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Do you need to file an Employment Related Security return by 6 July?

by Christa Humphreys

Now that a new tax year has begun, it is that time of year, when many companies are required to submit a return to HMRC to report shares and securities transactions involving employees and directors.

Failure to act could mean heavy penalties. If your employees have acquired securities in your company, whether via share issue or share transfer or other means, or options to acquire them, then you need to be aware of these rules.

The deadline is fast approaching. Companies have until 6 July 2024 to send their ‘Employment Related Securities’ returns to HMRC in respect of transactions arising in the year ended 5 April 2024.

Companies should consider whether any ‘reportable events’ took place between the period 6 April 2023 and 5 April 2024 and, if so, they should act now.

What is an Employment Related Security?

The definition of an ‘Employment Related Security’ is extremely broad.

In essence, these are securities acquired by a person where the right or opportunity to acquire them was made available ‘by reason of an employment’.

The effect of the rules is that almost all securities acquired by employees and directors will be deemed to have been acquired ‘by reason of their employment’ and will therefore be ‘employment related securities’ unless an exception applies.

‘Securities’ include shares, share options, loan notes, debentures, warrants entitling their holders to subscribe for securities and other instruments.

It does not matter whether the securities were acquired under approved HMRC schemes (such as EMI and CSOP) or by other means (for example by an ordinary issue or transfer of company shares), as all can potentially be caught by the rules.

‘Employment- related’ includes securities acquired by either former or prospective employees, as well as current employees. The employment can be that of the person acquiring the shares or of ‘any other person.’

It also includes the situation where the right or opportunity to acquire the shares/ securities is made by a person connected with the employer and not just by the employer itself.

Exceptions to the rules are made in specific and limited circumstances, such as shares acquired in the course of family relationships and for some employee- controlled companies where chargeable events affect all classes of share (such as the sale of the company). But the rules are not straightforward and any exceptions relied upon should be carefully considered.

What is a ‘Reportable Event’?

An Employment Related Securities Return must be submitted to declare ‘reportable events’.

Reportable events include a wide range of situations including, but not limited to:

  • Share acquisitions
  • The granting, exercise, release, assignment or variation of share options
  • Changes to restrictions on shares
  • Convertible securities on acquisition and/ or on conversion
  • Disposals of securities for more than market value
  • Post acquisition benefits from securities, such as a change in the articles which increases the value of the shares
  • Any action which artificially enhances the market value of securities.

However, this list is not exhaustive and the legislation is complicated.

Do I need to submit a return if there have been no Reportable Events?

Yes, possibly. Even if you have no events to report, you may still need to take action before 6 July 2024 to prevent HMRC from issuing an automatic penalty.

For example, if your company is operating an approved scheme you should file a nil return. If your company has previously made an ERS return but has not officially ‘closed’ the scheme on the Government Gateway portal you should either close the scheme or file a new return.

Do I need to submit a return if there is no tax to pay?

A return may be required even if you believe no tax is due.

The return is essentially an information gathering exercise for HMRC, to enable them to monitor securities transactions. It is required even if any tax has already been paid, for example via PAYE, or if no tax arises.

What happens if I don’t submit a return?

Penalties will arise if a return is due and is not submitted by 6 July. HMRC will issue an automatic penalty of £100 even if the return is just one day late.

If the return is still outstanding by 6 October and 6 January further automatic penalties of £300 will be issued on each of those dates. Total penalties of £700 will therefore have accrued if the return is nine months late.

HMRC also has the power to charge further penalties of £10 per day if the return is still outstanding by 6 April following the end of the tax year. They have the power to charge this daily penalty on each ‘responsible person’. This is usually the employer but can also be the company issuing the securities (for example, the parent company) or the person from whom the securities were acquired.

In addition to the late filing penalties, HMRC may also issue a penalty of up to £5,000 for inaccurate returns, where the inaccuracy was careless or deliberate.

It is clear that HMRC takes the filing of ERS returns very seriously. ‘Responsible persons’ ignoring their filing obligations could be making a costly mistake.

What should I do now?

Companies should review all shares and securities transactions within the period 6 April 2023 to 5 April 2024 and consider whether these need reporting.

How can Rickard Luckin help?

If you are aware of any transactions that may require reporting, or if you’re not sure and you would like us to help, please get in touch.

We can advise you whether you need to report the transactions and, if a return is required, we can prepare and submit it on your behalf.

If you would like us to help but we are not already the company’s registered agents for Employment Related Securities reporting, please be aware that the process for establishing agent authorisation with HMRC can take several weeks. Therefore, if you would like our assistance please let us know as soon as possible.

At Rickard Luckin we regularly help businesses to implement share incentive strategies. These can be a very effective and tax efficient way of rewarding and incentivising employees. If you would like to find out more about these and whether they could benefit your business, please contact us .

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