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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 2 share incentive plan (SIP): Notification & Enquiries: ”Serious” and “Less Serious” error

If, as a result of an enquiry HMRC decides that the requirements of Parts 2-9 of Schedule 2 are not or have not been met, the position depends on whether the error is a “serious” or “less serious” error.

 

“Serious” error (paragraph 81H)

 

An error will be considered as “serious” if there has been a fundamental or material error in the plan rules or in the way in which the scheme is operated and would include potentially something that cannot be put right by either amending or ‘repairing’ the plan rules. An example of a serious error might be where the plan shares are not and never were eligible shares, or where the employer was never eligible to operate the scheme.

If the error is deemed to be a “serious” error, the tax advantaged status of the scheme may be withdrawn either from a date specified in the closure notice or from the date of the closure notice (see ETASSUM27120). The date specified may be any date from the date the scheme failed to meet the requirements of Parts 2-9 of Schedule 2. Where the tax advantaged status is withdrawn, the interests of SIP participants (holding awards made before the date specified in the closure notice) are protected, as the SIP code continues to apply to shares that were awarded before the tax-advantaged status was removed (paragraph 81H(3) and (4)).

As well as removing the tax advantaged status, a penalty may be applied. The penalty may be up to twice the amount of tax and NICs relief given or due on shares granted to participants:

  • before the date of the closure notice or the specified date in the closure notice; and
  • when the SIP did not meet the requirements of Parts 2 to 9 of Schedule 2

 

“Less serious” error (paragraph 81I)

 

An error may be considered as “less serious” if it can be put right by amending or ‘repairing’ the plan rules, for example where the error relates to the operation of the plan rules. 

HMRC will make judgments about the nature of errors on a case by case basis taking into account a range of factors including (but not limited to) the numbers and types of shareholders involved, the amount of tax involved and the circumstances that caused the error.

Where the error is deemed to be a “less serious” error, the employer is required to ‘repair’ or correct the error within 90 days of:

  • the end of the period during which an appeal can be made against the decision that the error is an error within paragraph 81I; or
  • the date on which any appeal against the decision is determined or withdrawn.

If the employer ‘repairs’ or corrects the error within the 90 day period, the scheme retains its tax advantaged status. The employer may however incur a penalty up to a maximum of £5,000. When considering the amount of the penalty, HMRC will make judgments about the nature of errors on a case by case basis taking into account a range of factors including (but not limited to) the numbers and types of employees involved, the amount of tax involved and the circumstances that caused the error.

If the scheme organiser does not make the repair or correct the error within the 90 days period, HMRC can issue a default notice (paragraph 81I(6)). If a default notice is issued, the tax advantaged status of the scheme may be withdrawn either from a date specified in the default notice or from the date of the notice. The date specified can be any date from the date the error arose. Where the tax advantaged status is withdrawn, the interests of Schedule 2 SIP participants are protected (where awards were made before the date specified in the notice), as the SIP code continues to apply to shares that were awarded before the tax-advantaged status was removed (paragraph 81I(7)/(8)).

As well as removing the tax advantaged status, a penalty may be applied. The penalty may be up to twice the amount of tax and NICs relief for which participants in the SIP have not, or will not be liable as a consequence of the SIP being a Schedule 2 SIP in the period when Parts 2- 9 were not being met before the default notice (paragraph 81I(12). The amount of the penalty is based on HMRC’s “reasonable estimate” of the tax and NICs relief given and due (paragraph 81I(10)).