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HMRC internal manual

Employment Related Securities Manual

Employment-related securities and options: definition of ‘acquisition’ of securities or option

‘The acquisition’, in relation to employment-related securities or employment-related securities options, means the acquisition of the employment-related securities or options pursuant to the right or opportunity available by reason of the employment - ITEPA03/S421B (8) and ITEPA03/S471 (5).

Subsection 2(a) of ITEPA03/S421B defines the time of acquisition of a security, for the purposes of Chapters 2 to 4A, as:

“the time when the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest (and not, if different, the time when the securities are, or interest is, conveyed or transferred).”

Subsection 4 of ITEPA03/S477 defines the time of acquisition of securities on exercise of an option, for the purposes of Chapter 5, as:

“the time when a beneficial interest is acquired (and not, if different, the time when the securities are conveyed or transferred).”

The Part 7 definitions do not in any event apply to a money’s worth charge on acquisition -see ERSM20540.

In practice, the subtle differences should not create any difficulties, although difficulties can occur in the timing where, say, options are satisfied with both existing and new issue shares and a market value needs to be applied to the whole transaction, or where there is a cashless exercise with tranches of shares sold during the day. Scottish law may differ from English law in relation to when ownership passes.

We will apply common sense in allowing taxpayers and their agents to identify a reasonable date and time for acquisition in accordance with the above definitions and only query if there is evidence of avoidance or manipulation. See ERSM20410 on cashless exercises.

Benedict Manning v HMRC [2013] UKFTT 252 (TC)

This appeal to the First Tier Tribunal related to the application of ITEPA03/S222 (Payments by employer on account of tax where deduction not possible). Section 222 provides that if an employer deducts and accounts to HMRC for tax from a ‘notional payment’ such as a securities option gain and the employee does not, before the end of 90 days from ‘the relevant date’ make good the amount to the employer, then the amount is treated as earnings. (For notional payments treated as made after 5 April 2014, the time allowed is 90 days from the end of the tax year in which the relevant date falls.) See ERSM170400 and also EIM11950 onwards and EIM11952 in particular.

Mr Manning exercised a share option awarded under his employer’s share option scheme. The scheme rules provided that a condition for a participant’s exercise of an option was that they should deliver cash or a cheque to their employer sufficient to pay the PAYE tax due on the gain they made on exercise.

As a decisive factor in finding in favour of the taxpayer, the Tribunal decided that this requirement was a condition of the exercise of the share option and that Mr Manning could not be considered to have acquired a beneficial interest in the shares until he had paid his employer in respect of the PAYE.

While HMRC has not appealed against the decision in this case, there are aspects of its reasoning that HMRC will challenge if reliance is placed on it. The requirement within the scheme rules placed a separate obligation on Mr Manning to account for any PAYE tax (relating to the exercise of the share options) paid by his employer on his behalf. The acquisition of the beneficial interest in the shares by Mr Manning was not conditional upon his repayment of the PAYE tax and occurred at the time that he exercised his option and paid the exercise price to acquire the shares.