Budget Notes

BN25 EMPLOYMENT-RELATED SECURITIES: DEDUCTIBLE AMOUNTS

Who is likely to be affected?

1. Employers who provide, and employees who acquire, employment-related securities (ERS).

General description of the measure

2. Legislation will be included in Finance Bill 2008 to amend the wording of the rules affecting the taxation of ERS that were rewritten from the Income and Corporation Taxes Act 1988 (ICTA) into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to put beyond doubt the intention of the affected parts.

3. Users of avoidance schemes have argued that deductions for 'amounts that constitute earnings' can include earnings which were exempt income and therefore not charged to income tax, thereby reducing amounts which count as employment income under Part 7 of ITEPA, reducing chargeable gains under the Taxation of Chargeable Gains Act 1992 (TCGA), and increasing corporation tax relief available under Schedule 23 to the Finance Act (FA 2003). The wording will be amended to ensure that this is not the case.

Operative date

4. The measure will have effect for all relevant events and transactions occurring on or after 12 March 2008.

Current law and proposed revisions

5. The following parts of the legislation contain provisions that refer to 'amounts that constitute(d) earnings':

•    Part 7 of ITEPA - income tax rules for ERS;

•    Section 149AA of TCGA - rules for calculating the gain from ERS that is chargeable to capital gains tax (CGT);

•    Schedule 23 to FA 2003 - rules for corporation tax relief for ERS.

6. In all of the above provisions, the use of the phrase 'amounts that constitute(d) earnings' might be interpreted to cause a lower amount than intended to be chargeable to income tax, CGT or corporation tax. The use of this phrase was part of the rewriting of ICTA into ITEPA, which was not intended to change the meaning of the source legislation in ICTA.

7. The phrase 'amount that constitute(d) earnings' will be amended to put beyond doubt the intention of the legislation. The revision will make clear that the amounts referred to in this phrase are amounts that have been subjected to income tax.

8. The measure will have effect for all relevant events and transactions occurring on or after 12 March 2008. Changes to be made to section 149AA of TCGA applying to restricted and convertible securities; section 428 of ITEPA (as originally enacted), applying to conditional interests in shares; section 428 of ITEPA, applying to restricted securities; and section 480, applying to employment-related securities options will also have effect for ERS acquired before 12 March 2008 where the relevant event and transaction occurs on or after that date.

9. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

10. If you have any questions about this change, please contact Claire Talbot on 020 7147 2867 or Jon Clarke on 020 7147 2157 (email: shareschemes@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk