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Reporting 'net settled' employee share awards

Reporting 'net settled' employee share awards

HMRC has clarified how net settled employee share awards should be reported. What does this mean for employers?

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Lorna Jordan

Director of Reward, Tax and People Services

KPMG in the UK

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Companies usually need to account for PAYE and employee’s National Insurance Contributions (‘NIC‘) when shares are acquired under an employee share plan. 

They must then recover that PAYE and NIC from their employees.

One way to do this is through ‘sell to cover’ withholding arrangements. These involve the employee acquiring beneficial ownership of all of the shares subject to the award, but immediately selling some of them to raise funds to reimburse the employer. 

Another approach is for the employer to ‘net settle’ the relevant award.

Under net settlement, the employer settles part of the award equal in value to the PAYE and employee’s NIC due by making a cash payment to the employee. This cash sum is then immediately withheld by the employer and used to fund that PAYE and employee’s NIC.

The employee then acquires a beneficial interest in shares equal in value to the ‘net’ (i.e. net of PAYE and employee’s NIC) award.

How should net settled awards be reported?

Regardless of whether the PAYE and employee’s NIC due on a share based award is made good to the employer through sell to cover or net settlement, the employee acquires the same gross and net values.

However, awards settled using these different reimbursement methods should be reported differently on the year-end employment-related securities returns.

HMRC’s recently published Employment-Related Securities Bulletin confirms that net-settlement of a share based award should be reported on two separate lines of the return as follows:

  • Cash cancellation of part of the award; and
  • Acquisition of the ‘net’ number of shares.

Why does this matter?

HMRC uses information provided in the annual returns to identify any errors in:

  • PAYE and NIC operated on share based awards;
  • Statutory corporation tax relief claimed in relation to employee share acquisitions; and/or
  • Employees’ self-assessment filings.

Employers must therefore be confident not only that the information provided in the annual returns is complete and correct, but that it is consistent with their payroll and corporation tax compliance positions.

Whilst net settlement should not affect the employee’s income tax position, it will reduce the statutory corporation tax relief that the employer might be eligible to claim in respect of employee share acquisitions.

It can sometimes be difficult for UK employers to confirm whether payroll withholding is reimbursed by way of sell to cover, net-settlement, or by some other method (or combination of more than one approach) where this is administered by an overseas parent company.

It is important for UK employers to confirm the positon in order to ensure that their annual reporting is correct, and that they have not over claimed any statutory corporation tax relief to which they are entitled in respect of employee share acquisitions.

HMRC has confirmed to KPMG that it expects employers to submit amended annual returns where net settled awards were not reported on this basis in earlier years. Where any loss of PAYE or NIC, and /or any excessive claim for statutory corporation tax relief in respect of employee share acquisitions is identified, this should be disclosed to HMRC and corrected.

How KPMG can help

KPMG can assist employers to complete and submit annual returns and review their payroll and corporation tax compliance processes for employee share plans.

If you have any queries, or would like to discuss how KPMG can assist you, please get in touch with your normal contact or email employersclub@kpmg.co.uk

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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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