Share plan reporting 2023/24 – payroll errors

It’s not unusual to find payroll errors when completing year-end employment-related securities returns. In this article, we summarise how in-house tax and payroll teams can correct the position and reduce the risk of errors recurring. A future article will look at corporation tax errors that can also be uncovered during the annual share plan reporting process. 

Employee share plans can be challenging to run, especially when internationally mobile employees participate as their awards can be taxable in more than one jurisdiction, and income tax and social security obligations might not be aligned. 

Payroll withholding errors can also arise where:

• Overseas parent companies don’t inform their UK subsidiaries of share awards held by UK based employees;

• The employer doesn’t realise that income tax charges arose in respect of employment-related shares (e.g., when restrictions – such as a restriction on transfer – lifted from them); and
• The employer isn’t aware that a share-based award is valued differently for UK tax purposes compared to the grantor’s home jurisdiction and the UK tax implications are overlooked (this can arise, for example, with US profit interest style awards).

It’s important to move quickly where payroll withholding errors are identified as part of year-end employment-related securities reporting.

Employers should voluntarily disclosure any errors that were identified when completing the annual share plan returns and settle the amounts due to HMRC as soon as possible to minimise interest on late payment. An ‘unprompted’ disclosure made before HMRC identify the issue, and full cooperation, can also reduce any penalties HMRC might impose – potentially to nil.

Where errors are identified it’s important to show HMRC that effective steps have been taken to avoid them reoccurring. This is usually best done with a full written disclosure to HMRC.

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

It’s important to identify all employment tax withholding and reporting errors – not just the ones connected with employee share plans.

HMRC could see errors in one area indicating wider payroll and tax reporting weaknesses. HMRC can generally raise assessments in respect of any payroll errors that arose in the last four tax years (or the last six if HMRC successfully argue the errors arose due to ‘carelessness’).

Employers must settle any outstanding payroll withholding obligations with HMRC. But, it might be possible to recover the relevant PAYE and employee’s NIC (and employer’s NIC where it’s been validly transferred) from employees. Employers should review their share plan documentation to confirm whether they have any relevant recovery rights.

Employers should fully understand why any errors arose and ensure their systems and processes are improved 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, particularly for employers within the Senior Accounting Officer reporting regime.

An effectively managed payroll is vital for an employer to discharge its employment tax compliance obligations correctly.

Once remedial action has addressed any historical errors, regular PAYE health checks during the year can ensure that new process and controls are working effectively, and allow any corrective action that might be 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.

We have extensive experience helping companies to remediate PAYE and social security issues that arise from employee share plans’ complexity. Please contact the authors, or your usual KPMG in the UK contact, to talk through how we could support you with your employee share plan arrangements.

For further information please contact:

• Lorna Jordan
• Alison Hughes