Correcting share plan payroll errors

What should you do if completing your annual share plan returns highlighted payroll errors?

What should you do if completing your annual share plan returns highlighted payroll errors

Completing 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?

Employee share plans can be complex.

Payroll errors often arise, for example where:

  • Overseas parented companies don’t tell UK employers about awards held by internationally mobile, or even domestic, employees;
  • Employers aren’t aware that income tax charges arose in connection with employment-related shares (e.g. when restricted shares vested); or
  • Unlisted companies are unaware that their shares are ‘readily convertible assets’ and therefore within the scope of payroll withholding.

What do employers need to do?

Employers should voluntarily disclose any payroll withholding errors identified when completing the share plan returns and settle the amounts due with HMRC as soon as possible. This is important to minimise interest on late payment.

Additionally, if an employer makes an unprompted disclosure and cooperates fully with HMRC, this can mitigate any penalty charge, potentially reducing it to nil. Whilst employers could correct errors by submitting a revised Full Payment Submission for 2020/21 (previously by using an Earlier Year Update), this doesn’t enable companies to contractually settle late payment interest and/or mitigate penalties.

Employers who identify share plan payroll errors should consider the following points before disclosing errors to HMRC:

What’s the total liability?

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

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

Can you recover from employees?

It’s the employer’s responsibility to settle any outstanding payroll withholding with HMRC. However, it could be possible to recover PAYE and employee’s NIC (and employer’s NIC where validly transferred) from employees. Employers should review the share plan documentation to confirm what rights of recovery they might have.

Have employees already paid the income tax?

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. You cannot do this automatically however, and it requires HMRC and employee consent via a specific regulation. We can help you with the offset application process.

Have additional liabilities arisen?

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

The employer must account for NIC, and Apprenticeship Levy, where relevant, on these amounts. The income tax is due under self-assessment. If it wishes to, the employer can settle this additional income tax on a ‘grossed up’ basis on the employee’s behalf. However, ‘making good’ is broader than cash reimbursement. It’s important to examine the drafting and operation of the plan to determine whether additional charges have in fact arisen, or if adequate indemnities themselves constitute ‘making good’ by the employee.

How did the errors arise?

Employers should carefully review why errors or omissions arose and ensure their systems and processes are improved to make them more robust.

It’s important to show HMRC steps have been taken to prevent error reoccurrence. Sometimes evidence of such remedial steps and systems controls changes can support a suspension of any penalty charge.

This is particularly important for employers within the Senior Accounting Officer (SAO) reporting regime.