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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 4 Company Share Option Plan (CSOP): Notification & Enquiries: “Serious” and “Less Serious” error

If as a result of an enquiry HMRC decide that the requirements of parts 2-6 of Schedule 4 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 28H)

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 may include 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 were never eligible shares, or where the scheme organiser was never eligible to establish and 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If the error is deemed to be a “serious” error, the tax advantaged status of the scheme may be withdrawn either from a date specified in the closure notice or from the date of the closure notice (see ETASSUM46130). The date specified can be any date from the date the scheme failed to meet the requirements of parts 2-6 of Schedule 4.

As well as removing 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 closure notice or the specified date in the closure notice, and
  • when the scheme did not meet the requirements of parts 2-6 of Schedule 4.

The amount of the penalty is based on HMRC’s “reasonable estimate” of the tax relief given or due (paragraph 28H(3)).

 

“Less serious” error (paragraph 28I)

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

Where the error is deemed to be a “less serious” error, the scheme organiser 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 28I (see ETASSUM46170), or
  • if appealed, the date on which any appeal against the decision is determined or withdrawn.

If the scheme organiser repairs or corrects the error within 90 days, the scheme retains its tax advantaged status. The scheme organiser may however incur a penalty of up to £5,000.  When calculating 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 participants involved, the amount of tax involved and the circumstances that caused the error. 

If the scheme organiser does not repair or correct the error within 90 days, HMRC can issue a default notice (paragraph 28I(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.

As well as removing 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 of the default notice or the specified date in the default notice; and
  • when the scheme did not meet the requirements of parts 2-6 of Schedule 4 (paragraph 28I(8) & (9).