Common sense prevails on PAYE on employee share payments

Fri 25 Jul 2014

One of the most unreasonable, disproportionate rules in tax law has been amended to something much more sensible.

In its original form ITEPA 2003 s 222 only allowed 90 days for a company whose employee had received an award of  employment-related securities (ERS) that was taxable under PAYE (i.e. where the shares are treated as readily convertible assets) to obtain reimbursement from the employee. If the employee did not make good to the employer the PAYE amount in full within 90 days from the date of receipt of the taxable ERS benefit the tax paid (i.e. the PAYE paid over to HMRC by the employer on the employee’s behalf) was itself taxable as earnings in addition to being reportable on form P11D as a benefit in kind.. The additional tax due was not accounted for under PAYE by the employer but needed to be settled directly to HMRC by the employee.

All or nothing

The all or nothing nature of the rule made it especially harsh because it increased the tax charge and there was no refund even if the employee subsequently made a late full reimbursement.

The change takes effect from 6 April 2014, i.e. it applies to all relevant taxable events arising on or after that date.

The overdue change

Now that Finance Act 2014 is law the deadline for the employee to make reimbursement has become 90 days from the end of the tax year in which the ERS are awarded. This implements a recommendation of the Office for Tax Simplification and answers criticisms made ever since s 222 was announced.

The deadline is still quite tight where the employee receives a taxable benefit near the end of the tax year but this is likely to be less of a problem since the 90 day window provided, ending on 4 July after the year end, roughly coincides with the timetable for preparing P11Ds.  A single, uniform date of 6 July to correspond with the established P11D deadline would have been preferable.

S 222 is still all-or-nothing

Section 222 still imposes a fixed penalty, rather than a tax charge, so there is no incentive for employees to make reimbursement after the deadline. In practice   most companies have successfully navigated this position by providing in the share plan rules and agreements for a “sell to cover” authorisation, enabling the company to withhold shares and sell these to realise sufficient funds to cover the PAYE due. The net balance of equity and cash is then released to the employee and HMRC accept this set-off as the requisite making good by the employee provided this all takes place within the prescribed timeframe.

Scope of s 222

Section 222 extends beyond unapproved employee share schemes and includes:

• awards by intermediaries (ITEPA 2003 s 687);
• restricted securities on which no s 431 election has been made;
• shares that are not readily convertible assets (ITEPA 2003 s 698 (3); and
• non-UK resident employer (s 689) cases the rules on which were also amended in FA 2014 (see TTH 11 April).

NIC applies too

National insurance contributions also apply to s 222 payments by virtue of the Social Security (Contributions) Regulations 2001 (SI 2001/1004) reg. 22 and there is provision for this liability on the P11D.

This is a very welcome change which will particularly please multinational clients who have made equity awards to UK staff under foreign plans administered overseas.