If you’re an employer who’s exploring ways to retain and motivate your team, you be considering providing employees with shares or share option rights. This may be done by awarding shares under typical employee share incentive schemes and some other more bespoke arrangements. These are known as employment related securities (ERS).
Tax and National Insurance contributions (NICs) may be payable where the right or opportunity to acquire the securities (or an interest in securities) is made available to a director or an employee by reason of the employment of the person acquiring the securities (or interest). For these purposes, ‘employment’ includes a former, current and prospective employment. There is an exception to these rules where an individual transfers shares to a director or employee in the normal course of the domestic, family or personal relationships of that individual – for example, a gift of shares by a parent to a son or daughter working in the family company.
Besides the compliance requirements that may have to be satisfied at the time of the share or share option award – such as registering the company’s scheme with HMRC, the making of Section 431 elections etc – there are also annual compliance obligations that must be followed. The acquisition of all shares and securities are reportable events and the employing entity must file an annual share report.
This note focuses on the ‘Other Employment Related Securities’ return that reports non-approved share arrangements, but HMRC also require the filing of an ‘End of Year’ Annual Return for the following:
- EMI (Enterprise Management Incentive Option schemes)
- CSOP (Company Share Option Plans)
- SAYE (Save As You Earn Schemes)
- SIP (Share Incentive Plans)
The other ‘Employment-Related Securities Annual Return’ (formerly known as Form 42) must be filed by 6 July following the tax year of acquisition. In this connection, the Annual Return for the year ended 5 April 2023 must be filed by 6 July 2023 and penalties are raised for late filing. A £100 penalty will be issued automatically even if the return is just one day late, and additional automatic penalties are charged if the return is still outstanding three months, six months and later periods after the due date.
The term ‘employment-related security’ generally relates to shares of an employer company or, if a group, the shares of another company within the group, but also includes debt, derivatives and interests in investment partnerships.
For purpose of this Return, a reportable transaction includes:
- The grant and exercise of share options
- The award of restricted stock units
- Changes to the rights of securities
- Acquisitions from the employee for more than market value
- Certain share or option cancellations
Often overlooked is the requirement to report on the Annual Return securities acquired as part of rights or bonus issue or as part of a sales transaction. In the latter case, management sellers may have ‘rolled over’ some of their sales proceeds into new shares in the purchaser which might involve the issue of shares or of loan notes by the purchaser. As these shares/loan notes will have been issued or made available by a company connected with the person’s employer, they are regarded as employment related securities.
How BKL can help
HMRC do not issue notices to file or reminders and automatic penalties will apply for late filing. It is mandatory for annual returns to be filed online using the HMRC online filing facility.
If your company isn’t dealing in-house with the registration of its existing Share Schemes and the 2022/23 Reporting Requirement in-house, BKL’s tax specialists would be pleased to assist you with the online registration and deal with the online filing on your company’s behalf.
If you would like us to help you, please get in touch with your usual BKL contact or use our enquiry form. Let us know if you have provided or arranged to provide shares to a director or employee of your company under an EMI share option scheme, a CSOP scheme, an SAYE option scheme SIP or a non-approved arrangement.
Annual Returns for each of these schemes are required even if they are nil returns, subject to the following exception:
Unapproved arrangements do not need to be registered unless a “reportable event” has occurred since 5 April 2014, but an annual return is required if either a “reportable event” took place in the year to 5 April 2023, or your company was required to file an ERS Annual Return online for last year.