Employment Related Securities – Reporting obligations

Introduction

For most employers, they will tend to only come into contact the employment related securities (“ERS”) rules on very few occasions. 

The typical instances will be if the employer provides their employees with free or discounted shares, or if they grant options to employees to acquire shares in the future.  

In the vast majority of cases shares acquired by an employee in their employing company or group will be considered to be employment-related and therefore reportable.  It is important to note that the shares need not be acquired from the employer – if another shareholder provides the shares then these will also fall within the regime.

There are also a number of other events that do not relate directly to the acquisition or disposal of shares but which need to be reported.  The most likely one is where shares have been issued with restrictions over them (for example on the ability to sell them) – referred to as restricted securities.  The restrictions will have most likely depressed the market value of those shares – and once the restrictions are lifted then the market value will increase. 

The increase in value as a result of the lifting of restrictions is taxable on the employee and must be reported.  The only exception is where the employee and employee have elected at the time the shares were issued to ignore the effect of the restrictions in valuing the shares – this is known as a “section 431 election.”

The Reporting Regime

The reporting regime now provides that a return in a specified form must be submitted for each fiscal year (i.e. the year to 5 April) that a ‘scheme’ is open on HMRCʼs system, whether or not there have been any reportable transactions in the year.  This last point can be problematic when a “scheme” is opened to report a one-off event but then not “closed” – HMRC will expect a report each succeeding year and will issue penalties for a failure to file even if the return would be “nil.”

The reports must be filed no later than 6 July following the end of each fiscal year. Failure to comply results in an automatic penalty of £100, followed by later penalties of £300 each if the filing remains outstanding at the three and six month mark – a daily penalty of £10 per day can be applied if the compliance failure continues past that point.

A similar system now also applies to the various statutory share schemes (such as the Enterprise Management Incentive scheme), which each have their own reporting regime.

Reportable Events

Reports will be required for most acquisitions of shares by employees, subject to certain limited exceptions:

• Shares acquired on the incorporation of a company (or shortly after incorporation), provided that the company provided the company has no assets other than share capital when the shares are acquired

• Transfers of shares in the normal course of domestic, family or personal relationships (this is a key “get out of jail free” card for the ERS regime as a whole)

• Flat management companies and membersʼ clubs – there is generally no need to report the acquisition or disposal of shares in flat management companies unless the transaction has some element of ‘bounty’ in it (for example, the shares are sold at over-value) or the shares are restricted securities

• There is no need to report acquisitions by employees who are not UK resident and do not have any UK duties in the year of the award, as long as they are not likely to become UK resident or work in the UK during the vesting period of the award

If shares have previously been acquired by an employee as employment-related securities then any further shares acquired by way of a share for share exchange will also be employment-related securities and should be reported.  If however the original shares are not required to be reported because they were acquired on incorporation then the new shares should also not be considered to be employment related and need not be reported. 

Practicalities of Reporting

The reporting system for ERS is something of an administrative nightmare for employers.  To make a report, the employer will need to go into its ‘PAYE for employers’ account on the HMRC website and then access the section marked ‘ERS for employers’ to set up a ‘scheme’. This can only be done using the employerʼs log-in credentials; an agent cannot establish a scheme on an employerʼs behalf. 

If the employer wishes to have an agent file the ERS return on their behalf a code must be requested by the agent, the code will be sent to the employer who must then provide the code to the agent to allow them register themselves and file the return.  All of this takes time which means that setting up a scheme cannot be left to the last minute if penalties are to be avoided!

A scheme will need to be set up even if an employer simply wishes to report a share transaction that does not fit within a conventional employeesʼ share scheme.

Once the scheme has been established the employer or its agent can then upload information using spreadsheets saved in the .ods format. The system is very prescriptive – a small step away from the prescribed format will result in the spreadsheet being rejected which can lead to a significant degree of frustration!

Once all of the transactions under a scheme have been completed, the scheme will need to be closed (again, this can only be done by the employer). As above, if a scheme is not closed, the employer must continue to file returns and will be liable for penalties if the returns are not made.

Next Steps

ERS reporting is a complex and messy exercise! If you think you may have to file a report by 6 July but are unsure, or need help with the reporting itself then contact ETC Tax