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May 30, 2024

Employment Related Securities - End of Year Reporting

Companies who have issued shares or other securities to their employees or directors need to consider whether they have a requirement to report this to HMRC under the Employment Related Securities (“ERS”) legislation. The 6th July deadline for submitting ERS returns is fast-approaching and it’s therefore important that employers understand their reporting requirements to avoid potential penalties.

The reporting requirements extend to include any companies who have share option schemes in place, even where no activity has happened in the year. This includes EMI, CSOP, SAYE and SIP schemes.

Failure to report can result in significant penalties and we recommend that companies review the filing requirements now to ensure they are compliant.

What is an Employment Related Security

The definition of Employment Related Securities is very broad and includes any issue of shares or other securities which includes loan stock, debentures, restricted stock units, and units in collective investment schemes.

What events are reportable?

The list of reportable events is extensive, but the most common transactions that we see as being reportable include the following:

  • Acquisition of shares in a company by an employee or director. This could be as part of a management buyout, as an incentivisation package, or on the restructuring of a group.
  • Any company which has a share option scheme in place. Most commonly this is EMI, but any share option scheme should be reported annually to HMRC regardless of whether there has been any activity in the year.
  • Disposals of securities and or interests in securities for more than their market value at the time of which the disposal was made.
  • Any company which has assigned or released a security option which has been acquired by the reason of the individual’s employment or because of the reason of the employment of any other person.
  • A company which has done anything that can artificially enhance the market value of a security.
  • The lifting of restrictions on restricted securities (e.g., shares awarded to an employee which are subject to a forfeiture restriction if the employee leaves the company within a specified period).

What tax is due?

The taxation of these securities can be complex and depends on the circumstances under which the securities are acquired and disposed of. The main tax implications typically include income tax and capital gains tax (CGT).

Income Tax

Any tax due under this regime would be payable via PAYE or the employee’s self-assessment tax return. The ERS return is simply reporting the reportable event to HMRC, not notifying, or paying any tax due.

  1. Acquisition of shares and securities

Under the ERS legislation, a tax liability will arise where shares or securities are acquired for less than their market value. The taxable amount will usually be the difference between the market value of the shares at the time that they were acquired and the amount that was paid by the employee.

Furthermore, if the shares are considered to be readily convertible assets (e.g, listed shares or shares that can be easily sold), then National Insurance Contributions may also be due.

  • Share options
  • Approved Share Option Schemes (e.g., EMI, CSOP, SAYE, SIP): These schemes often provide tax advantages. For instance, under the Enterprise Management Incentive (EMI) scheme, there is typically no income tax or NICs on the grant or exercise of the option, provided certain conditions are met.
  • Unapproved Share Options: Income tax is typically due when the option is exercised on the difference between the market value of the shares at exercise and the option price.
  • Restricted Securities

A tax liability may also arise if restricted securities (e.g. those which are subject to restrictions such as good or bad leaver provisions or shares that cannot be sold for a certain period) have been awarded to an employee and the restrictions have come to an end therefore increasing the value of the shares. Employees may make an election under Section 431 ITEPA 2003 to be taxed on the unrestricted market value at acquisition to potentially reduce future tax liabilities however this election must be made both jointly between the employer and the employee within 14 days of the award of the shares. It can be difficult to determine the tax charge on the lifting of restrictions on restricted securities so please get in touch if you require any further information.

  • Convertible securities

If the securities can be converted into other securities, specific tax rules apply to the conversion event.

Capital Gains Tax

CGT arises on the disposal of securities. The chargeable gain is the difference between the disposal proceeds and the acquisition cost (including any amount that was subject to income tax on acquisition). Reliefs such as the annual exemption of £3,000 per annum or Business Asset Disposal Relief may be available to reduce the tax liability arising.

Overall, the tax implications of ERS depend on various factors, including the type of securities, the nature of the acquisition, and the holding period. Both employees and employers must carefully consider these aspects to ensure compliance and optimise tax efficiency.

Consulting with a tax advisor is often recommended to navigate these complexities effectively.

Submitting an Employment Related Securities Return

In most cases, the deadline to submit an ERS return is the 6th of July following the end of the tax year in which the reportable transaction occurred. Once registered, you will then need to file an ERS return every year for as many years that the scheme is still active. For this reason, we always recommend closing the scheme once the reporting is complete if it relates to a one-off transaction.

For share option schemes, these should be kept open as you will need to submit a nil return for live schemes even where there is no activity.

There are some exceptions where an ERS return will not always be required, such as the transfer of shares in family business to the next generation. These type of transactions will fall under the family exemption as the shares have been awarded in the normal course of domestic, family or personal relationships.

What are the penalties for a late submission?

If you miss the submission deadline of the 6th of July, you will receive an initial £100 penalty. After the 6th of October, a further £300 penalty will arise and then another added £300 will arise  on the 6th of January if the ERS return is still outstanding. Daily penalties may then accrue from the 6th of April or 9 months after the initial deadline.

It is therefore extremely important to ensure that:

  1. ERS schemes are registered in good time. This can take some time to complete, and it is therefore recommended that ERS schemes are registered well ahead of the 6th July deadline.
  2. If an agent is completing the company’s ERS return they will need to get authorised to act as the company’s agent for ERS services.
  3. The ERS return is submitted by the 6th July deadline and all reportable events have been included.

How do you submit an ERS return?

This can be done through your usual HMRC business portal, under the section entitled “employment related securities”. If you have not already set up a scheme, then you will need to do this first. If a scheme is already in place, then a return can be submitted by “viewing schemes or arrangements”.

The templates for submitting the return can be found at HMRC’s website - Employment related securities return templates and forms - GOV.UK (www.gov.uk)

How we can help with your ERS reporting

As the submission date is now approaching, business should consider preparing and submitting their ERS returns to HMRC. We can help with all aspects of reporting so that you are fully meeting the requirements. We offer comprehensive assistance to ensure full compliance:

  • We will help you assess whether an ERS return must be filed.
  • We will identify all share scheme reporting obligations.
  • We will assist with the registration of schemes with HMRC.
  • We will become your ERS agents so that we can complete and submit the ERS returns.

If necessary, we can assist with past reporting to ensure that all of the company’s ERS reporting is up-to-date and, if applicable, correspond with HMRC to reduce penalties.

Get in touch!

With the deadline quickly approaching, now is the ideal time to consult with our trusted tax advisors at PD Tax to ensure that deadlines are met and avoid any potential penalties. Additionally, feel free to reach out if you require any further details or wish to discuss eligibility for reliefs.

Note that the date for ERS submissions is the same as that for P11D submissions. As such, if you were unaware of this, make sure to get in touch to ensure you remain compliant.

Disclaimer: This article is for general information purposes only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice.

Contact us today to discuss your tax requirements.
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