ERSM110030 - Securities Options: Dividend Equivalents
When companies award rights to receive shares, they may also give employees an additional right whereby on receipt of the share award they will also receive an amount equal to the dividends paid on the number of shares received between the award date and the date the shares are received. These amounts mirror what would have been distributed if the shares were held during that period.
Dividend equivalents can be paid in cash or shares and will be subject to income tax and in some cases NICs. Companies often retain discretion over whether to settle the amounts in cash or shares, withthis decision not made until the payment is due.
Importantly, where a company retains discretion, the award could still be treated as a right to acquire securities depending on the circumstances (ERSM110025).
Where settled in cash, the amount will be taxed either as general earnings under ITEPA03/S62 or, in some cases, specific employment income under ITEPA03/S477(3)(c) depending on whether the initial award is a right to acquire securities. Where there is no such right to acquire and the payment is taxed as earnings, it is subject to PAYE and ERS reporting is not required.
If settled in shares, the amount may again be taxed as general earnings under ITEPA03/S62 or specific employment income under ITEPA03/S477(3)(c) depending on whether the initial award is a right to acquire securities, but in all cases, regardless of the tax treatment, the acquisition of securities would be reportable on an ERS return.
Solely in these specific circumstances, dividend equivalents may be reported on the ERS return when they are settled. If settled in shares the figures should be included in the total number of shares acquired under the share award and if settled in cash the earnings would be treated as employment income and dealt with under PAYE.