Share plan compliance reviews

Employee share plans can be crucial for recruiting and retaining key talent. However, the associated payroll withholding and reporting requirements are often complex. Compliance failings can result in financial and administrative costs for a business. BDO can review your employee share plans and the way you operate them to help you avoid expensive compliance mistakes and to ensure that they are still the best way to achieve your business goals.

Why undertake a compliance review?

Share plan awards can give rise to different Pay As You Earn (PAYE) and NIC withholding obligations on the dates of grant, vesting, exercise and, in certain circumstances, sale of the underlying shares.

The tax residence status of participating employees at different points in time can have a major impact on the tax treatment at each stage. For many employers, this represents one of the most complex aspects of PAYE and NIC compliance and, in our experience, can lead to compliance errors.

Key compliance risk areas

HMRC takes a risk-based approach to ensuring compliance and targets employers that have a high risk profile – a series of small errors can put your company under HMRC spotlight.

Share plan compliance can be complicated and the risk of potential error increases where plans:

• Are administered by an overseas parent company
• Have internationally mobile participants
• Are not fully understood by local payroll and HR functions
• Allow leavers’ awards to vest and be exercised after cessation of employment
• Have breached the legislative requirements to maintain tax favoured approved status and this is not identified
• Have not been updated to take account of changes to PAYE and NIC legislation.

The costs of non-compliance

In addition to the cost of settling PAYE and NIC and similar liabilities in other countries, (and the possibility of being unable to recover this from former or internationally mobile employees), interest will normally be due on late payments. It is also likely that penalties will be imposed.

Where PAYE is not recovered from the employee within certain time limits, HMRC may also charge ‘tax on tax’ or apply ‘grossing-up’ of benefit in kind charges, and additional NIC obligations can arise.

If HMRC chooses to investigate your share plans this can often lead on to a review of your employer wider PAYE and NIC compliance systems – with all the disruption and extra demands on management time that a such an enquiry can trigger.

Managing the commercial risks

HMRC’s ‘risk-based’ approach to PAYE and NIC compliance is relatively straightforward. Where an employer can demonstrate that its share plan PAYE and NIC compliance is up to date and robust systems are in place to enable accurate monitoring and reporting to HMRC, the employer is likely to be regarded a ‘low risk’ in compliance terms. Employers that qualify as ‘low risk’ can expect far fewer HMRC compliance visits – a good incentive to get your reporting right.

See our share incentives hub.

If you would like help and advice on putting your share plan administration in order, testing your controls or on any other share plan issue, please contact Andy Goodman or Matthew Emms.