UK: Share Schemes - Annual Reporting Requirements - Form 42: Time Limits

Last Updated: 9 July 2004
Article by David Pett and Judith Greaves

Originally published June 2004

An obligation to make a return on Form 42 arises if shares have been acquired, or an option granted, by reason of employment or if any other event has occurred which could give rise to a charge to tax, whether or not tax is in fact chargeable.

The Inland Revenue have put answers to Frequently Asked Questions relating to the completion of Form 42 on their website. The limited extension of the deadline has been prompted in part by difficulties experienced by some companies in accessing and printing Form 42 on the Revenue website.

You must complete and return Form 42 to the Revenue by Tuesday 6 July UNLESS your company qualifies for the later submission deadline of 7 September 2004 (see Action Checklist below).

Form 42 is available at:
http://www.inlandrevenue.gov.uk/shareschemes/42-2004-q8-31.pdf

Action Checklist

Form 42

  • Check whether your company has received a Form 42 with your company's details pre-printed on it. If that is the case, then you must complete and return the form to the Inland Revenue by Tuesday, 6 July 2004.
  • You have until 7 September 2004 to complete and return Form 42 if:-
    • your company has not been sent the form at all; or
    • you received a blank form; or
    • you simply downloaded a copy of Form 42 from the Inland Revenue website.

EMI options

  • If your company was unable to grant EMI options because it held non-qualifying subsidiaries, check whether you can now grant EMI options.

Anti-avoidance

  • If you use Inland Revenue approved share option schemes, check whether you may be caught by the new rules.

Anti-Avoidance

CSOPs, SAYE options and SIPs: anti-avoidance From 18 June 2004, the employment-related securities rules introduced in 2003 relating to:-

  • restricted securities (Chapter 2 of Part 7 ITEPA 2003)
  • convertible securities (Chapter 3)
  • securities with artificially depressed market value (Chapter 3A)
  • securities with artificially enhanced market value (Chapter 3B)
  • securities acquired for less than market value (Chapter 3C)
  • securities disposed of for more than market value (Chapter 3D); and
  • post-acquisition benefits from securities (Chapter 4) will now apply to shares acquired under an approved scheme.

For most approved plans, there is no cause for alarm. Although shares acquired under a SIP, an SAYE or CSOP scheme which count as ‘restricted securities’ may be acquired for a consideration which is less than their ‘unrestricted market value’ (UMV), this will not affect the relief from income tax on acquisition of the shares and should not trigger any further charge to income tax when the shares are sold, or upon the occurrence of any other ‘chargeable event’. This is because a section 431(1) election will be deemed to be made, so that the employee will be treated as having acquired the shares for a consideration equal to their UMV.

However, once the shares are acquired, the employee may now suffer a charge to income tax if, for example, he subsequently receives a benefit by virtue of his ownership of the shares, or the shares are subsequently disposed of for a consideration which is greater than their market value (Chapter 3D).

Artificial schemes

New legislation was introduced on 7 May 2004 to stop artificial tax-avoidance schemes intended to facilitate the payment of tax-free bonuses to employees. These schemes were exploiting exemptions from income tax where the company whose shares were acquired was employee controlled and the chargeable event related to all shares of the class acquired by employees.

Likewise, new legislation on 18 June 2004 put a stop to artificial tax-avoidance schemes designed to take advantage of the fact that, previously, no chargeable event occurred when an ‘associated person’ ceased to be associated with the employee at a time when that person held employment-related securities. Such securities could then be sold without triggering a charge to income tax. The new clauses provide that a person who, when the securities are first acquired, is a ‘relevant linked person’ (as defined) will at all times be deemed to remain a ‘relevant linked person’, notwithstanding that the association between that person and the employee may have ceased.

SIPs, SAYE option plans and CSOP schemes

With effect from 18 June 2004, the tax exemption on the award of shares or exercise of a share option under the above schemes is only available if the avoidance of tax or NICs is not the main purpose (or one of the main purposes) of any arrangements under which the shares in question are awarded or acquired, or the option was granted or is exercised.

EMI options

For EMI options granted on or after 17 March 2004, it is no longer necessary for all subsidiaries of the EMI company to be 75% owned and controlled. With the exception of property subsidiaries, any subsidiary of the EMI company need only be a 51% subsidiary. If the company has any subsidiary which owns or manages property, then the company must own at least 90 per cent of its issued share capital as well as the voting power, and be entitled to 90 per cent of profits available for distribution and 90 per cent of the assets on a winding-up.

Holders of ‘market value’ EMI options over ‘restricted’ shares are relieved of the burden of making a s431(1) election to avoid unexpected charges to income tax when the option shares are sold or a ‘chargeable event’ otherwise occurs. Such election will be deemed to have been made. In the case of a ‘discounted’ EMI option over restricted shares, an actual s431(1) election may still be appropriate when the option is exercised, but normally only if the market value of the shares has increased since the date of grant.

NICs

Amendments to the existing legislation will confirm that no NICs are due if a CSOP option is exercised, less than 3 years after grant, within 6 months after the employee has left by reason of injury, disability, redundancy or retirement after an age specified in the rules. This ensures that the NIC exemption is brought into line with the exemption from income tax in these circumstances.

Shares acquired by employees in a public offer

Changes similar to those described in ‘NICs’ above apply from 18 June 2004 in relation to shares acquired by employees pursuant to a public offer.

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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