NICs. The following paragraphs explain how the rules in Part 7 of ITEPA will be applied to achieve this policy intention and provide some guidance in identifying the divide between remuneration and capital.

Business sales

Where there is a sale of the goodwill and other assets of a business rather than a sale of the securities through which those assets are held the above guidance will apply with all appropriate amendments.