The Social Security (Contributions) Regulations 2001

Regulation 24

SCHEDULE 2 U.K. CALCULATION OF EARNINGS FOR THE PURPOSES OF EARNINGS-RELATED CONTRIBUTIONS IN PARTICULAR CASES

Calculation of earnings U.K.

1.  This Schedule contains rules for the calculation of earnings in the assessment of earnings-related contributions in particular cases.

Calculation of earnings in respect of beneficial interest in assets within Part IV of Schedule 3 U.K.

2.—(1) Except where paragraph 3, 4, 5 or 6 applies, the amount of earnings comprised in any payment by way of the conferment of any beneficial interest in any asset specified in Part IV of Schedule 3, which falls to be taken into account in the computation of a person’s earnings shall be calculated or estimated at a price which that beneficial interest might reasonably be expected to fetch if sold in the open market on the day on which it is conferred.

(2) For the purposes of sub-paragraph (1), where any asset is not quoted on a recognised stock exchange within the meaning of section 841 of the Taxes Act, it shall be assumed that, in the open market which is postulated, there is available to any prospective purchaser of the beneficial interest in the asset in question all the information which a prudent prospective purchaser might reasonably require if he were proposing to purchase if from a willing vendor by private treaty and at arm’s length.

Valuation of beneficial interest in units in a unit trust scheme U.K.

3.  The amount of earnings which is comprised in any payment by way of the conferment of a beneficial interest in any units in a unit trust scheme (within the meaning of section [F1 237 of the Financial Services and Markets Act 2000] having a published selling price and which falls to be taken into account in the calculation of a person’s earnings shall be calculated or estimated by reference to the published selling price on the day in question.

Textual Amendments

F1 Words in Sch. 2 para. 3 substituted (1.12.2001) by The Financial Services and Markets Act 2000 (Consequential Amendments) (Taxes) Order 2001 (S.I. 2001/3629), arts. 1(2)(b), 191

Here “published selling price” means the lowest selling price published on the date on which the payment in question is made, and where no such price is published on that date, it means the lowest selling price published on the last previous date on which such a price was published.

Conferment of a beneficial interest in an option to acquire asset falling within Part IV of Schedule 3 U.K.

4.  The amount of earnings which is comprised in a payment by way of the conferment of a beneficial interest in an option to acquire any asset falling within Part IV of Schedule 3 shall be calculated or estimated by reference to the amount which would be comprised in accordance with paragraph 2, or, if paragraph 3, 5 or 6 would apply in accordance with that paragraph, in a payment by way of the conferment of a beneficial interest—

(a) in the asset which may be acquired by the exercise of the option; or

(b) where that asset (the first asset) may be exchanged for another asset (the second asset) and the value of the beneficial interest in the second asset is greater than that in the first, in that second asset,

on the day on which the beneficial interest in the option is conferred.

The amount shall be reduced by the amount or value, or, if variable, the least amount or value, of the consideration for which the asset may be so acquired.

Readily convertible assets U.K.

5.—(1) The amount of earnings which is comprised in—

(a) any payment by way of the conferment of a beneficial interest in any asset falling within Part III of Schedule 3;

(b) any payment by way of the conferment of a beneficial interest in any asset falling within Part IV of Schedule 3 which is a readily convertible asset;

(c) any payment by way of—

(i) a voucher, stamp or similar document falling within paragraph 12 of Part IV of that Schedule where the asset for which it is capable of being converted is a readily convertible asset;

(ii) a non-cash voucher not falling within Part V (whether or not also falling within paragraph 12 of Part IV of that Schedule) which is capable of being exchanged for a readily convertible asset;

and which is to be taken into account in computing a person’s earnings, shall be calculated in accordance with sub-paragraph (2) to (5).

(2) In the case of an asset falling within paragraph 1 of Part III of Schedule 3 the amount is the best estimate which can reasonably be made of the amount of income likely to be chargeable to tax under Schedule E in respect of the provision of the asset.

(3) In the case of an asset falling within paragraph 2 of Part III of Schedule 3, the amount is the best estimate that can reasonably be made of the amount of income likely to be chargeable to tax under Schedule E in respect of the enhancement of its value.

(4) In the case of a voucher, stamp or similar document falling within—

(a) sub-paragraph(1)(c); or

(b) paragraph 3 of Part III of Schedule 3,

the amount is the best estimate that can reasonably be made of the amount of income likely to be chargeable to tax under Schedule E in respect of the provision of any asset for which the voucher is capable of being exchanged.

(5) In the case of an asset falling within sub-paragraph(1)(b), the amount is the best estimate that can reasonably be made of the amount of income likely to be chargeable to tax under Schedule E in respect of the provision of the asset.

Assets not readily convertible: beneficial interests in alcoholic liquor on which duty has not been paid, gemstones and certain vouchers and non-cash vouchers U.K.

6.  The amount of earnings comprised in any payment by way of the conferment of a beneficial interest in—

(a) an asset which—

(i) falls within paragraph 9 or 10 of Part IV of Schedule 3 (payments by way of alcoholic liquor on which duty has not been paid or by way of gemstones not to be disregarded as payments in kind), and

(ii) is not a readily convertible asset;

(b) a voucher, stamp or similar document which falls within paragraph 12 of Part IV of that Schedule and which is not capable of being exchanged for a readily convertible asset; or

(c) a non-cash voucher not excluded by virtue of Part 5 of that Schedule and which falls within paragraph 12 of Part IV of that Schedule (assets not to be disregarded as payments in kind) which is not capable of being exchanged for a readily convertible asset;

shall be calculated or estimated on the basis of the cost of the asset in question.

Here “the cost of the asset” in relation to any voucher, stamp or similar document includes the cost of any asset for which that voucher, stamp or similar document is capable of being exchanged.

Conditional interest in shares U.K.

7.—(1) The amount of earnings, comprised in any payment by way of the conferment of a conditional interest in shares, falling to be taken into account in computing a person’s earnings, shall be the difference between—

(a) the market value of that person’s interest immediately after—

(i) the interest ceases to be only conditional, or

(ii) if earlier, the sale or other disposal of that interest; and

(b) the amount or value of the consideration given by that person for that interest together with any amounts which have previously been included in his earnings for the purpose of assessment of earnings-related contributions in respect of his acquisition of that interest.

The difference shall be calculated on the basis of the best estimate that can reasonably be made.

(2) In this paragraph—

(a) “market value” has the meaning given in section 140A(6) of the Taxes Act F2 ; and

(b) “the amount of the consideration given” shall be calculated in accordance with section 140B of that Act as it would be for the purposes of section 140A.

Textual Amendments

F2 1988 c. 1.

Convertible interest in shares U.K.

8.—(1) The amount of earnings comprised in any payment by way of the conferment of a beneficial interest in convertible shares and which falls to be taken into account in calculating a person’s earnings shall be the gain from their conversion.

The amount of the gain shall be calculated on the basis of the best estimate that can reasonably be made.

(2) In this paragraph the gain from the conversion of convertible shares is the amount found by the formula—

Here—M is the market value at the time of conversion of the shares into which the convertible shares are converted.

For this purpose “market value” has the same meaning as in section 140F(3) of the Taxes Act.

S is the amount or value of any consideration given for the convertible shares.

For this purpose that amount or value shall be calculated in accordance with section 140E of the Taxes Act.

C is the amount or value of any consideration given for the conversion in question.

P is the amount (if any) which has previously been included in that person’s earnings for the purpose of assessment of his earnings-related contributions, in respect of his aquisition of the interest in the convertible shares.

E is the amount of any gain from an earlier conversion, if the convertible shares were acquired through a series of conversions, where that earlier conversion gave rise to a liability for earnings-related contributions, to the extent that that amount is not included inP.

For this purpose a conversion gives rise to a liability for earnings-related contributions if it—

(a)gives rise to a gain treated as earnings under regulation 22(3); or

(b)would have given rise to such a gain but for the fact that the market value of the shares at the time of the conversion of the shares into which the convertible shares were converted did not exceed the amount produced by the addition of the values forS,C,P and E applicable at the time of the relevant conversion.

Assignment or release of right to acquire shares where neither right nor shares readily convertible U.K.

9.—(1) The amount of earnings comprised in any payment by way of a gain which a person realises by the assignment or release of a right to acquire shares in a body corporate—

(a) obtained by that person as a director or employee of that or any other body corporate where neither that right nor those shares are readily convertible assets; and

(b) falling to be taken into account in calculating a person’s earnings;

shall be calculated on the basis set out in sub-paragraph (2).

(2) The basis is the best estimate that can reasonably be made of the difference between—

(a) the amount or value of the consideration for that assignment or release; and

(b) the amount or value of the consideration (if any) given for the grant of the right.

In making the estimate, a just apportionment shall be made of any entire consideration given for the grant of the right to acquire those shares and other shares or otherwise for the grant of the right to acquire those shares and for something else besides.

(3) This paragraph is subject to paragraph 10.

Assignment or release of a right, acquired as director or employee before 6th April 1999, to acquire shares where neither right nor shares readily convertible U.K.

10.—(1) The amount of earnings comprised in any payment by way of a gain which a person realises by the assignment or release of a right to acquire shares in a body corporate (“the first body corporate”), obtained by that person before 6th April 1999 as a director or employee of that or any other body corporate where neither that right nor those shares are readily convertible assets, where—

(a) a subsequent right forms all or part of the consideration given for the assignment or release of the first right; and

(b) that subsequent right is—

(i) a right to acquire shares in the first body corporate or any other body corporate,

(ii) not treated as consideration for the assignment or release of the first right by virtue of section 136(1) of the Taxes Act; and

(iii) acquired at a total discount on the total market value which is substantially greater than the total discount on the total market value of the first right at the time of its assignment or release;

shall be calculated on the basis set out in sub-paragraph (2) [F3 except where paragraph 11A applies] .

(2) The basis is the best estimate which can reasonably be made of the difference between the total discount on the subsequent right and the total discount on the first right.

Textual Amendments

F3 Words in Sch. 2 para. 10(1) added (10.4.2003) by The Social Security (Contributions) (Amendment No. 3) Regulations 2003 (S.I. 2003/1059), regs. 1(1), 3(2)

Exercise of right to acquire shares gained as director or employee before 6th April 1999 U.K.

11.—(1) The amount of earnings comprised in any payment by way of gain which a person realises by the exercise of a right to acquire shares in a body corporate obtained by that person as a director or employee of that or any other body corporate, where—

(a) that right—

(i) formed all or part of the consideration given for the assignment or release of a right which was obtained before 6th April 1999 (“the first right”) to acquire shares in a body corporate (“the first body corporate”),

(ii) is a right to acquire shares in the first body corporate or any other body corporate; and

(iii) was not treated as consideration for the assignment or release of the first right by virtue of section 136(1) of the Taxes Act; and

(b) at the time of its acquisition, the total market value of the subsequent right was not similar to the total market value of the first right immediately before its assignment or release,

and which falls to be taken into account in computing a person’s earnings, shall be calculated or estimated in accordance with sub-paragraph (2) [F4 except where paragraph 11A applies].

(2) The basis of calculating or estimating the amount of a gain realised by the exercise at any time of a subsequent right shall be the best estimate that can reasonably be made of such part of that gain as relates to the difference between—

(a) the amount that a person might reasonably expect to obtain from a sale in the open market at the time that the shares were acquired pursuant to that subsequent right, less the amount or value of the consideration (if any) given for those shares and the grant of that right; and

(b) the amount that a person might reasonably expect to obtain from a sale in the open market of the shares which were the subject of the first right at the time of its assignment or release less the amount of value of the consideration (if any) given for those shares and the grant of that right.

(3) For the purpose of sub-paragraph (2) “gain” means the amount realised by the exercise of a subsequent right, less any amount which has previously been included in that person’s earnings for the purposes of assessing his earnings-related contributions in respect of his acquisition, assignment or release of the first right.

In making the estimate, a just apportionment shall be made of any entire consideration given for the grant of the right to acquire those shares and other shares or otherwise for the grant of the right to acquire those shares and for something else besides.

Textual Amendments

F4 Words in Sch. 2 para. 11(1) added (10.4.2003) by The Social Security (Contributions) (Amendment No. 3) Regulations 2003 (S.I. 2003/1059), regs. 1(1), 3(2)

[F5 Exercise, assignment or release of share option — market value of option or resulting shares increased by things done otherwise than for genuine commercial purposes U.K.

11A.— (1) This paragraph applies for calculating or estimating the amount of earnings which is comprised in a payment which—

(a) would be disregarded in the computation of earnings for the purposes of earnings-related contributions by virtue of paragraph 16 of Part 9 of Schedule 3; but

(b) is not disregarded because paragraph 17 of that Part applies to it.

(2) If this paragraph applies, the amount of earnings to be taken into account for the purpose of earnings related contributions is the amount which would, but for paragraph 16 of Part 9 of Schedule 3, have been taken into account by virtue of section 4(4)(a) of the Act.

• This is subject to the following qualification.

(3) If—

(a) the right to acquire shares in a body corporate is not capable of being exercised more than ten years after the date on which it was obtained,

(b) an amount of earnings was taken into account for the purpose of earnings-related contributions in respect of the earner’s obtaining that right, at the time he obtained it (“the deductible amount”), and

(c) no exercise, assignment or release of the whole or any part of—

(i) that right,

(ii) any right replacing that right (“a replacement right”), or

(iii) any subsequent replacement right,

has occurred on or after 10th April 2003,

the deductible amount may be deducted from the amount otherwise to be taken into account by virtue of this paragraph.]

Textual Amendments

F5 Sch. 2 para. 11A and cross-heading inserted (10.4.2003) by The Social Security (Contributions) (Amendment No. 3) Regulations 2003 (S.I. 2003/1059), regs. 1(1), 3(3)

Interpretation of paragraphs 9, 10 and 11 U.K.

12.  This paragraph applies for the purposes of paragraph 9, 10 and 11.

In those paragraphs—

(a) “the total market value” means the price which the shares which are the subject of the right in question might reasonably be expected to fetch on sale in the open market;

(b) the total market value of the subsequent right is similar to the total market value of the first right if it is not substantially greater than the first right;

(c) “total discount” means the difference between the total value of the exercise price of the shares that are the subject of the right in question and the total market value of that right;

(d) neither the consideration given for the grant of the right nor any entire consideration shall be taken to include the performance of any duties of or in connection with the office or employment by reason of which the right was granted and no part of the amount or value of the consideration given for the grant shall be deducted more than once;

(e) “shares”, so far as the context permits, includes stock; and

(f) “body corporate” includes—

(i) a body corporate constituted under the law of a country or territory outside the United Kingdom; and

(ii) an unincorporated association wherever constituted.

Apportionment of a payment from a retirement benefits scheme for the benefit of two or more people U.K.

13.—(1) If, pursuant to a retirement benefits scheme, a payment is made with a view to providing any benefits under such a scheme in relation to more than one person, the amount of earnings which is comprised in that payment shall be calculated or estimated on the basis set out in whichever of subparagraphs (2) or (3) applies.

(2) If the separate benefits to be provided to each of the people referred to in sub-paragraph (1) are known at the time when the payment is made, the basis is that of the separate payments which would have had to have been paid to secure the benefits.

(3) In any other case, the amount of the payment shall be apportioned equally between all the persons in respect of whose earnings the payment is to be taken into account.

Valuation of non-cash vouchers U.K.

14.—(1) The amount of earnings comprised in any payment by way of a non-cash voucher which is not otherwise disregarded by these Regulations and which falls to be taken into account in calculating an employed earner’s earnings shall be calculated on the basis set out in sub-paragraph (2).

(2) The basis referred to in sub-paragraph (1) is that of an amount equal to the expense incurred (“the chargeable expense”)—

(a) by the person at whose cost the voucher and the money, goods or services, for which it is capable or being exchanged, are provided;

(b) in, or in connection with that provision,

and any money, goods or services obtained by the employed earner or any other person in exchange for the voucher shall be disregarded.

This is subject to the following qualification.

(3) For the purpose’s of sub-paragraph (2)—

(a) the chargeable expense shall be reduced by any part of that which the employed earner makes good to the person incurring it; and

(b) in the case of a non-cash voucher which can be exchanged only for a meal which exceeds [F6 15 pence,] the chargeable expense shall be reduced by the amount (if any) by which it exceeds the face value of the voucher.

Textual Amendments

F6 Words in Sch. 2 para. 14(3)(b) substituted (26.7.2001) by The Social Security (Contributions) (Amendment No. 5) Regulations 2001 (S.I. 2001/2412), regs. 1, 4

Apportionment of earnings comprised in a cash or non-cash voucher provided for benefit of two or more employed earners U.K.

15.—(1) The amount of earnings comprised in any payment by way of a cash voucher or a non-cash voucher provided for the benefit of two or more employed earners and which falls to be taken into account in computing the earnings of each of those earners shall be calculated or estimated on the basis set out in whichever of sub-paragraphs (2) or (3) applies.

(2) If the respective proportion of the benefit of the voucher to which each of those earners is entitled is know at the time of the payment, the basis is that of a separate payment equal to that proportion.

(3) In any case where the respective proportions are not know at the time of the payment, the basis is equal apportionment between all those earners.

(4) In this paragraph—

(a) “chargeable expense” has the same meaning, and is calculated in the same way, as in paragraph 14; and

(b) if an employed earner makes good any part of the chargeable expense to the person incurring it, that chargeable expense in relation to that employed earner shall be reduced by that part.