Shares and PAYE…and penalties…

Our client “intelligence” is telling us that HMRC appear to be standing firm on imposing penalties where PAYE is not processed correctly on share option exercise and share vesting. One would hope that late or underpaid “in year” PAYE payments would be viewed sympathetically. HMRC do allude to considering exceptional circumstances on a case by case basis. However, we would always air on the side of caution and getting it right in the first place.

The starting point is that PAYE is due to be paid to HMRC by the 19th of the month following the end of the tax month – thus PAYE for the month ending 5 November must be paid to HMRC by 19th November (or the 22nd where the payment is made electronically).

Prior to 6th April 2010 there would not have been an issue, since PAYE penalties only applied annually. Provided all PAYE due for the year was settled by 19th April following the end of the income tax year, then no penalty would arise.

The “new” penalty regime, which has been with us since April 2010, could result in significant costs on understated or late payments in the tax year. Large employers (250+ employees) are now also subject to the new penalty regime instead of the previous mandatory surcharges.

Where the amount due is understated or payment is made late, the penalty regime is such that penalties may be triggered as soon as the day after the monthly due date. Needless to say, HMRC do not penalise or reward for overpayments and early payment!

Penalties will be considered where payment is understated or received after 19th (or 22nd) of the month. The level of the potential penalty rises as the number of defaults increase. The table below details the current PAYE penalty regime for in year defaults.

Employee shares and the operation of PAYE have always proved a tricky area. As far as shares are concerned there are two areas where a potential penalty can commonly arise:

• as a UK employer you simply may not be aware that your overseas parent has operated a share plan for UK employees and that you have a PAYE responsibility;
• Where you operate an UK plan, you may not be able to operate PAYE in the month that the shares vest. This could be because the payroll run is done mid-month and the vesting occurs later in that month.
  

Under the current regime an understated or late monthly payment carries a penalty risk. It is therefore imperative to manage the PAYE position around share awards – improved communication and perhaps the operation of a separate payroll being possible solutions.

If you would like further information, or would like to discuss how this may affect your business, please contact Dave Hedges, dhedges@edge-tax.com or your usual contact at Edge Tax.