ETASSUM37090 - Schedule 3 SAYE option schemes: Option Notifications: ‘Serious’ and ‘Less Serious’ error

If as a result of an enquiry HMRC decide that the requirements of Parts 2-7 of Schedule 3 are not or have not been met, the position depends on whether or not the error is a “serious” or “less serious” error.

“Serious” error (paragraph 40H)

An error will be considered as “serious” if there has been a fundamental or material error in the scheme rules, or in the way in which the scheme is operated, and may include something that cannot be put right by either amending or ‘repairing’ the rules. An example of a serious error might be where the scheme shares are not and were never 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If the error is deemed to be a “serious” error, the tax advantaged status of the scheme may be withdrawn either from a date specified in the closure notice or from the date of the closure notice (see ETASSUM37060). The date specified may be any date from the date the scheme failed to meet the requirements of Parts 2-7 of Schedule 3. Where the tax advantaged status is withdrawn, the interests of SAYE participants holding options before the date specified in the notice are protected, as the SAYE code continues to apply to options that were granted before the tax-advantaged status was removed (paragraph 40H(3)/(4)).

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

  • before the date of the closure notice or the specified date in the closure notice, and
  • when the scheme did not meet the requirements of parts 2-7 of Schedule 3.

The amount of penalty is based on HMRC’s “reasonable estimate” of the relief given or due (paragraph 40H(5)) when the scheme did not meet the requirements of Parts 2-7 of Schedule 4.

“Less serious” error (paragraph 40I)

An error may be considered as “less serious” if it can be put right by amending or repairing the scheme rules, for example where the error relates to the operation of the scheme 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 option holders 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 it 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 40I, or
  • if appealed, 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 of up to £5,000.

If the scheme organiser does not make the ‘repair’ or correct the error within the 90 day period, HMRC can issue a default notice (paragraph 40I(6)). If a default notice is issued, the tax advantaged status of the scheme will be withdrawn either from a date specified in the default notice or from the date of the default notice. The date specified can be any date from the date the error arose. Where the tax advantaged status is withdrawn, the interests of SAYE participants whose options were granted before the date specified are protected, as the SAYE code continues to apply to options that were granted before the tax-advantaged status was removed (paragraph 40I(8) and (9)).

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

  • before the date of the default notice or the specified date in the default notice, and
  • when the scheme did not meet the requirements of parts 2 to 7 of Schedule 3.

The amount of the penalty is based on HMRC’s “reasonable estimate” of the relief given and due (paragraph 40I(10)).