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Introduction

For most employers, they will tend to come into contact with the Employment Related Securities (“ERS”) rules on very few occasions.

Typical cases will be where the employer offers its employees free or discounted shares, or if it grants employees options to acquire shares in the future.

In the vast majority of cases, shares acquired by an employee in the company or group that employs them will be considered employment-related and therefore reportable. It is important to note that the shares do not necessarily have to be acquired from the employer: if another shareholder provides the shares, these will also fall under the scheme.

There are also a number of other events which are not directly linked to the acquisition or disposal of shares but which must be reported. The most likely case is where the shares have been issued with restrictions (for example on being able to sell them) – called restricted securities. The restrictions will most likely have lowered the market value of these stocks – and once the restrictions are lifted, the market value will increase.

The capital gain resulting from the lifting of restrictions is taxable for the employee and must be declared. The only exception is where the employee and the employee have chosen, at the time of issuing the shares, to ignore the effect of the restrictions on the valuation of the shares – this is called a “choice under section 431”.

The declaration regime

The reporting regime now provides that a return in a specified form must be submitted for each financial year (i.e. the year up to 5 April) in which a ‘scheme’ is opened on the system from HMRC, whether or not there were any reportable transactions during the year. . This latter point can be problematic where a ‘system’ is open for reporting a one-off event but is not ‘closed’: HMRC will expect a report each subsequent year and will impose sanctions for failure to report, even if the statement would be “nil.”

Reports must be filed no later than July 6 following the end of each fiscal year. Failure to comply with this rule results in an automatic penalty of £100, followed by subsequent penalties of £300 each if the deposit remains outstanding after three and six months – a daily penalty of £10 per day may be applied if the lack of conformity persists beyond that. this point.

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

Events to report

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

• Shares acquired when a company is incorporated (or shortly after its incorporation), provided that the company has no assets other than the share capital at the time 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)

• Apartment management companies and member clubs – it is generally not necessary to report the acquisition or disposal of shares in apartment management companies, unless the transaction involves a “bonus” element (for example, the shares are sold at goodwill) or the shares are restricted securities

• It is not necessary to report acquisitions made by employees who are not resident in the United Kingdom and do not carry out any duties in the United Kingdom during the year of the award, provided that they do not are not likely to become UK residents or work in the UK during the vesting period. price

If shares have already been acquired by an employee as employment-related securities, any additional shares acquired through a stock exchange share will also be employment-related securities and must be declared. However, if the original shares are not required to be reported because they were acquired upon incorporation, the new shares should also not be considered employment-related and should not be reported.

Practical aspects of reporting

The ERS reporting system is something of an administrative nightmare for employers. To report, the employer will need to access their ‘PAYE for Employers’ account on the HMRC website and then navigate to the ‘ERS for Employers’ section to set up a ‘scheme’. This can only be done using employer login credentials; an agent cannot establish a system on behalf of an employer.

If the employer wishes an agent to 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 enable them to register and file the declaration. . All this takes time and setting up a system cannot be left to the last minute if we want to avoid penalties!

A system will need to be put in place even if an employer simply wishes to report a share transaction which does not fall within the framework of a traditional employee shareholding plan.

Once the program is established, the employer or their agent can then upload information using spreadsheets saved in .ods format. The system is very prescriptive: one 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 transactions under a scheme are complete, 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 subject to penalties if returns are not made.

Next steps

ERS reporting is a complex and complicated exercise! If you think you may need to file a return by July 6 but are unsure or need assistance with the return itself, contact ETC Tax.