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Fixing share plan payroll problems

Fixing share plan payroll problems

Completing your annual share plan returns might have highlighted payroll errors – how should these be corrected?

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The process of completing the annual employment-related securities returns often uncovers payroll compliance errors. This article looks at what employers should do to correct the position.

What can go wrong?

Running an employee share plan can be complex.

It’s not uncommon for payroll errors to arise, for example where:

  • Overseas parent companies don’t tell UK employers about the acquisition or vesting of awards held by internationally mobile, or even domestic, employees;
  • Employers are unaware that income tax charges have arisen in connection with employment related shares (such as on a disposal at more than market value by ‘good leavers’); or
  • Private companies (e.g. subsidiaries) are unaware that their shares are ‘readily convertible assets’ and therefore within the scope of payroll withholding.

What should employers do?

It’s important that employers voluntarily disclose any payroll withholding errors to HMRC and settle the outstanding amounts as soon as possible.

This will minimise the late payment interest due.

Additionally, for unprompted disclosures where the employer cooperates fully, HMRC’s guidance confirms this can mitigate and reduce the penalty charge.

Whilst employers often use Earlier Year Updates to correct small one-off errors, this facility is being withdrawn from April 2020 and does not enable companies to contractually settle late payment interest and/or mitigate penalties.

Employers who identify share plan payroll errors should consider the following when preparing their written disclosures.

  • What are the total liabilities?

It’s necessary to identify all employment taxes withholding and reporting errors – not just those in relation to share plans – as errors in one area might indicate other weaknesses.

HMRC will generally expect employers to identify errors that arose in the last four tax years (or the last six year years if HMRC successfully argue that the errors arose due to ‘carelessness’).

  • Can anything be recovered from employees?

It’s the employer’s responsibility to settle any outstanding payroll withholding with HMRC.

However, it might be possible to recover from employees PAYE and employee’s NIC (and employer’s NIC where validly transferred to employees).

Employers should review the share plan rules and other relevant documents to confirm what rights of recovery they might have.

  • Have employees already personally paid the income tax due?

If employees have already paid any of the income tax through self-assessment, it should be possible to offset those amounts against the employer’s PAYE liability.

  • Have any additional liabilities arisen?

Where employees do not ‘make good’ PAYE on share awards within 90 days of the end of the tax year – including where PAYE was not operated at all – additional ‘tax on tax’ charges can arise.

The employer must account for employee’s and employer’s NIC, and Apprenticeship Levy where relevant, on these charges, but the income tax is due under self-assessment.

The employer can settle this additional income tax due on a ‘grossed up’ basis on the employee’s behalf. This is a commercial decision for the employer.

However, ‘making good’ is broader than cash reimbursement, and it is important to examine the drafting and operation of the plan carefully to determine whether any additional charges have in fact arisen or if adequate indemnity protection and practice constitutes a ‘making good’ by the employee.

  • How did the errors arise?

It’s important to demonstrate to HMRC that the cause of the errors has been identified and steps taken to prevent reoccurrence.

Employers should carefully review why errors or omissions arose, and ensure that systems and processes have been improved to make them more robust.

This is particularly important for employers within the senior accounting officer reporting regime.

How can KPMG help?

KPMG has extensive experience of assisting employers to confirm the payroll withholding and reporting treatment of share based awards – held by both domestic and internationally mobile employees – and designing effective compliance processes enabled and supported by market-leading technology solutions.

We also assist employers to identify, disclose and settle payroll errors, and improve systems to minimise the risk of future errors arising.

If you have any queries, please get in touch with your normal contact or e-mail or employersclub@kpmg.co.uk.

© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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