New HMRC requirements for reporting net-settled employee share awards

As ‘sell to cover’ arrangements result in the employee beneficially acquiring all the shares which were subject to the award and immediately selling some to cover the payroll withholding, they can result in unnecessary shareholder dilution (as new shares are issued that the employee doesn’t retain). To avoid this dilution or for other commercial reasons, the employer can instead settle in cash part of the award that’s equal in value to the payroll withholding due. The employer immediately withholds this cash and pays it to HMRC, issuing only shares with a value equal to the net (i.e. after payroll withholding) award that the employee will retain.

For example, if 1,000 Restricted Stock Units vest when the company’s shares are worth £5 each, and the £5,000 that counts as employment income is subject to PAYE and employee’s NIC at a combined rate of (say) 42 percent, the employer could settle that award by:

• Settling £2,100 of the award value (i.e. £5,000 at 42 percent) in cash that it immediately pays to HMRC to cover the payroll withholding liability; and
• Settling the £2,900 net value of the award by issuing 580 new shares worth £5 each.

HMRC’s new guidance refers to this approach as ‘net-settlement for tax’.

As HMRC’s new guidance emphasises, correctly identifying employee share awards that are net-settled for tax is not only important to ensure they are reported correctly, but also to ensure the employer’s corporation tax position is correct. This is particularly important for companies that are within the Senior Accounting Officer reporting regime.

Failing to identify employee share awards that are net-settled for tax can result in corporation tax relief for employee share acquisitions being overclaimed – with the potential for penalties and interest on underpaid corporation tax (you can read more on this in our previous article on the corporation tax treatment of net-settled for tax awards).

HMRC’s previous reporting guidance required each net-settled for tax share award that was structured as a ‘securities option’ to be reported on two lines on the relevant annual return. That is, one line to report the shares beneficially acquired by the employee and a further line to report the relevant cash payment.

However, for 2025/26 and subsequent years, employers will be required to:

• Report share awards structured as ‘securities options’ that are net-settled for tax on one line (i.e. reporting the share acquisition and cash payment together); and
• Retain records that demonstrate PAYE and NIC were accounted for correctly and show how those sums were recovered from the employees (i.e. by net-settlement for tax) for the current tax year plus six years as these may be requested during an HMRC compliance check.

Late returns for 2024/25 and earlier years should also follow the new single line reporting for share awards that are net-settled for tax. However, where prior year returns that have already been submitted are amended, the amended returns may be submitted using the previous two line reporting (i.e. HMRC do not require amended returns to be resubmitted using the new reporting format).

HMRC’s new guidance also includes helpful commentary on reporting net-settled for tax share awards that are not structured as ‘securities options’, and on reporting share awards that are ‘net-settled for the exercise price’ (i.e.where the employer lets employees exercise options that would otherwise require the payment of an exercise price by reducing the number of securities that the employee acquires on exercise).

The guidance includes helpful worked examples of how some common net-settlement for tax scenarios should be reported (though these are caveated as not being exhaustive).

HMRC’s updated guidance is welcome, and some employers may find the new one line reporting approach for net-settled for tax awards simpler. However, employers should familiarise themselves with the new reporting requirements to ensure they are able to source robust data that allows them or their agents/advisers to report net-settled awards in the annual employment-related securities return correctly.

Points to consider, bearing in mind the requirement to retain records for potential HMRC inspection that demonstrate how payroll withholding has been recovered from employees, include those set out below:

• How could you demonstrate that you’ve correctly classified share awards as ‘securities options’ or other awards to determine the correct reporting? Some share awards do not give employees a ‘right’ to acquire shares and so are not ‘options’ for the relevant income tax and corporation tax purposes. This can affect how such awards are reported on the annual return, and can potentially have broader tax implications (e.g. for the employee’s Capital Gains Tax position, and for corporation tax relief relating to internationally mobile employees);
• How could you satisfy HMRC that you’ve correctly identified net-settled for tax share awards? Determining whether share awards are net-settled for tax can be time consuming and potentially challenging. This is because it can require data to be sourced from several internal departments (e.g. payroll, reward, company secretarial or legal) as well as from external brokers, and can also involve a careful legal analysis of the detailed plan documentation as well as understanding what happens in practice – specialist advice might be required on how your plan actually works; and
• How could you demonstrate that your corporation tax deductions are correct? Where share awards are net-settled for tax the specific statutory corporation tax deduction will be different, and often lower, than if ‘sell to cover’ arrangements had been used. Additionally, any general principles corporation tax deduction available for the cash cost of net-settling for tax can be complex to calculate. It’s therefore important to be able to demonstrate to HMRC that where you identify net-settled for tax awards you take corporation tax deductions in line with HMRC’s guidance. This means that you take the correct statutory deduction based on the shares that have been beneficially acquired by employees, and that if you take a general principles deduction for the cash settled element you have calculated this deduction based upon the correct analysis of your share plan, as outlined above.

KPMG in the UK has extensive experience assisting companies to review and confirm the nature of share awards, and whether awards are net-settled for tax, to confirm the correct reporting, payroll and corporation tax treatment. Please contact the authors, or your usual KPMG contact, to talk through what HMRC’s new guidance might mean for your employment-related securities reporting and broader tax compliance positions.

For further information please contact:

• Alison Hughes
• Lorna Jordan