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HMRC internal manual

Employment Related Securities Manual

Interaction of UK law and treaties - from 6 April 2015: time apportionment

Time apportionment: securities options

The effect of a double taxation treaty was discussed at ERSM163110. If the UK is not the country of residence when a chargeable event happens, then the employee may be resident in a territory with which we have a double taxation treaty. If so, they will be able to make a claim that the UK restricts its liability to the amount derived from employment in the UK. This is commonly referred to as “time apportionment”.

The most common situation where this arises is with share options. The Organisation for Economic Co-operation and Development (OECD) has published a paper setting out in detail the international consensus on how these should be taxed where work has been carried out in more than one territory. The UK’s approach follows this.

In the UK, share option gains are time-apportioned on the basis that the right to exercise an option is earned by service from the date of grant forwards to the date the option vests, by reference to the number of workdays in each country during that period. This treatment is in accordance with OECD recommendations, but some Double Taxation Agreements may specify a different treatment, for example the UK/US Treaty specifies that share option gains are time apportioned over the period from grant to exercise. (See ERSM163130)

In view of the fact that there is an OECD consensus on the treatment of share options, HMRC is prepared to apportion gains for the purposes of the domestic charge under Part 7, where there are overseas workdays in territories having double taxation treaties with the UK, without a claim under the treaty. In cases not involving share options, it will be necessary for a claim to be made under the treaty before any apportionment can be made. However, the effect of Chapter 5B will often be that the UK charge is time-apportioned regardless of the effect of the treaty.

Time apportionment: Restricted and forfeitable securities

Whilst the principles outlined in ERSM163110 will apply where shares are acquired other than via an option, the underlying facts may be different and sometimes a reduction in UK liability may not be available under a double taxation treaty.

Up until 6 April 2008, HMRC maintained that while, in general, the right to exercise an option was earned by future service from the date of the grant forwards, restricted securities (including forfeitable securities) should usually be regarded as a reward for service up to their award, but with a blocking period where the securities could be lost or before the end of which the recipient was unable to obtain the full benefit in cash terms. HMRC’s position was that for treaty relief, the reward from restricted securities was normally earned up to the date of the award and that the primary taxing rights belonged solely to the territory where the work was carried on up to the date of grant, not after it.

Revised practice

Following the changes of Finance Act 2008 to the taxation regime for internationally mobile employees in receipt of employment-related securities, there is statutory recognition that, in general, the period in which a restricted or forfeitable security will be earned is the period between the award of the security and the lifting of the restriction or forfeiture condition. From 6 April 2008 HMRC have applied this approach for the purposes of treaty time apportionment, whether or not the rules of Chapter 5B of Part 2 of ITEPA 2003 apply and regardless of whether the securities were awarded before 6 April 2008.

This is the general approach. As with the rules of Chapter 5B, where the facts of a case point to the conclusion that the reward relates to employment carried on during a different period than that between award and lifting of restrictions, say, for example a period from some time prior to the award to very shortly after it, then the earnings period would be regarded as that which accorded most closely with the facts.