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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Post Acquisition Benefits from Securities

Dividends as benefits

The most frequently encountered benefit in connection with a share is the receipt of a dividend. Normal dividends are unlikely to be charged under Chapter 4 because they are chargeable to Income Tax under Chapter 3 (old Schedule F) and Chapter 4 (old Case V of Schedule D) Part 4 ITTOIA 2005. This was made clear in the ministerial statement set out below.

Ministerial statement 21 June 2005

The Paymaster General (Dawn Primarolo) made the following statement in the Standing Committee on Finance (No. 3) Bill 2005 on 21 June 2005 to clarify the scope of an amendment:

“These arrangements are devised to deal with the minority of cases where there are complex, contrived arrangements to avoid paying Income Tax and National Insurance on employment rewards. The Government have made clear their intention to close that activity down permanently.

There has been some debate about whether small businesses are caught by the provisions, so I am grateful to have the opportunity to offer small businesses some reassurance.

A change being made to Chapter 4 of the Income Tax (Earnings and Pensions) Act 2003 will remove, where avoidance is involved, the provision that automatically exempts benefits received in connection with securities from a full Income Tax and National Insurance charge, if Income Tax has been paid elsewhere. I am aware, from representations made directly to me and my Department, that professionals have expressed concern about the possible scope of the change. I want to make it clear that this change does not bring all benefits derived from securities into a tax and National Insurance charge. A reference to benefits in the context of the schedule means the employment reward—the passing of value to an employee in return for the employee’s labour. Where investors are carrying out their normal investment transaction, this charge will not affect them.

The purpose test introduced in Section 447 of the 2003 Act has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash bonuses. If taxpayers use contrived arrangements to get round anti- avoidance legislation—to avoid paying the proper amount of tax and National Insurance—they cannot expect to be excluded from the charge. However, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and National Insurance.”

Where an owner-managed company, run as a genuine business, pays dividends out of company profits and there is no contrived scheme to avoid Income Tax or NIC on remuneration or to avoid the IR35 rules, HMRC will not seek to argue that a Chapter 4 benefit has been received by the directors because of the exclusion provided by ITEPA03/S447 (4) - see ERSM90200.

But see ERSM90210 where the exclusion is removed when avoidance is involved.