Real Time Information and the impact on Share Incentive Plans (and other share plans too!)
HMRC is changing the way that businesses report PAYE and it is essential that where a share scheme is in operation the plan administrator (in-house or out-sourced) appreciates the payroll impact that this change might have.
Under the current system employers inform HMRC of the deductions they have taken from employees pay after the end of the tax year. The new system is called Real Time Information ('RTI'). As of April 2013, under RTI, as its name implies, businesses will legally have to report their PAYE transactions on or before payments are made to their employees i.e. in real time.
Businesses must ensure they are prepared for the changes. This involves a number of checks, from ensuring the correct payroll software is in place to verifying their employee data. HMRC provides a checklist for employers to aid them in this process. This can be found here.
The introduction of RTI has and will continue to force companies to review their current PAYE systems and procedures. For a company that operates a share scheme, such as a Share Incentive Plan (SIP), this change emphasises the importance of accurate record keeping and timely payments to HMRC. The current PAYE deadlines that apply to payments to HMRC are the same under a SIP. On top of processing the monthly wage and salary deductions a payroll department can be burdened with the onerous task of ensuring their SIP liabilities are under control.
For example, a departing employee who has acquired shares under a SIP has their shares released from the SIP trust on their last day of employment. It is the company's responsibility to determine the taxable value of the shares and then calculate the PAYE due (and know that it is due under PAYE and not self-assessment) and pay this over to HMRC within the tight deadlines that are imposed under PAYE regulations. An employer has no more than a month to process and file this information and make payment to HMRC. In addition, the payroll department will need to deal with what happens to the released shares. This involves contacting the departed employee advising them of the options they have in respect of their shares. The individual must provide consent to the transfer or indeed sale of their shares before payroll can action anything. This is before the leaver has considered how they might repay any PAYE liabilities on the release of their shares.
So, when is a liability due for collection under PAYE and what are the penalties and current reporting obligations? There are a number of circumstances under which tax may be due, for example:
- Exercise of a non-statutory share option,
- Exercise of a CSOP option within 3 years from date of grant,
- Exercise of a discounted EMI option,
- An EMI Option disqualifying event,
- Shares ceasing to be subject to a SIP in circumstances where tax is due,
- The employee receiving compensation for giving up or for not exercising a share option,
- An employee acquiring shares at less than fair value,
- Removal of restrictions or a risk of forfeiture on shares.
If the shares in question are Readily Convertible Assets (RCAs) then tax will be due for collection under PAYE rather than Self-Assessment.
The rules for determining whether or not shares are RCAs or not are complex. There is a common misconception that only listed company shares are RCAs, but private company shares can be RCAs in certain circumstances, particularly where an EBT habitually provides share liquidity.
For a summary of the reporting obligation, tight deadlines and penalties for non-compliance, see here.
HMRC are still issuing guidance in response to claims that for some companies, the implementation of RTI is a real problem. The aim of the change is to ensure that more employees pay the right amount of tax and National Insurance. Overall the change is being made for the greater good and intends to aid companies and employees in the future to ensure their PAYE payments and liabilities reconcile. However, in reality it accentuates the need for companies to assess their current procedures and systems.
The above is just one reason why it is becoming increasingly difficult to administer share plans like SIP in-house and there are others that mean out-sourcing this function is eminently sensible see here. RM2 is delighted to assist companies with this task and our plan administration fact sheet can be downloaded here.
If you would like to speak to us about the implementation and/or administration of a share scheme please contact a member of the RM2 team on 020 8949 5522.