Shares in companies are commonly used by employers to reward, retain or provide incentives to employees. The most common forms of employment-related securities are share options and share awards. The UK has a complex set of rules that govern the reporting of these employment-related securities. This becomes even more challenging when dealing with internationally mobile employees.
By way of example, if you are an employer with employees who spend time working in the UK as well as overseas over, for example, the vesting period of a share or stock award, there are some key areas for you to consider and manage e.g.:
Who constitutes an internationally mobile employee?
Internationally mobile employees are generally defined as:
- UK residents going overseas to work
- overseas residents coming to the UK to work, and
- UK or overseas residents who move in and out of the UK
What is a Readily Convertible Asset?
Broadly, an RCA is any asset that can be used to realise a cash sum. This can be the case if the asset is listed on an investment exchange, or where trading arrangements exist/are likely to be in place in the future.
If an asset is an RCA, the employment income upon a chargeable event will be brought within the scope of PAYE.
What are you UK payroll reporting obligations (PAYE)?
A UK payroll withholding obligation will exist if the employee had any work connection with the UK during the relevant period. This obligation is likely to exist if this is an overseas employee on an overseas payroll.
What are your UK National Insurance (NIC) / Social Security obligations?
The UK legislation relating to employment related securities for internationally mobile employees has been brought in line with tax. This means that any periods where an individual is not liable to UK National Insurance owing to residence conditions, European Union social security rules, or an international social security convention, the employment income relating to non-UK workdays can be disregarded.
However, it does not always work like this in practice.
What is an s431 Election?
Upon the issue of employment related securities, the securities will have a value; where restrictions are attached to the securities this will reduce the value of the share.
Restrictions usually provide incentive for the employee to remain with the company. These may include the requirement for employees to sell their shares back to the company upon leaving the company or forfeiting their right to the shares.
Where the relevant conditions are met, employees can elect to be subject to income tax on the unrestricted market value at the date of acquisition in order to avoid paying income tax on the unrestricted market value once the restrictions lift/disposal of the shares – potentially once the shares have grown in value and therefore creating a higher tax charge.
However, for internationally mobile employees, unless an employee has taxable general earnings in the UK on acquisition of an employment-related security, they cannot make an s431 election. Therefore, non-UK resident employees will not be able to eliminate the tax charge on the lifting of restrictions or sale of the shares.
What income is liable to PAYE and National Insurance?
As detailed, it is possible to apportion the share income to exclude the portion that relates to the period an employee spends working outside of the UK between the grant of an option or the award of a restricted security, and the exercise or vest date.
This is provided that one or more of the following conditions are satisfied:
- the employee is UK resident and claims the remittance basis during any part of the relevant period, or
- the employee was not UK resident for some part of the relevant period, or
- the employee was subject to ‘split tax year’ treatment during the relevant period.
The relevant period depends on the specific arrangements of the stock plan and market value of the shares:
- for restricted shares, it is the period from the date of acquisition to the chargeable event
- for stock options it is from the date of acquisition to the earlier of the vesting date and the chargeable event
- for Restricted Stock Unit ‘RSU’ awards it will be the vesting period.
What is an s222 charge?
The s222 charge is a charge imposed if an employee does not make good to their employer any PAYE tax that was not able to be fully deducted at the point of the chargeable event within 90-days of the end of the relevant tax year.
This generally occurs where an employee’s monthly pay is not sufficient enough to cover the PAYE due.
If the employee does not make good to their employer the underpaid PAYE within 90 days, the outstanding amount will be treated as employment earnings in the tax year and subject to the employee’s marginal rate of tax.
Would you like to know more?
All companies have an obligation to inform HM Revenue & Customs (HMRC), about transactions in employment related securities that relate to their employees who are undertaking duties in the UK. Where these are internationally mobile employees, there are further considerations for both the employee and employer.
For further details around the annual reporting requirements please refer to our ERS reporting insight here.