The deadline for employers to file their annual employment-related securities (ERS) returns with HMRC for the 2022/23 tax year is approaching. The filing deadline is 6 July 2023.
ERS returns have to be completed in respect of UK directors, employees or employees with UK work duties who have acquired shares or other securities (for example, loan notes, options etc) in their company; or if their company operates an employee share plan or arrangement, for example an enterprise management incentive (“EMI”) option scheme.
When is a return required/what is reportable?
Annual ERS returns are required to report events relating to securities which involve employees and/or directors (including founding directors).
Transactions do not need to be part of a formal share or option scheme to be potentially reportable and can include one-off events, for example, certain corporate transactions and re-organisations. Reporting may also be required where shares/securities are located outside of the UK.
There also doesn’t have to be a tax liability for the transaction to be reportable, the employee may have bought the shares at market value, paid the income tax, but as an ERS event, it is still reportable.
The events and transactions that can be classified as ERS are wide-reaching and the ERS rules can apply even if there is no formal employee share plan in existence. This could include (but is not limited to):
- HMRC tax-advantaged plans (EMI, CSOP, SAYE & SIP), which have their own specific reporting requirements, and always require an annual return, even if there is nothing to report.
- Share acquisitions and disposals.
- Share options.
- Share-for-share exchanges, common where a business re-organisation takes place, or other types of corporate transactions.
- Variations in share capital.
- The lifting of restrictions attached to shares, or changing the rights to a share class.
- Overseas plans with UK participants (e.g. US stock option plans).
- Transactions involving loan notes or warrants, which are common in business sales/changes of ownership.
There are very limited exemptions to the reporting requirements, the main one being family relationship.
Filing a return
To enable a report to be made, a company must ensure it has registered its share schemes and ERS events via the HMRC online PAYE portal. The initial stage can only be completed by the employer, not their accountant or adviser, who can only take over responsibility once the scheme is registered and agent authority has been issued.
Any scheme registered online will require annual returns to be filed for subsequent tax years, irrespective of whether there have been any reportable events in those tax years, unless the scheme has been formally closed by entering a ‘date of final event.’ All HMRC approved share & option schemes, for example EMI, are required to file an annual return, until the scheme is closed, for example on the sale of the business or the options lapsing.
It is common for an employer to open a scheme and make a one-off standalone report, for example an individual buys into a company becoming a director (= ERS reportable event), but if the scheme is not closed, HMRC will expect a return automatically, and late filing penalties will be issued, even if there is nothing to report.
HMRC does not send reminders to file ERS returns but will issue automatic penalties. HMRC can levy automatic late filing penalties (starting at £100 per scheme). Returns containing a ‘material inaccuracy’ can also attract additional penalties.
The main issue is that employers do not recognise that share transactions are reportable via an ERS return, or may mistakenly fail to deduct income tax and National Insurance contributions (NIC) through PAYE, which only becomes apparent when the annual return is being filed, or worse when flagged by HMRC, or more likely on a future sale of the business, as part of the due diligence.
Common issues we have found:
- Failure to notify HMRC of the grant of EMI options within 92 days from each grant date (with screen shots being taken of the reporting);
- Employees/directors acquiring/disposing of shares at a price that is different to the market value for tax purposes.
- Share class redesignations or other restructuring, particularly if it results in an uplift in the market value of particular shares;
- Share for share exchanges, bonus issues and rights issues involving employees;
- Transactions in one individual’s shares affecting the value of another person’s shares;
- Gifts of shares to employees as rewards/incentives.
We therefore recommend that any activity involving UK employees/directors which involves shares, options or other securities is considered to confirm whether there is a registration and reporting requirement.
Should you need to speak to us regarding your filing duties, please do not hesitate to contact us.