UK: Tax Factsheet - Employee Share Based Reward Reporting - March 2011

Last Updated: 8 March 2011
Article by Inez Anderson

Reporting Obligations

Employers and other "responsible persons" have an obligation to report the following events relating to employees and directors:

  • share awards,
  • share purchase and certain share sales,
  • grant of share options, and
  • certain other share-related transactions and events. Reports must be sent to HM Revenue & Customs (HMRC) before 7 July each year. Failure to report can lead to significant penalties. The reporting requirements cover employee sharerelated events occurring in the preceding tax year (6 April to 5 April).

Don't assume that just because you have not been sent a return you do not need to complete one.

Consequences of failure

Where returns are not filed within the deadline or are incomplete the following penalties may be imposed:

  • an initial penalty of up to £300 if the return is not filed on time
  • a further penalty of up to £60 per day if the delay continues after the initial penalty is imposed
  • if information contained in the return is incorrect there is a potential maximum penalty of £3,000.

Note that for these purposes each reportable event counts as a return and these penalties would be multiplied by the number of entries omitted, delivered late or containing errors.

Does this apply to you?

You are a "responsible person" for the purposes of the penalties mentioned above if you are any of the following:

  • the employer of the employee concerned
  • the host employer e.g. a company to which an employee is seconded
  • the person from whom the securities in question were acquired
  • the person by whom the securities were issued.

Frequent Problem Areas

Difficulties encountered when providing share options or share awards to employees and the subsequent requirements to complete the return forms include:

  • awards to internationally mobile employees
  • reporting by employer companies in relation to confidential awards made by parent or associated companies
  • ascertaining the appropriate market value of the shares in relation to restricted securities and/or awards in non-listed company shares
  • determining whether PAYE and NIC should be operated where the event or transaction creates a charge to income tax
  • awards to non-employees, such as consultants.

How can we help?

Our employment tax specialists can:

  • give reassurance if you think you do not need to complete a return
  • help complete returns either on paper or online
  • advise on HMRC reporting and PAYE requirements in relation to share schemes or share awards
  • assist with share valuations where restricted securities or shares in unlisted companies are involved
  • review administration and reporting processes with a view to improving compliance, minimising administration time and reducing future risk
  • help with any HMRC correspondence or negotiations.

Reporting for Approved Plans

Each of the HMRC approved plans has its own specific return:

  • Enterprise Management Incentives (Form EMI40) Details of options adjusted (following a variation in share capital), replaced (due to a company reorganisation), released or lapsed plus information concerning disqualifying events and both taxable and non-taxable option exercises.
  • Company Share Option Plan Form 35) Details of options granted and those exercised (in a non-approved way) plus summary information concerning the numbers of shares (over which options were granted) issued and/or transferred, and of employees who exercised.
  • Share Incentive Plan (Form 39) Details of awards of free and matching shares and the acquisition of partnership and dividend shares. Information concerning free, matching or partnership shares ceasing to be part of the plan (less than five years after the award) and free or matching shares forfeited (by leavers). Details of: any company reorganisation; the number of shares still in the plan beyond five years from grant; and, if shares are listed on an exchange, their year-end market value.
  • Save As You Earn share option plan (Form 34) Details of options granted and those exercised within three years following grant plus summary information concerning the numbers of staff receiving option grants and/or exercising options, numbers of shares issued/transferred and the total amount paid for shares.

Reportable transactions for Unapproved Plans

Events and transactions concerning employment-related securities, which do not arise under an approved plan, are to be reported on the return Form 42.

Acquisition of any type of interest in a 'security' must be reported if the acquisition relates to an employment, and a variety of other transactions or events must also be included.

A "security" for these purposes includes shares (whether in the employer company or not), debentures, loan stock, warrants (that are not simple options), futures and other types of financial instrument.

'Employment' covers all employees and directors (including non-executives) whether past, present or prospective and if an event occurs that involves someone other than the employee, but arises by virtue of the employee's employment, it must also be reported.

Reportable events include:

  • The grant of an unapproved option over securities
  • The assignment or release of an unapproved option over securities
  • The acquisition of shares (including by exercise of an unapproved option or an approved option in an unapproved way)
  • The lifting (and/or variation) of restrictions or forfeiture conditions over employment related securities
  • Disposal of employment related securities whilst they are subject to restrictions
  • Anything done that leads to an artificial increase in the value of employment related securities
  • Disposal by an employee of employment related securities at a price greater than their open market value
  • Disposal of partly paid employment related securities
  • The release of the holder of employment related securities from the obligation to pay the balance outstanding if they were partly paid.

Certain transactions do not have to be reported on Form 42. These include:

  • shares in certain types of newly incorporated companies
  • transfers of shares in the normal course of domestic, family or personal relationships
  • shares in flat management companies
  • certain rights and bonus issues
  • shares acquired independently by employees.

However, given the penalties, it is best to seek our advice if you are in any doubt.

Please Note

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.

You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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