Income Tax (Earnings and Pensions) Act 2003 section 554J

Exclusions: earmarking for employee share schemes (1)

Section 554J provides an exclusion from the disguised remuneration rules (Part 7A, Chapter 2) where shares are earmarked by a third party solely to satisfy an award under an employer's employee share scheme, provided certain conditions are met.

• Where an employer operates a share scheme that makes deferred awards of shares (or cash determined by share value) to employees, and those awards carry a genuine risk of forfeiture, the earmarking of shares to meet such awards is excluded from the disguised remuneration charge — provided the earmarking is not connected to a tax avoidance arrangement.
• The deferral period (from award date to vesting date) must not exceed ten years, and there must be a reasonable chance at the award date that the award will be revoked because the performance or other conditions will not be met.
• If shares are earmarked in anticipation of an award that has not yet been made, the award must actually be made within three months; otherwise, the exclusion is lost and a deemed taxable event occurs at the end of that three-month window.
• At the vesting date, any earmarked shares that have not been delivered to the employee, used to fund a cash payment to the employee, or released because the award was revoked, are treated as the subject of a new taxable relevant step — meaning the disguised remuneration charge applies to those residual shares and any related income.