Disguised Remuneration and Employee Share Plans

Posted by admin at 15:51 on 13 Feb 2017


EBT Trustees Beware Triggering Unwelcome Charge

What is "disguised remuneration"?

Disguised remuneration is covered in a specific piece of legislation that was enacted in 2011, also commonly known as "Part 7A".

Part 7A was introduced to prevent tax avoidance related to certain payments made to employees and their families via third parties such as Employee Benefit Trusts (EBTs). The legislation is designed to ensure that any such payments are charged to income tax and National Insurance Contributions (NICs) under PAYE, immediately and without deferral.

How it works

Very briefly, if a trustee or other third party takes certain steps ("relevant steps") in connection with the provision of "rewards, recognition or loans" to employees (or other associated persons), there will be an immediate charge to income tax and NICs.

Note that "third party" is not limited to EBTs. Because of the way the legislation is drafted, it can in some circumstances include members of the same group of companies as the employing company.

This means that, unless care is taken, there can be a PAYE charge even before the employee has received any payment.  For example, one "relevant" step set out in the legislation is "earmarking". This is not defined – although the legislation adds that the earmarking will apply "however informal" - so this could include any kind of setting aside or designation of funds for a particular purpose.

For example, if the trustee of an EBT records that there has been a notional allocation of shares for a particular employee under a share plan, this will be classed as earmarking, even if the employee does not yet have the right to acquire the shares. A PAYE charge will arise on the value of the shares. This position can be further clouded in the usual instance of an EBT trustee acting in an individual capacity whilst also being an executive director of the sponsoring company. If the company board express wishes about future named share recipients this might trigger the earmarking charge.

Other relevant steps include making a payment, making a loan, and making an asset available to an employee (however informally).

How does disguised remuneration affect HMRC approved share plans?

If you are operating HMRC recognised share plans (EMI, CSOP, SIP or SAYE), there are exemptions in place and Part 7A will not as a general rule apply.

However, there are exemptions to the exemptions! So even where you are using an HMRC recognised plan, you may fall foul of Part 7A in certain circumstances. For example:

  • The number of shares earmarked for use under the Plan over a 10 year period must not exceed a "reasonable amount".  ("Reasonable amount" is not defined in the legislation.) So, for example, the trustee of an EBT setting aside shares to be held to satisfy the exercise of EMI options will need to keep a careful track of the numbers of shares earmarked over the lifetime of the plan.
  • The "relevant step" must be taken solely in connection with approved options. For example, where EMI and Unapproved options are granted, there is a risk that shares earmarked for the unapproved options will be charged under Part 7A. Worse, if your EMI agreement covers both EMI and Unapproved options (in case the individual limit is breached), all of the shares earmarked may face a Part 7A charge.

How does disguised remuneration affect unapproved plans?

If you are operating a "standard" unapproved share or option plan (including LTIPs), exclusions will also apply. However, these are limited and again, if a third party (such as an EBT) is used to award shares or grant options, care should be taken.

For example, options (including phantom options) should not be exercisable until a "specified vesting date" (up to 10 years after the date of grant) or a specified exit event that is reasonably likely to happen (viewed as at the time of the award). Furthermore the option should not be exercisable unless certain vesting conditions can be met and there is a reasonable chance that the option will lapse because of a failure to meet those vesting conditions.

It is not entirely clear that early exercise of options, for example in the case of a good leaver or a corporate transaction such as a sale, is technically permitted under the legislation. The general view is that standard good leaver provisions would be acceptable to HMRC.

How does disguised remuneration affect deferred cash payments?

If cash is earmarked – set aside – for employees and is to be paid on a deferred basis, then a Part 7A charge may arise on the amount when it is so earmarked, unless an exemption applies.

The exemption will apply provided that the award is not paid out until specific conditions are met on or before the vesting date. The vesting date must be no more than 5 years after the award date. There must be a reasonable chance that the award will be revoked because not all the specified conditions are met.

How does disguised remuneration affect loans?

The legislation is particularly harsh in relation to bona-fide employment related loans. Generally, income tax and NICs will become chargeable immediately on the value of the loan, irrespective of whether interest is charged, and no relief is available when a taxed loan is repaid.

Again, the exclusions are very limited. For example, there is an exclusion for a loan made as part of a commercial transaction, but this would require the loan to be made on commercial terms by a body whose business involved making loans or supplying goods and services on credit. That is very unlikely to apply to typical EBT arrangements.

There is also an exclusion for short term loans enabling employees to exercise share options; these loans must be repaid within 40 days.


This note provides an overview of the Part 7A rules and should not be taken as definitive guidance on the position. The deferred remuneration legislation is widely drafted and very complex. Its effects have yet to be tested in the courts, which is particularly important because much of the language used is not defined elsewhere in legislation. There is a significant amount of guidance provided by HM Revenue & Customs (HMRC) but relying on HMRC guidance does not provide a guaranteed position of safety.

If you are using an EBT or any other third party to hold shares on behalf of your employees, or to grant options or make deferred payments to your employees, you should take advice from an expert. Failure to get clear guidance could result in an immediate and potentially significant tax charge on both the company and the employees. This legislation is unforgiving and complex enough to keep experienced specialists on their toes. So you must have a trustee who is well versed in these matters. If you are an individual acting as an EBT trustee in a personal capacity then remember you are exposed to personal liability if things go wrong...

RM2 act as professional trustees and administer numerous EBT share plan arrangements. To safely navigate the above and find out how to appoint us to act for you, contact a member of the RM2 team directly on 020 8949 5522.