Tax withholding in the UK takes place through the Pay-As-You-Earn (PAYE) system. The local subsidiary must calculate and pay to Her Majesty’s Revenue & Customs (HMRC) the tax liability arising upon the applicable taxable event within 14 days after the end of the tax month during which the taxable event takes place (or within 17 days after the end of the tax month during which the taxable event takes place if paying electronically).

The local subsidiary is required to pay the tax on behalf of the employees to HMRC by the relevant payment date irrespective of whether it has collected the tax from the employees by that date (and may become liable to pay penalties and interest with respect to any late payment to HMRC). Within 90 days after the end of the tax year in which the applicable taxable event occurs, the local subsidiary must recover the tax from the employees. If the employee does not reimburse the local subsidiary for the income tax paid on his or her behalf by this due date, the employee is deemed to have received a benefit equal to the amount of tax not recovered.  This results in an additional tax and NICs charge to the employee on the amount of tax that was not recovered, regardless of whether the employee subsequently reimburses the local subsidiary. The employee then has to account to the HMRC directly with respect to the income tax due on this additional benefit under the self assessment regime, while the local subsidiary must withhold employee NICs and pay employer NICs on the deemed benefit. This is considered a grossing up tax charge as it is essentially a tax on a tax charge.

HMRC has now indicated that the grossing up tax charge can be avoided provided there is an enforceable contractual agreement pursuant to which the employee indemnifies the employer or issuer for the income tax due.  It is possible to include this obligation in the award agreement.  Accordingly, we recommend updating award agreements to include language that reflects HMRC’s recent guidance.

Are You Ready for This Year's UK Annual Share Plan Reporting?

Annual share plan returns must be filed with the UK tax authorities (Her Majesty's Revenue & Customs or "HMRC") in relation to equity awards in the UK on or before July 6 following the end of each UK tax year, which runs from April 6 to April 5. The returns for this year will not be staggered and companies are encouraged to submit their returns as early as possible.