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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Just and reasonable override - up to 5 April 2015: introduction

ITEPA03/S41E provides that where the amount of foreign securities income that is calculated in accordance with ITEPA03/S41C is not, having regard to all the circumstances just and reasonable, then a just and reasonable figure may be substituted.

The aim of the apportionment rules in Chapter 5A is, for employment income charges arising under Part 7 of ITEPA for UK-resident employees, to broadly replicate the effect of the charging provisions that apply to the general earnings of UK-resident employees.

So, where the foreign earnings of an employee who is resident in the UK but not ordinarily resident there (from 6 April 2013, where the foreign earnings of an employee who is not domiciled in the UK and meets the requirements of section 26A - see ERSM160615) are, by virtue of ITEPA03/S26, subject to UK tax only to the extent that they are remitted, Chapter 5A attempts to identify the portion of an employment-related securities gain that relates to duties performed outside the United Kingdom.

Similarly, where the chargeable overseas earnings of an employee who is resident and ordinarily resident but not domiciled in the UK (from 6 April 2013, where the chargeable overseas earnings of an employee who is not domiciled in the UK and does not meet the requirements of section 26A - see ERSM160615) are only subject to UK tax if and when remitted by virtue of ITEPA03/S22, again, Chapter 5A attempts to apportion employment income from employment-related securities between overseas duties for a foreign employer and duties of an associated employment in the same way that ITEPA03/S24 does for general earnings.

The detailed apportionment rules try to achieve this by envisaging the gain as accruing equally over the whole of a relevant period. The relevant period is the period over which the gain could be regarded as having been earned.

There may be circumstances where the relevant period laid down in ITEPA03/S41B does not match the reality of the period over which the gain can fairly be said to have been earned. There may be other circumstances when the gain could not fairly be said to have been earned in equal amounts over each day of the relevant period. In such circumstances, the just and reasonable override acts to replace the amount calculated by s41C with a just and reasonable amount.

The legislation does not set out how this is to be achieved. Instead, the intention is to have regard to the general aim of the apportionment rules as mentioned above; to broadly replicate the effect of the charging provisions that apply to the general earnings of UK-resident employees. (See the examples at ERSM160920)

As a result, in some circumstances there may be more than one way to arrive at a just and reasonable result, but whichever method is used, the results should be more or less the same.

When HMRC staff find cases where the just and reasonable override has been used by the taxpayer or the employer, or where it has not been used but is felt to be appropriate by HMRC, the case should be referred to ESSU.

Remittance basis must apply in the statutory relevant period

The rules for applying the remittance basis to employment-related securities in Chapter 5A of Part 2 of ITEPA only take effect if the remittance basis applies in general (by virtue of sections 809B, 809D or 809E of ITA 2007) to any part of the relevant period. This means that, where a taxpayer feels that the statutory relevant period does not reflect the true period over which, on the facts of his or her case, an ERS gain has been earned, the remittance basis must nevertheless apply to some part of the statutory relevant period, in order for the just and reasonable provision within the rules of Chapter 5A to be invoked, enabling the true relevant period to be recognised.