.png)
.png)
22 October 2000
A United Kingdom employee (paying tax at higher rate) was awarded share options when the United States parent company (quoted) set up its United Kingdom operation during 1999. This is an unapproved scheme for United Kingdom tax purposes.
Some shares were exercised in February 2000. The shares cost nothing, but were worth £100,000 at date of exercise. Therefore tax of 40 per cent is payable.
Some shares were exercised in February 2000. The shares cost nothing, but were worth £100,000 at date of exercise. Therefore tax of 40 per cent is payable.
A United Kingdom employee (paying tax at higher rate) was awarded share options when the United States parent company (quoted) set up its United Kingdom operation during 1999. This is an unapproved scheme for United Kingdom tax purposes.
Some shares were exercised in February 2000. The shares cost nothing, but were worth £100,000 at date of exercise. Therefore tax of 40 per cent is payable.
The employer did not deduct the tax due on exercise of the options, of £40,000, from the employee's net pay in February 2000 (under the change in legislation effective 6 April 1999 putting the onus on the employer to pay the tax due through pay-as-you-earn) nor subsequently. The United States stock option agreement did allow for deduction of withholding taxes.
The employee sold the shares and received the full £100,000. The employer did not pay over the tax under pay-as-you-earn. In fact it is only now becoming aware of this requirement.
Should the employee put the gain on his tax return, and pay the tax at 40 per cent of £100,000, or should the employer have paid it — or have they both got to pay it? The fact that it was not reimbursed to the employer by the employee within 30 days (February 2000) seems to mean that the tax itself became a taxable benefit on which the employer should pay tax. Nothing was shown on form P11D in respect of this benefit. Presumably interest is also payable by the employer, and a penalty for an incorrect form P11D?
So must the employer pay the 40 per cent tax, and tax on the 40 per cent (56 per cent tax)? Does the employee have to pay the tax as well, i.e. 40 per cent, or under section 144A only 40 per cent of 40 per cent, i.e. 16 per cent, or both amounts (40 per cent + 16 per cent) as well?
(Query T15,699) Confused.
Section 135, Taxes Act 1988 imposes an income tax charge under Schedule E, measured here by the market value of the shares when the option is exercised. That amount becomes part of the base cost of the shares on disposal (section 120(2) and (4), Taxation of Chargeable Gains Act 1992). It follows that the client had no chargeable gain on the sale and so cannot report one.
Section 203FB, Taxes Act 1988 was inserted with effect for events occurring after 5 April 1998 (not 1999), including section 135 charges as above. It operates by bringing within the 'readily convertible assets' provisions of section 203F the shares concerned, but section 203FB(6A) limits the measure of the pay-as-you-earn obligations to the charge as measured for section 135. So the employer should have operated pay-as-you-earn in February 2000. The tax was accountable promptly under the Income Tax (Employments) (Notional Payments) Regulations 1994 (SI 1994 No 1212).
An article, 'Reluctant Litigators' by Nigel Popplewell in Taxation, 18 March 1999 at pages 595 and 596, reviews an employer's opportunity to recover under-deducted tax, but National Insurance dues are another matter, as shown by the 'dot.com' furore which led to section 187A, Taxes Act 1988.
The employee should report the section 135 liability in his return and pay the tax by 31 January 2001, hopefully avoiding trouble with his employer, only likely to suffer interest and penalties in the event of a pay-as-you-earn audit. — Elder.
The querist says the shares cost nothing this is true, but they had a value. That was clearly a reward for services and subject to income tax. The querist says the United States agreement allowed for deduction of withholding tax, but that appears not to have been operated. Whether that was because it did not apply to this employee, or through neglect, we do not know. If it did not apply, that may be because payment to this employee did not count as overseas income; in that case it would appear to be United Kingdom income and subject to pay-as-you-earn, but that was not operated. We do not know if the United Kingdom company failed to operate pay-as-you-earn because it thought the options were overseas income, or through neglect.
One way or another it looks as though the company should have deducted tax on the exercise of the options. If that should have been pay-as-you-earn, the company has to pay the Revenue; it had a right to recovery from the employee by deduction, but if it failed to exercise the right, the employee does not have to pay (or, at any rate, only in unusual circumstances if the Revenue makes a direction which seems unlikely here).
Sale of the options produces a gain in the normal way about which the querist seems fully informed. On this he seems quite clear that the employer was unaware of the correct procedure and did not operate it.
The whole problem seems to arise because the company has not proceeded correctly. There is no duty on the employee to sort out the company's mistakes and pay the tax which the company has to pay, regardless of whether it exercised its right of deduction. He is entitled to credit for what should have been deducted. It is up to the Revenue to collect tax due under pay-as-you-earn statutes from the employer: the employer must pay under penalty and interest.
This client is unlikely to be the only employee involved. The querist is recommended to consult the company's finance director or accountant so that the company puts its tax affairs in order, after which the client's tax should be straightforward. — W.T.G.
Editorial note. This question contains a mixture of business relationships and tax. Assuming that the employee still works for the United Kingdom subsidiary of the United States company, he presumably holds a senior position and will not wish to 'fall out' with his employers. One would therefore suggest (a) that he delays submission of the 2000 tax return; and (b) that, as suggested by 'W.T.G.', he consults the finance director, and that a joint way forward is agreed before an approach is made to the Revenue. At some stage, what has happened will have to be disclosed and, whatever the conclusion, the employee should ensure that the company is responsible for any interest and penalties.
Some shares were exercised in February 2000. The shares cost nothing, but were worth £100,000 at date of exercise. Therefore tax of 40 per cent is payable.
The employer did not deduct the tax due on exercise of the options, of £40,000, from the employee's net pay in February 2000 (under the change in legislation effective 6 April 1999 putting the onus on the employer to pay the tax due through pay-as-you-earn) nor subsequently. The United States stock option agreement did allow for deduction of withholding taxes.
The employee sold the shares and received the full £100,000. The employer did not pay over the tax under pay-as-you-earn. In fact it is only now becoming aware of this requirement.
Should the employee put the gain on his tax return, and pay the tax at 40 per cent of £100,000, or should the employer have paid it — or have they both got to pay it? The fact that it was not reimbursed to the employer by the employee within 30 days (February 2000) seems to mean that the tax itself became a taxable benefit on which the employer should pay tax. Nothing was shown on form P11D in respect of this benefit. Presumably interest is also payable by the employer, and a penalty for an incorrect form P11D?
So must the employer pay the 40 per cent tax, and tax on the 40 per cent (56 per cent tax)? Does the employee have to pay the tax as well, i.e. 40 per cent, or under section 144A only 40 per cent of 40 per cent, i.e. 16 per cent, or both amounts (40 per cent + 16 per cent) as well?
(Query T15,699) Confused.
Section 135, Taxes Act 1988 imposes an income tax charge under Schedule E, measured here by the market value of the shares when the option is exercised. That amount becomes part of the base cost of the shares on disposal (section 120(2) and (4), Taxation of Chargeable Gains Act 1992). It follows that the client had no chargeable gain on the sale and so cannot report one.
Section 203FB, Taxes Act 1988 was inserted with effect for events occurring after 5 April 1998 (not 1999), including section 135 charges as above. It operates by bringing within the 'readily convertible assets' provisions of section 203F the shares concerned, but section 203FB(6A) limits the measure of the pay-as-you-earn obligations to the charge as measured for section 135. So the employer should have operated pay-as-you-earn in February 2000. The tax was accountable promptly under the Income Tax (Employments) (Notional Payments) Regulations 1994 (SI 1994 No 1212).
An article, 'Reluctant Litigators' by Nigel Popplewell in Taxation, 18 March 1999 at pages 595 and 596, reviews an employer's opportunity to recover under-deducted tax, but National Insurance dues are another matter, as shown by the 'dot.com' furore which led to section 187A, Taxes Act 1988.
The employee should report the section 135 liability in his return and pay the tax by 31 January 2001, hopefully avoiding trouble with his employer, only likely to suffer interest and penalties in the event of a pay-as-you-earn audit. — Elder.
The querist says the shares cost nothing this is true, but they had a value. That was clearly a reward for services and subject to income tax. The querist says the United States agreement allowed for deduction of withholding tax, but that appears not to have been operated. Whether that was because it did not apply to this employee, or through neglect, we do not know. If it did not apply, that may be because payment to this employee did not count as overseas income; in that case it would appear to be United Kingdom income and subject to pay-as-you-earn, but that was not operated. We do not know if the United Kingdom company failed to operate pay-as-you-earn because it thought the options were overseas income, or through neglect.
One way or another it looks as though the company should have deducted tax on the exercise of the options. If that should have been pay-as-you-earn, the company has to pay the Revenue; it had a right to recovery from the employee by deduction, but if it failed to exercise the right, the employee does not have to pay (or, at any rate, only in unusual circumstances if the Revenue makes a direction which seems unlikely here).
Sale of the options produces a gain in the normal way about which the querist seems fully informed. On this he seems quite clear that the employer was unaware of the correct procedure and did not operate it.
The whole problem seems to arise because the company has not proceeded correctly. There is no duty on the employee to sort out the company's mistakes and pay the tax which the company has to pay, regardless of whether it exercised its right of deduction. He is entitled to credit for what should have been deducted. It is up to the Revenue to collect tax due under pay-as-you-earn statutes from the employer: the employer must pay under penalty and interest.
This client is unlikely to be the only employee involved. The querist is recommended to consult the company's finance director or accountant so that the company puts its tax affairs in order, after which the client's tax should be straightforward. — W.T.G.
Editorial note. This question contains a mixture of business relationships and tax. Assuming that the employee still works for the United Kingdom subsidiary of the United States company, he presumably holds a senior position and will not wish to 'fall out' with his employers. One would therefore suggest (a) that he delays submission of the 2000 tax return; and (b) that, as suggested by 'W.T.G.', he consults the finance director, and that a joint way forward is agreed before an approach is made to the Revenue. At some stage, what has happened will have to be disclosed and, whatever the conclusion, the employee should ensure that the company is responsible for any interest and penalties.
