HMRC target employment-related securities

Why did HMRC launch this campaign?

Employers are usually required to operate PAYE and both employee’s and employer’s NIC (and Apprenticeship Levy if applicable) in relation to employment-related securities, if they are Readily Convertible Assets (RCAs) when any taxable amounts arise. Where the correct PAYE withholding differs from the employee’s final income tax liability, the employee is required to ‘true up’ the position through self-assessment. However, identifying when employer payroll withholding obligations arise is not always straightforward. For example, errors can arise where employers:

• Do not appreciate that securities are RCAs (this can be a particular challenge for shares in family and other private companies);
• Do not arrive at the best estimate that can reasonably be made of the taxable value on which PAYE and NIC should be operated; or
• Do not receive sufficient information about employee share plan awards administered elsewhere in the group (e.g. where an overseas parent company operates a group share plan but is not aware of its local UK subsidiary’s payroll obligations).

HMRC's annual employment-related securities reporting process, and HMRC reviewing publicly available information, can highlight potential compliance issues and might have led HMRC to conclude that employment-related securities are a particular challenge for some employers and/or employees.

What do HMRC’s letters ask employees to do?

Letters KPMG has seen ask employees to check by 31 January 2027 whether they:

• Acquired any shares or other securities by reason of employment during ‘the relevant tax year’;
• Paid less than tax market value for those shares or other securities; and
• Paid income tax through PAYE.

Potential consequences of payroll inaccuracies

Where income tax due in respect of employment-related securities has not been collected through PAYE, the letter states that the employee might need to include this in their self-assessment tax return. This could be the correct treatment (e.g. where shares are not RCAs and so the employer has no withholding obligations, or PAYE was based on a tax code provided by HMRC that does not accurately reflect the employee’s final income tax liability). However, where an employee reports that their employer did not operate PAYE, depending on the circumstances, HMRC might then enquire into the employer’s payroll compliance and tax valuation positions to confirm whether no withholding was in fact correct and/or any tax valuations were the best estimates of the taxable amounts that could be made at the time.

Where HMRC identify PAYE/NIC inaccuracies and/or successfully challenge any tax valuations on which withholding positions are based:

• The employer will be liable for any outstanding amounts (which, depending on the circumstances, might not be recoverable from employees) and interest on late payment;
• HMRC could impose penalties unless the employer can demonstrate that it took reasonable care; and
• Additional ‘tax on tax’ charges could arise for employees (which the employer might need to settle on a grossed-up basis) if the full amount of PAYE due was not ‘made good’ within 90 days of the end of the relevant tax year.

What should employers do?

It is likely that employees who receive an HMRC letter will follow their suggestion to ask their employer for assistance. Although these letters seem to confine themselves to questions regarding acquisitions of employment-related securities, employees might also ask whether there were any other chargeable events during the tax year, and what reporting and withholding approach to those was taken by their employer.

To manage such requests as efficiently as possible, and ensure that employees respond to HMRC’s letter in a consistent way (as different responses from the same employee population might prompt an HMRC enquiry) employers should consider proactively:

• Reviewing the employment-related securities events they reported to HMRC;
• Validating their PAYE/NIC treatment and, where relevant, the tax valuation methodology used, to confirm these are supportable;
• Refreshing their employee communications in relation to employment-related securities awards, to ensure the positions taken are clearly explained to employees; and
• Remediating any inaccuracies identified through voluntary disclosures to HMRC.

It is important that any inaccuracies identified are disclosed to HMRC as soon as possible as ‘unprompted’ disclosure, together with full cooperation, can potentially reduce to nil any penalties that HMRC might otherwise impose. Additionally, HMRC might treat as ‘prompted’ any disclosure made after the 31 January deadline (as they might consider that the employer only then disclosed the issue as they thought HMRC were about to uncover it based on the employee’s response).

Where errors are identified in any tax year, the employer should also be able to demonstrate to HMRC that appropriate steps have been taken to minimise the risk of any reoccurrence (correcting employment-related securities payroll errors is discussed in more detail in this earlier article). If possible, the employer and employee should coordinate their respective filings when correcting any payroll errors.

How KPMG can help

We have extensive experience assisting companies in the operation and communication of employee share plans, including helping to resolve PAYE and NIC arising from employee share plans and other arrangements involving employment-related securities. Please contact the authors, or your usual KPMG in the UK contact, to talk through how we might help you manage your and your employees’ responses to HMRC’s new ‘nudge’ campaign.

For further information please contact:

• Alison Hughes
• Mike Lavan