Share plan reporting: what should you do about corporation tax errors?
Annual share plan reporting can uncover corporation tax errors – here’s what companies should consider
Annual share plan reporting can uncover corporation tax errors – here’s what companies
Annual employee share plan reporting can identify errors in the tax treatment of the underlying transactions. In this article, we look at some corporation tax errors that are often found during the annual share plan reporting process, and what companies can do to address them (in-house tax teams considering these issues might wish to share our previous article on employee share plan payroll errors with their payroll and employment tax colleagues).
Corporation tax relief for employee share plans
Before considering what errors can arise, it’s worth recalling the three different ways companies can claim corporation tax deductions for employee share plan costs.
Tax-advantaged Share Incentive Plans (SIPs)
Firstly, there’s a specific regime for SIPs, which are share acquisition plans that meet specific conditions for beneficial income tax and capital gains tax treatment. The rules for claiming corporation tax relief for providing employee shares through a SIP are complex, and companies often make errors.
However, as this is the least common regime for claiming corporation tax relief for employee share acquisitions, this article doesn’t discuss these rules in detail.
The Corporation Tax Act 2009, Part 12 (Part 12)
Secondly, there’s another specific regime under Part 12 for qualifying employee share acquisitions outside a SIP. Provided all the relevant conditions are met, the employer can claim a corporation tax deduction equal to the market value of the shares on the date they are acquired by employees less any amount the employees pay for them. The requirements for this relief include that the employee acquires a beneficial interest in fully paid-up, non-redeemable, ordinary shares.
Other employee share plan costs
Thirdly, for other employee share plan costs (e.g. administration, brokers’ fees, and the provision of shares that don’t qualify for a specific deduction under the SIP or Part 12 regimes), the employer may be able to claim a deduction under general principles for charges to its income statement which are incurred wholly and exclusively for the purposes of its trade and are revenue rather than capital in nature.
What corporation tax errors can arise?
In our experience, preparing annual employee share plan returns often uncovers:
- Over claimed Part 12 deductions where employee share awards are ‘net-settled’;
- Over or under claimed Part 12 deductions for awards held by Internationally Mobile Employees (IMEs); or
- Corporation tax deductions claimed on the wrong basis (which can result in errors in the quantum or timing of a deduction – or both).
The issue with net-settled share awards
Share-based awards are ‘net-settled’ if – rather than being settled wholly in shares – they are partly settled in cash, which the employer withholds to cover the PAYE and employee’s NIC due (i.e. settlement in shares is ‘net’ of payroll withholding).
As the employee does not acquire a beneficial interest in all the underlying shares, any Part 12 deduction is limited to the value of shares beneficially acquired and the employer must seek a general principles deduction for the cash cost of net-settlement. However, based on HMRC’s guidance, any general principles deduction for that cash cost may be less than the Part 12 deduction which would have been available, had the employee beneficially acquired all the underlying shares.
The key challenge for employers is that whether share awards are in fact ‘net-settled’ may not be immediately apparent and can be difficult to establish – potentially becoming apparent only once detailed enquiries have been made with the parent company’s share plan administrators to confirm the year-end share plan reporting disclosures. Companies can therefore find that they’ve historically overclaimed corporation tax deductions under Part 12 as they were unaware that some, or all, of their employees’ share awards are net-settled.
Further details on net-settlement and HMRC’s relevant corporation tax guidance are available in our previous article.
Challenges with IMEs
IMEs pose specific challenges for corporation tax compliance.
Pre-existing share awards held by in-bound IMEs can generate Part 12 deductions for their host employers that might be overlooked. However, any such deduction is limited to the amount charged to UK tax as employment income. Ensuring that any Part 12 deductions available in respect of in-bound IMEs are identified and claimed correctly therefore needs a robust process for identifying IMEs who arrive in the UK holding share-based awards, tracking when those employees acquire the underlying shares, and calculating a deduction based on the amount subject to UK income tax.
Conversely, out-bound IMEs who leave the UK with share-based awards granted in respect of employment with a UK company can give rise to Part 12 deductions for the full ‘gain’ they receive, even if this is not fully charged to UK income tax. It’s therefore also important to ensure that out-bound IMEs’ share awards are tracked for trailing corporation tax deductions, as well as trailing payroll obligations.
However, the Part 12 rules have the potential to create a double deduction for the same share-based employment income – once in the UK and once in the IME’s home or host country – so international groups should confirm the extent to which it would be appropriate and permissible to claim in each jurisdiction (and UK anti-avoidance rules can be relevant here).
Getting the basis of your deduction wrong
As Part 12 is the most common basis on which corporation tax deductions are claimed for employee share acquisitions, companies can sometimes overlook the separate SIP rules, and inadvertently claim deductions for SIP share awards under the wrong regime. Depending on the specific basis on which shares are sourced to satisfy SIP awards, corporation tax deductions claimed in error under Part 12, rather than under the SIP regime, can result in the company over or under paying corporation tax.
Have you thought about transfer pricing?
In addition to the above corporation tax considerations, the transfer pricing implications of operating an employee share plan should not be overlooked regardless of the employer company's country of residence. As a recent Irish transfer pricing case on employee share plans demonstrates, these issues are monitored by tax authorities and may affect any self-assessed tax charge.
It’s therefore important for multinational groups to ensure that their transfer pricing policies take due account of their global employee share plans, and that any recharges in respect of the cost of providing the plan – or their absence – are consistent with the arm’s length principle.
What should companies do now?
Companies should ensure they could demonstrate to HMRC that their systems and processes for calculating employee share plan deductions – which for some companies may be a significant figure – are robust. This is particularly important for companies that are within the Senior Accounting Officer regime.
Specific questions corporate tax teams can consider include:
- How do we know whether employee awards are net-settled? This can be difficult to confirm and specialist advice might be needed on the implications of how your group share plan works in practice;
- How could we demonstrate to HMRC and other stakeholders our deductions are correct? What processes do you have in place to ensure that you haven’t over – or under – claimed deductions in relation to any net-settled awards, IMEs, and that all deductions have been correctly calculated in line with the applicable rules?;
- Do we need to amend any historical corporation tax deductions? This should include considering whether HMRC should be notified of any ‘uncertain tax treatment'; and
- How are we measuring and treating the cost of share-based awards from a transfer pricing perspective? Consider whether your existing transfer pricing policies are appropriately taking account of share-based remuneration including any recharge arrangements. Is the treatment reflected in your intra-group agreements (such as service agreements) and do your accounting systems and processes ensure that the transfer pricing policies and agreement terms are being adhered to in practice?
How KPMG can help
We have extensive experience helping companies to remediate employee share plan corporation tax compliance issues, and to consider the transfer pricing impact of their employee share plans. 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.
