Annual employee share plan reporting can identify errors in the tax treatment of underlying transactions. This article explores common corporation tax errors often discovered during the annual share plan reporting process and suggests practical points for companies to consider when rectifying any errors. In-house corporation tax teams may also wish to share this article’s companion piece on employee share plan payroll errors with their payroll and employment tax colleagues.
There are three principal routes through which companies may obtain corporation tax relief for the cost of providing employees with shares:
Preparing annual employee share plan returns can identify issues such as:
Share-based awards are ‘net-settled’ if, rather than being settled wholly in shares, they are partly settled in cash that the employer keeps back to cover the PAYE and employee’s NIC due (so settlement in shares is ‘net’ of payroll withholding).
Where employees do not acquire a beneficial interest in all shares subject to the award, the Part 12 deduction is limited to the value of the shares beneficially acquired. A separate deduction may be available under general principles for the cash cost of net-settlement, but that deduction might be less than the Part 12 deduction that would otherwise have been due if the employee had beneficially acquired all the shares under the award.
A practical challenge for employers is often identifying whether awards have in fact been net-settled, rather than the payroll withholding recovered on a 'sell to cover' basis. This may require input from share plan administrators, company secretarial teams and other stakeholders to determine the position. Where net-settlement has not previously been identified, companies may find that historical Part 12 deductions have been overstated.
IMEs can lead to complexities with regards to corporation tax compliance.
Share awards held by inbound IMEs may give rise to Part 12 deductions for UK host employers, based on amounts charged to UK employment income tax. These Part 12 deductions can be missed unless employers have robust processes for identifying relevant employees, tracking share acquisitions and calculating a deduction based on the amount subject to UK income tax. The interaction with any recharge payments made to a host employer may, however, need to be considered before taking a Part 12 deduction.
Outbound IMEs may also give rise to Part 12 deductions, even where the employment income is not fully taxed in the UK. Therefore, it’s important to make sure that outbound IMEs’ share awards are tracked for trailing corporation tax deductions as well as any ongoing UK payroll obligations.
Where there might be employer deductions for the same share-based employment income in the UK and in the IME’s home or host country, international groups should confirm the extent to which it would be possible to claim in each jurisdiction (and UK and other anti-avoidance rules can potentially be relevant here).
Specific consideration may also need to be given to other scenarios (e.g. branches or employees who spend part of the vesting period working in the UK but are not present at either grant or acquisition of shares).
Part 12 is typically the most common basis on which corporation tax deductions are claimed for employee share acquisitions, but it is not always the correct one. For example, a private equity backed company will typically be under the control of another unlisted company and so not eligible for a Part 12 deduction. Any corporation tax relief therefore needs to be claimed under general principles. Claiming relief under the wrong regime can result in an incorrect deduction, either in amount, timing, or both.
Companies should be able to demonstrate that, in the event of an HMRC inquiry, their processes for calculating employee share plan deductions are robust, particularly where deductions are material or the company is within the Senior Accounting Officer regime. Specific questions that corporate tax teams can consider include:
KPMG has extensive experience assisting companies identify and remediate corporation tax compliance issues arising from employee share plans. Please contact the authors, or your usual KPMG in the UK contact, to discuss how we could support you with your employee share plan arrangements.
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