Share plan reporting 2022/23 – tackling payroll errors

Here’s what to do if your 2022/23 share plan reporting identified payroll withholding errors.

Share plan payroll errors

Employers often identify payroll reporting errors when completing their year-end employment-related securities returns. This article summarises how tax and payroll teams should approach any errors, correcting the position and minimising the risk of reoccurrence in future years. 

Share plans are challenging

Employee share plans can be complex to administer, particularly for groups with internationally mobile employees whose awards may be taxable in more than one jurisdiction, and where the income tax and social security obligations may not completely align. We’re seeing more HMRC enforcement activity in this area.

Other examples of why payroll withholding errors arise include where:

  • An overseas parent doesn’t inform its UK subsidiary about awards held by local employees;
  • The employer isn’t aware that income tax charges arose in respect of employment-related shares (e.g. when restrictions lifted); or
  • The employer isn’t aware that its unlisted shares are treated as ‘readily convertible assets’ and so within the scope of payroll withholding.

What should employers do?

It’s important to address the situation proactively when things don’t go to plan.

Employers should make a voluntarily disclosure to HMRC of any payroll withholding errors identified when completing their annual share plan returns and settle the amounts due with HMRC as soon as possible. Settling the under withheld PAYE and National Insurance Contributions (NIC) quickly is important to minimise interest on late payment.

Additionally, an unprompted disclosure (i.e. one made before HMRC identify the issue) and full cooperation can reduce any penalties HMRC might impose – potentially to nil.

Where errors are identified, it’s also important to demonstrate that appropriate steps have been taken to prevent them happening again. This is usually best done with a full written disclosure to HMRC.

Employers who identify share plan payroll errors can consider the below points when preparing to disclose and settle the matter with HMRC.

What’s the total liability?

It’s necessary to identify all employment tax withholding and reporting errors, and not just those associated with the share plans. HMRC might see errors in one area suggesting wider payroll and tax reporting weaknesses. HMRC generally expect employers to identify any 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?

The employer must settle any outstanding payroll withholding with HMRC. However, it might be possible to recover PAYE and employee’s NIC (and employer’s NIC where the employee has agreed to pay it) from employees. Employers should review their share plan documentation to confirm whether they have any relevant rights of recovery.

Have employees paid the income tax already?

At the current time this is unlikely in relation to 2022/23, but for any errors identified in earlier tax years, if employees have already paid any income tax due through self-assessment it should be possible to offset it against the employer’s PAYE liability. This requires HMRC and the employee to consent via a specific process.

Have additional liabilities arisen?

If employees did not ‘make good’ the PAYE due on share awards within 90 days of the end of the relevant tax year (i.e. by the following 4 July), regardless of whether or not PAYE was operated correctly, further ‘tax on tax’ charges can arise.

The employer must account for NIC and, where relevant, Apprenticeship Levy, on these amounts. The income tax is due under self-assessment, but the employer can choose to settle this additional income tax on the employee’s behalf on a ‘grossed up’ basis. However, ‘making good’ is broader than cash reimbursement, and in certain circumstances HMRC can accept that sufficiently robust indemnities in the share plan documentation can prevent such charges arising. However, each case must be examined on its specific facts to determine whether additional charges have arisen or if any indemnities themselves constitute ‘making good’ by the employee.

How did the errors arise?

Employers should take care to understand why any errors arose and make sure their systems and processes adapt to make them more robust. It’s important to be able to demonstrate to HMRC that appropriate steps have been taken to prevent errors reoccurring.

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

Evidence of appropriate corrective steps and changes to systems can support suspension of any penalty HMRC might impose. 

Monitor and test your new payroll processes

Payroll is a powerful tool to support a business in discharging its employment tax compliance responsibilities correctly. Once corrective action has been taken to address any historical errors, we recommend regular PAYE health checks during a tax year to ensure that the new process and controls are working, spot any issues and take any action needed.

Work closely with your in-house Reward colleagues and share plan administrator to cross reference and reconcile tax withholdings processed through the tax year.