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HMRC internal manual

Employment Related Securities Manual

PAYE and NICs - up to 5 April 2015: example 1

Edith is a Hong Kong citizen who has been assigned to the UK for 2 years from 1 May 2009 and is awarded an option over shares in her UK-employer company on 1 June 2010, in year 2 of her stay in the UK. Edith leaves the UK and returns to Hong Kong on 30 April 2011, where she continues to work for the same group. Her option vests on 30 November 2011 but she does not exercise it until 30 May 2012. For 2012/13 Edith is not UK-resident and remains back home in Hong Kong. She claims the remittance basis in 2009/10, 2010/11 and 2011/12.

Edith is UK-resident when she is granted her options, so Chapter 5 of Part 7 applies. As Edith pays £10,000 to acquire shares worth £20,000 the Chapter 5 specific employment income will be £10,000. She is not ordinarily resident in 2010/11 and 2011/12, which years fall within the relevant period from grant of the option (1 June 2010) to the date of vesting (30 November 2011) and she has claimed the remittance basis for at least one of those years, so ITEPA03/S41A will apply. While she is UK resident all her duties are performed in the UK and during the time that she is not resident in the UK, all of her of duties are performed overseas. Her employer is fully aware of her residence status, her remittance basis claim and the balance of her workdays over the entire period.

The effect of Chapter 5A of Part 2 of ITEPA 2003 is to produce taxable specific income under subsection (4) of ITEPA03/S41A in the sum of £6,094 (that is £10,000 x 334/548) for 2012/13. (See ERSM160865 for examples of how to calculate foreign securities income). The employer has sufficient information to calculate this amount and should operate PAYE on it. (See ERSM161030)

As the shares that Edith acquires are UK assets, the foreign securities income arising from them is considered to have been remitted to the UK at the time of the chargeable event and is taxable specific income under subsection (6) of ITEPA03/S41A in the sum of £3,905 for 2012/13 (see ERSM161100).

As the UK does not have a comprehensive Double Tax Agreement with Hong Kong, there is no time apportionment of the gain. (See ERSM161300)

Edith is liable for UK NICs when the option is granted but this is disregarded from earnings so no Class 1 NICs liability arises. As Chapter 5 of Part 7 applies on exercise there are deemed earnings of £10,000 within SSCBA92/S4(4)(a). However, Edith is no longer resident or gainfully employed in the UK so, despite the UK being the source, HMRC would not pursue the payment of NICs.

For the application of this and the other examples to periods from 6 April 2013, see ERSM160873.