Chapter EIM40013
| Published date | 22 May 2014 |
| Record Number | EIM40013 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
Many bonus schemes are referenced to performance periods, but awards will not be paid unless employees are in employment on the date of payment. For example, a bonus is referenced to company profits for year ended 31 December but is not paid until the following 30 June. Employees who worked for the employer during the performance year forfeit their entitlement if they leave employment before 30 June.
Up to 28 February 2008, HMRC took the view that the bonus award could only be “for” the year in which unfettered entitlement to receive it arose. The year that the bonus was “for” was the year in which the employment condition was satisfied. Since 28 February 2008, HMRC has adopted the principles set out in EIM40008 and subsequent pages.
Good and bad leaversMany of the plans with employment conditions identify “good” and “bad” leavers and prescribe different treatments for the 2 categories. “Good leavers” are employees who cease employment before the bonus payment date through retirement, redundancy or ill-health. “Bad leavers” are those who are dismissed for cause or resign to join a competitor.
It’s possible to take various views on the year that such bonus awards are “for” where there is an employment condition:
- the performance period
- the performance period plus the period from the end of the performance period to the date of payment, sometimes referred to as the “vesting period”
- the year in which the date of payment falls
Your decision should take account of what the bonus scheme is intended to achieve. If this is not clear from the documents, you may base judgments on how the employer treats good and bad leavers.
Plans that:
- are designed to provide incentives to employees for performance periods, but,
- do not pay out unless the participants are still in employment at the specified date, but,
- do not specify any additional performance conditions in the period beginning after the original performance period and ending on the payment date,
are likely to pay out awards that are “for” the original performance period. However, if the plan introduces additional performance conditions for the second period the period that the award is “for” is likely to be the aggregate of both periods.
If “good leavers” are entitled to receive awards; that may indicate that the awards are “for” the original performance period...
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