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HMRC internal manual

Employment Related Securities Manual

Just and reasonable override - up to 5 April 2015: example 3 - taxpayer-favour adjustment in respect of leaving employment during the relevant period

Nina is awarded nil cost securities options on 1 September 2008 which vest on 31 August 2013. She is R/NOR in 2008/09, 2009/10 and 2010/11.

Nina works wholly in the UK in the period from 1 September to 5 April 2009 and then spends half of her workdays in 2009/10 in the UK and half overseas. From 6 April 2010 to 31 August 2010, Nina again works half in the UK and half overseas. On 31 August 2010, Nina leaves her employment and returns home to India. She does not lose her entitlement to exercise her securities option, but the earliest time at which she may do this remains 31 August 2013.

On 1 September 2013, Nina exercises her option and acquires her shares. The gain is £182,600.

Nina claims the remittance basis for her years of UK residence, 2008/09, 2009/10 and 2010/11.

The relevant period in accordance with ITEPA03/S41B(5) runs from 1 September 2008 to 31 August 2013. For part of that period, ITA07/S809B applies to Nina.

ITEPA03/S41C(6) applies to her for 2008/09, 2009/10 and 2010/11. Also, within the relevant period, Nina is not resident in the UK from 6 April 2011 to the end of the relevant period on 31 August 2013. In accordance with ITEPA03/S41C(7), 2011/12, 2012/13 and 2013/14 are treated as if ITA07/S809B applies.

In accordance with ITEPA03/S41C(2), the securities income is treated as accruing evenly over the relevant period: that is £100 per calendar day (five years including one leap year).

In the part of the relevant period that runs from 1 September 2008 to 5 April 2009, all of Nina’s duties are performed in the UK, so, of the securities income treated as accruing over that period (217 x £100 = £21,700), none is foreign.

In 2009/10 half of Nina’s duties have been performed in the UK, so of the securities income treated as accruing over that period (365 x £100 = £36,500) half (£18,250) is foreign.

For 2010/11, Nina is UK-resident and eligible for remittance basis. In the year, half of Nina’s duties have been performed outside the UK, so the statute at ITEPA03/S41C(5) would treat half of the securities income treated as accruing over the year (365 x £100 = £36,500 x ½ = 18,250) as foreign.

ESC A11 would treat the part of 2010/11 following Nina’s return to India as a period of non-residence, but, as there are no duties in that part of the year, this would not have the effect of reducing Nina’s UK tax liability, since none of the securities income treated as accruing over that period would be foreign.

From 6 April 2011 until the end of the relevant period, Nina performs no duties of the employment, so, of the securities income treated as accruing over the remainder of the relevant period (879 x £100 = £87,900), none is foreign.

So, of the total securities income of £182,600, £36,500 is foreign and £146,100 is charged as taxable specific income in the UK in 2013/14.

This does not appear to be a fair result. Of the time from the start of the relevant period up to the cessation of Nina’s employment, her duties were split between UK and foreign duties at around 64.8% to 35.2%. The just and reasonable override would give effect to this and treat £64,275 as foreign.

For the application of this and the other examples to periods from 6 April 2013, see ERSM160873 in respect of NOR status and ERSM70460 in respect of split year treatment.