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HMRC internal manual

Employment Related Securities Manual

PAYE and NICs - up to 5 April 2015: example 3

Jeremy is a UK citizen who leaves the UK on 1 July 2009 for an assignment in France lasting 24 months. He remains employed by the UK employer and has an E101 certificate, extended over the 24-month period of the assignment. While in the UK on 1 June 2008 he receives an option over shares. The options vest on 31 May 2010 and on 1 August 2010 he exercises his option and acquires shares, producing an option gain of £10,000.

Jeremy is UK-resident at grant so Chapter 5 applies. A charge arises on £10,000 under ITEPA03/S476 when the shares are acquired on the exercise of the option. He was UK-resident, ordinarily resident, and UK-domiciled for 2008/09 and 2009/10 and not UK-resident in 2010/11. He is not eligible to claim the remittance basis in any year which falls in the period between 1 June 2008 and 31 May 2010, so Chapter 5A of Part 2 does not apply. As Jeremy is not treaty resident in the UK when the chargeable event occurs and there is a UK/France DTA, he may claim time apportionment on a straight line basis between UK and non-UK duties between grant and vest. (See ERSM161300.) Unless the employer has obtained an NT code, it should operate PAYE on the amount that counts as employment income under Chapter 5 - unless it has sufficiently accurate information on periods of employment spent abroad, in which case it may operate PAYE for the non-resident employee only on the UK proportion, using the best estimate that can reasonably be made, in accordance with ITEPA03/S696(2). Time apportionment gives a UK tax charge of £10,000 x 260/480 = £5,416.

For NICs, the option was granted whilst Jeremy was insured in the UK scheme. A charge to tax under Chapter 5 gives rise to deemed earnings under SSCBA92/S4(4)(a) when shares are acquired. As the gain from the share option was realised from a period of employment in the UK, a liability for Class 1 NICs arises.

As Jeremy has a valid E101 at the point the deemed earnings are received, UK NIC is due on the same amount that is counts as employment income by virtue of Chapter 5, which is £10,000. In this instance, even if Jeremy did not hold E101 at the point of deemed earnings we would pursue UK NICs under EC sourcing rules.

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