Share Plan Reporting 2024/25: tackling payroll errors

Running an employee share plan can have lots of moving parts – particularly if Internationally Mobile Employees (IMEs), whose share awards might be taxed in multiple jurisdictions with income tax and social security obligations that don’t align, are involved. Payroll withholding errors can occur when:

• Overseas parent companies fail to notify their UK subsidiaries of share awards held by UK-based employees (including IMEs);
• Employers overlook income tax charges related to employment-related shares (e.g. when restrictions, such as transfer limitations, are lifted); and
• Employers are unaware that share awards are valued differently for UK tax purposes compared to the grantor's home jurisdiction, leading to overlooked UK tax implications (which can happen, for instance, with US profit interest style awards).

Errors in the associated income tax and social security payroll withholding are often identified only when the annual employment-related securities return is being completed, and correcting the position is only possible after that return has been filed.

Swift action is crucial when payroll withholding errors are identified during year end employment-related securities reporting.

Employers should voluntarily disclose any errors found when completing the annual share plan returns and settle amounts due to HMRC promptly to minimise interest on late payments. An 'unprompted' disclosure before HMRC identify the issue, coupled with full cooperation, can potentially reduce any penalties that HMRC might impose to nil.

When errors are discovered, it's vital to show HMRC that effective measures have been put in place to stop those errors occurring again. This is typically best achieved through a comprehensive written disclosure to HMRC.

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

Assessing the amount due to HMRC

It's essential to identify all employment tax withholding and reporting errors, not just those related to employee share plans, before making a disclosure to HMRC. HMRC might perceive errors in one area as symptoms of broader payroll and tax reporting weaknesses. Generally, HMRC can raise assessments for any payroll errors that occurred in the past four tax years (or the last six if HMRC successfully argue the errors were due to 'carelessness').

Recovering PAYE and NIC from employees

Employers must settle any outstanding payroll withholding obligations with HMRC. However, it may be possible to recover the relevant PAYE and employee's NIC (and employer's NIC if validly transferred) from employees. Employers should review their share plan documentation to confirm any relevant recovery rights.

Understanding the source of the error

Employers should thoroughly understand why any errors occurred and ensure that their systems and processes are enhanced to address the underlying issues. Demonstrating to HMRC that appropriate steps have been taken to prevent errors from recurring is crucial, particularly for employers within the Senior Accounting Officer reporting regime.

Monitoring and testing new payroll processes

A well-managed payroll is essential for an employer to meet its employment tax compliance obligations. Once corrective steps have addressed historical errors, regular PAYE checks throughout the year can ensure that new processes and controls are functioning effectively and allow for any necessary actions in year. Working with in-house Reward teams and external share plan administrators to cross-reference and reconcile tax withholdings processed during the tax year might be part of that process.

We have extensive experience assisting companies to resolve PAYE and social security issues arising from employee share plans. Please contact the authors or your usual KPMG in the UK contact to discuss how we can support your employee share plan arrangements.

For further information please contact:

• Alison Hughes
• Lorna Jordan