New year, but not yet the new tax year

As the new year begins, employers will be onboarding newly recruited employees, setting growth financial targets for the upcoming year, and offering new incentives to reward key employees. This is an opportunity to positively incentivise your workforce and increase engagement and empowerment. 

An incentivisation scheme could bring rewards for the employer as well as the employee. For example, an employee share plan which awards shares or share options to employees can be designed to improve retention levels and incentivise employees to grow the business in line with its agreed objectives. It is important that the share awards plan is structured to meet your commercial objectives and ensure that it rewards and incentivises employees as desired.

As the acquisition of shares or similar securities is through the employee’s employment, the shares are treated by HMRC as employment related securities (ERS). 

Obligations to meet 

It’s a new calendar year, but the 2023/24 tax year ends on 5 April 2024 and there are various ERS reporting requirements.

The main annual reporting obligations for employers are the ERS annual returns. For the 2023/24 tax year, the ERS annual return filing deadline is 6 July 2024.

The type of ERS annual return varies depending on your company’s arrangements and the specific activity that has taken place during the tax year for the employee incentive plan. 

ERS annual returns are also required where a company operates any of the following tax-advantaged employee share plans: 

• enterprise management incentive options (EMI); 
• company share option plan (CSOP); 
• share incentive plans (SIP); and
• save as you earn (SAYE).

In addition, there is a separate annual ERS return (known as an ‘Other’ return, formerly ‘Form 42’). This may be required to report other ERS arrangements outside of the tax-advantaged plans listed above.

ERS transactions do not need to be part of a formal plan and may include one-off events, such as a transfer of shares between shareholders. Employers may have a requirement to file one or more ERS annual returns for the relevant tax year.

Planning to begin

There are still a couple of months left until the new tax year so you could start your tax year-end planning now and identify any reportable ERS transactions during the 2023/24 tax year to date. It helps to get ahead in preparation of the annual reporting.

You must register ERS arrangements online via HMRC’s ERS online service in respect of the relevant year(s) of activity. Returns may also be filed on the employer’s behalf. The ERS agent registration process can take a few weeks to complete so should be considered in good time ahead of the deadlines.

Once an ERS scheme is registered, an annual return is required for subsequent tax years, unless the plan has been formally closed on HMRC’s ERS online service. If there have not been any reportable events in the tax year, a ‘nil’ annual return is required.

If you have a scheme registered in error, or it is no longer operating, the scheme registration should be ceased by entering a date of final event. You need to submit an annual return for the tax year in which the final event date occurs.

There are exceptions for events where reporting may not be required. For example, a report may not be required where shares are transferred by an individual in the normal course of domestic, family or personal relationships of the person transferring the shares. The ERS legislation and the associated reporting requirements are wide-reaching, so check the detail to avoid costly errors.

Where non-UK resident employees do not have any UK duties in the tax year of the award, there is usually no need for the company to report their securities if the employees are not likely to become UK resident or work in the UK during the award’s vesting period.

Don’t forget…

Automatic late filing penalties apply where ERS returns are filed after 6 July. A fixed £100 automatic penalty is levied per registration where the deadline is missed. There are additional automatic late filing penalties which increase over time including if the return remains outstanding three months and six months after the due date. If a return is outstanding nine months after the due date, HMRC may charge daily penalties. HMRC may also charge penalties where returns contain inaccurate information.

There are also important obligations to notify HMRC in relation to setting up and establishing an HMRC-approved incentive plan, such as: EMI, CSOP, SIP and SAYE. Non-compliance can result in penalties, potential disqualification of the tax-advantaged scheme and unexpected tax charges, such as income tax/national insurance contributions, may arise.

If you would like more information on designing share plans or your ERS reporting obligations, please contact Martin Cooper.