UK: HMRC and the Code

Last Updated: 16 January 2011
Article by Paul McGrath

Any firm that must apply the revised FSA Remuneration Code (and indeed, any firm which, while entitled to disapply Code rules, nevertheless chooses to implement some or all of them) will need to think carefully how to implement the provisions relating to the deferral of variable remuneration and the satisfaction of variable remuneration in shares or share-like instruments. Even before the Code was revised, it was not uncommon for some variable bonuses to be paid on deferred terms, such deferral providing a useful retention mechanism for key staff.

Where bonuses are deferred, employers have frequently used an employee benefit trust ('EBT') as the ultimate paying entity. Typically, the employer would contribute the full amount of annual bonus payments to the EBT, which would then hold such sums for a specified number of years, before paying them out to employees who remained with the company after the qualifying period. The advantage from the employee's perspective is that, provided the employer was solvent at the time it made the contribution to the EBT, sums held within the EBT are relatively safe from attack by creditors if the fortunes of the company subsequently change for the worse. Also, to the extent that vesting of any portion of the deferred bonus is dependant upon the exercise of some person's discretion, having an independent, professional trustee as the person exercising that discretion provides some comfort that the discretion will not be exercised unfairly against the employee should there be, for example, a change in management at the company itself.

It might be thought that the use of EBTs would increase as a result of the revisions to the Code. However, on 9 December 2010 the Government released draft clauses to be included in the 2011 Finance Bill which may put an end to the use of EBTs as vehicles for deferring remuneration.

In the past, deferred bonuses were generally only taxed when actually received by the employee, not when the employee was notified of the award or when the sums to satisfy bonuses were transferred to an EBT. If the new rules are enacted as announced, any allocation, reservation or earmarking of any sum of money or asset held by an EBT with a view to its later being paid to an employee will be taxable at the first moment of allocation, reservation or earmarking. In short, if an employer uses an EBT (or any other third party, eg a custodian or escrow agent) to warehouse deferred bonuses, it is likely that those bonuses will be taxed at or about the time the EBT receives the cash. This could be several years before the employee actually receives all or any part of the bonus. Indeed, if some or all of the bonus amount is forfeited because the employee fails to meet the vesting criteria, eg because he leaves or because the performance of the employer deteriorates, he will have paid tax on an amount he will not have received and will not be able to recover that tax from HMRC.

Unless the draft legislation is significantly amended before it is enacted, it would seem that employers would generally be ill advised to pay sums representing deferred remuneration to third parties but should instead keep these amounts within their own bank accounts. The new rules would also catch the employer acting as trustee. In fact, the rules are drafted so widely that they could be interpreted as catching any reservation of money by the employer for the purpose of paying bonuses, even if there is no actual trust created.

Another use to which EBTs have historically been put is to act as a warehouse for shares to be used to satisfy awards made by an employer under a share option scheme or long term incentive plan. Given the requirement under the Code to satisfy at least 50% of variable remuneration in shares or share-like instruments, it is likely that the use of share option and long term incentive plans will increase. That said, if the new rules on EBTs are enacted in their current form, care will need to be taken to ensure that income tax and national insurance contribution charges are not inadvertently triggered. The new rules will not catch the grant of a share option by the trustees of an EBT. However, many companies with share option plans grant the options themselves and have a separate arrangement with the EBT for it to reserve a number of shares held by it to satisfy those options. The reservation of shares by the EBT will trigger an income tax and NIC charge upon the relevant employees, even though there would have been no such charge had the grant been made directly by the EBT.

All this is unsettling as employers grapple with the implications of the Code. Withers LLP is currently liaising with HMRC in order to clarify the scope of the draft legislation and to press for changes to limit it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions