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 Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.