The deadline for employers to file their annual ‘employment-related securities’ (ERS) tax returns for the 2018/19 tax year is fast approaching.
- directors or employees have acquired shares in your company; or
- your company operates an employee share plan or arrangement,
there will likely be a registration and/or filing requirement by 6 July 2019.
Annual ERS tax returns are required to report events relating to securities (such as shares or loan notes) which involve employees and/or directors (including founding directors). This might typically involve, for example, the grant/exercise of options, or the acquisition/disposal of shares, or altering share rights or restrictions on a group reorganisation or reconstruction.
A company must ensure it has properly registered its share schemes and ERS events online via the HMRC PAYE portal, even if there is only a ‘one-off’ share acquisition. Annual returns must then be submitted even if there have been no reportable events during the tax year.
For EMI options, it is vital that all options granted are notified online within 92 days of the grant otherwise tax-advantaged status is lost.
Penalties can be levied for late returns and/or errors. Perhaps more importantly, often an income tax and national insurance contributions (NIC) liability arises on the ERS event which could result in higher late payment penalties and interest for the company should PAYE be applicable. It is therefore vital that employers consider any arrangements that could potentially be caught under the ERS tax regime.
The range of transactions that are classified as ERS is wide-reaching and the ERS rules can apply even if there is no formal employee share plan in existence.
Often, employers do not recognise that share transactions are reportable for tax purposes – and will mistakenly fail to deduct income tax and NIC through PAYE. Common examples we have seen include:
- employees/directors acquiring/disposing of shares at a price that is different to the market value for tax purposes. This could be the case if, for example, a pro-rata value is paid for minority shareholdings;
- share class redesignations or other restructuring, particularly if it results in an uplift in the market value of particular shares;
- transactions in one individual’s shares affecting the value of another person’s shares;
- the lifting of restrictions attached to shares, for example if shares were subject to a forfeiture provision for a limited time and that time has passed; and
- gifts of shares to friends.
If shares are ‘readily convertible assets’ at the date of the chargeable event, the employer is required to deduct income tax and NIC (employees’ and employers’) through PAYE based, broadly, on the market value of shares at the date of the event less any payment by the relevant employee or any amount that has already been subject to tax.
If annual ERS tax returns have not been filed by 6 July following the end of the tax year HMRC can impose late filing penalties as follows:
- £100 automatic penalty; plus
- £300 if three months late; plus
- £300 if six months late; plus
- £10 per day if more than nine months late.
A penalty of £3,000 per return can be imposed for errors or omissions.
What companies can do
We always recommend carrying out regular reviews of your employee share arrangements and the ways in which they operate.
This helps not only to ensure they remain compliant with legislative changes and updates to HMRC practice or guidelines, but also that they are achieving their intended purposes.
Questions companies can ask include the following.
- Have any employees/directors bought or sold shares during the tax year?
- Has the company’s share structure changed, eg amendments to the articles, a group restructuring or new investors?
- Have the share scheme rules or agreements been amended to cover the new GDPR obligations?
- If there is an EMI scheme, has the company/group changed investments or exceeded any limits, eg 250 or more employees or over £30m gross assets?
- If there is an EMI scheme, does the standard option certificate or agreement include a full list of the restrictions on the shares (now an HMRC requirement)?