several different situations involving employment related securities. The value of the benefit counts as employment income for the employee. The benefit is treated, for both PAYE and NICs purposes, as a RCA. (ITEPA s.698, https://bit. ly/3jFWidF) ● Gains from securities options – When an employee acquires securities from a securities option, the value of the benefit, counts as employment income for the employee. The benefit is treated, for both PAYE and NICs purposes, as a readily convertible asset. (ITEPA s.700, https://bit. ly/3s5TCd4) In addition, the notional payment rules operate for payments made by an intermediary of the employer (ITEPA s.687); and payments made by a non-UK employer (ITEPA s.689). Tax liabilities The tax liabilities on notional payments are, initially, handled under PAYE. However, if the employer and the employee fail to follow the statutory procedures correctly, some or all of the value of the notional payment may have to be treated as a benefit in kind, resulting in both the employer and employee incurring additional costs. The procedures, which are punitive in terms of the additional tax that the employee must pay and the additional secondary class 1 NICs that the employer must pay, are intended to compel compliance. Note that the term ‘employee’ includes office-holders, e.g. company directors and company secretaries, even if they do not have a contract of employment. In the circumstances described, below, the amount of tax that the employee fails to repay to the employer within ninety days of receiving the notional payment is treated as a benefit to the employee and is reported in the P11D return. The same amount is also used to determine the class 1 NICs liabilities. The value of the notional payment or, in the case of RCAs their estimated value, is notionally added to gross pay for PAYE purposes. The resulting tax liability is deducted from the employee’s earnings, to pay the tax charge. In some cases, the employer may be unable to deduct the full amount of income tax because, for example, the amount due is more than the whole of the employee’s cash wage for the pay period.
If this situation arises: ● the employer must, nevertheless, pay the full amount of the tax and NICs due in respect of the employee’s gross pay to HMRC Accounts Office by the next normal payment date, and ● the employee must repay the amount of tax that the employer has been unable to deduct to the employer within ninety days of receiving the notional payment. ...employer has settled the employee’s pecuniary liability and the outstanding amount becomes liable for class 1 NICs in the earnings period in which the ninety- day period ends. The result of this procedure is that, until the employee makes reimbursement, the employer has to bear the cost of the tax that could not be deducted from the employee’s earnings. Throughout this procedure, the liability for the income tax due on the notional payment remains with the employee. The payment is only treated as settling the employee’s tax liability at the end of the ninety-day period if the employee has failed to reimburse the undeducted tax by that time. If the employee fails to reimburse some or all of the undeducted tax by the end of the ninety-day period, the amount unpaid at that time is treated as if the employer had met the pecuniary liability of the employee, i.e. the tax owed by the employee to HMRC. The amount unpaid is ‘money’s worth’ (ITEPA, s.62) in the hands of the employee and creates an additional tax reporting requirement and a further class 1 NICs liability. Where, for practical reasons, it is not possible for the employee to make the reimbursement by means of a payment to the employer within ninety days, it would
be acceptable for another reimbursement method to be used, such as the parties entering into a loan agreement, whereby the employer loans to the employee the amount necessary for the reimbursement, and the employee is contractually required to make regular loan repayments. Such an arrangement may have tax liabilities under the beneficial loan provisions. Other arrangements that purport to meet the reimbursement requirement are payments into escrow accounts, or into a director’s loan account, or indemnity contracts. These arrangements, however, do not satisfy the reimbursement requirement as no payment has been made directly to the employer. The amount of the tax unpaid at the end of the ninety-day period is treated as a settlement by the employer of the employee’s personal liability for the income tax due on the notional payment. It is reported in section B – Payments made on behalf of employee, on the line specifically designated ‘Tax on notional payments not borne by employee within 90 days of receipt of each notional payment’. If the employee repays the tax due after the end of the ninety-day period, that does not remove the reporting requirement or the resulting tax charge for the employee. Class 1 NICs The NICs liabilities on the various kinds of payments that are defined as ‘notional payments’ for tax purposes are to class 1 NICs. The amount on which tax is due under PAYE is the amount that is liable for class 1 NICs. The resulting primary NICs are deducted from the employee’s earnings in the earnings period in which the notional payment is made. The amount of tax that is paid to the HMRC is also treated as earnings for class 1 NICs purposes. Consequently, if the employee fails to reimburse the undeducted tax within the ninety-day period, the employer has settled the employee’s pecuniary liability and the outstanding amount becomes liable for class 1 NICs in the earnings period in which the ninety-day period ends. Even if the employee subsequently repays the tax, the NICs liability will stand and cannot be refunded. As the NICs liability and the tax reporting requirement occur at different times, employers must take care to meet both requirements. n
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Issue 72 | July / August 2021 Issue 73 | September
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