UK: Form 42: How Much Should Employers Know About Their Employees?

Last Updated: 17 August 2005
Article by Jeremy Mindell

Most Read Contributor in UK, August 2017

Jeremy Mindell, UK group employee tax manager of HHG PLC, focuses on the recent introduction of Form 42 by the Inland Revenue and its wider implications.

The in-house employee taxes manager is required to deal with a wide range of issues concerning employees – issues which, in a large accountancy and consulting firm, would span four or five departments. The role within an in-house function requires broad knowledge, which can be supplemented with in-depth expertise from advisers whenever required.

Part of the challenge of the job lies in dealing with a large number of departments in which, surprisingly, work colleagues do not live, dream, work, eat and sleep taxation! That is why the in-house tax manager needs to act as an early warning system; to try and ensure that, in major transactions, tax of all kinds is at least considered before irrevocable decisions are made. Creating a shadow tax team of individuals across the business, one which knows enough about tax to refer appropriate questions to the tax manager, is crucial. In any large organisation, it is neither possible, practical nor desirable for a single individual to scrutinise all transactions.

In the course of day-to-day work, the tax manager needs to establish contacts in departments as diverse as facilities, payroll, share schemes, building services, cost centres, domestic HR, international assignments HR, benefits, finance and IT, as well as with colleagues in corporate tax and VAT. Into this varied diet, new ingredients are regularly thrown to keep everyone on their toes. Form 42 has recently provided just such extra spice.

What is Form 42?

Form 42 has not yet reached the iconic status of the forms P45, P60, P11D or IR35. It surely will become as famous (or infamous!), unless share schemes fall out of favour as a way of remunerating employees. Form 42 may yet rise to assert its place in the pantheon of Inland Revenue forms, acronyms and names that are known to a wider audience than UK tax professionals.

The form, which reports unapproved share options, share awards, financial instruments, etc, was conceived in April 2003, when the Finance Bill for 2003 was introduced. This 16-page form had a gestation period– longer than that of a human being but somewhat shorter than that of an elephant– before it was born in March 2004. I suspect that few reasonable people would argue that there was no need for the form. It provides a formal layout for information about unapproved forms of share-based remuneration. Although employers were required to report similar information for share options before the introduction of Form 42, there was no prescribed format to facilitate and remind employers of the requirement to file. With share/securitybased remuneration schemes gaining popularity over the past 10 years, some might say that the need for a formally constituted return was overdue.

Encouraging employers to provide reasonable information regarding income and employee share schemes should be in the interest of all taxpayers. However, the devil, as ever, is in the detail. Companies face the major challenge of collecting, monitoring and recording a very large quantity and variety of information.

There is certainly a justification for share scheme reporting, as it allows the Inland Revenue to cross check the information on individuals’ tax returns. Many employers will have found that it has generated a greater need for robust information systems and processes. Ensuring that the increased amount of information required for Form 42 is available in the three months after the end of each tax year has now become essential for employers.

If you add into the melting pot the additional penalties for late submission, completing Form 42 in its first year proved an enormous challenge. At HHG, we needed input from HR, finance, share schemes specialists, our investments department and payroll, as well as trustees within a short period of time in order to produce the requisite information on time by 6 July. This reinforces my belief that one of the core functions of any in-house tax team is to ensure that disparate departments are not only aware of tax issues as and when they happen, but are also prepared to play their part in achieving the common goal.

Issues of confidentiality

One of the more interesting points about share scheme reporting is the extent to which it requires the employer to know considerably more about employees than might intuitively be expected. The company needs to check a residency box if the individual is either not resident or not ordinarily resident in the UK for tax purposes. This has logic to it, as the treatment of share award options does depend on residency status at grant and, potentially, at exercise as well.

As many employers will know, this gives a host of problems. Since the advent of Self-Assessment, the Inland Revenue has not, as a rule, issued residence rulings. It can prove difficult, therefore, to establish what an employee’s residence status is and, consequently, how to treat share scheme events for PAYE, NIC and Form 42 reporting purposes. Accordingly, in order to determine an individual’s residence status, the employer must either take the employee’s word on the matter or enquire further. This could lead to the employee having to provide information that he or she would prefer to keep private.

Residence, like a number of other areas connected with taxation, depends on that nebulous concept, intention. Briefly, if an individual intends to stay in the UK for more than three years, he is resident and ordinarily resident from the outset. If an individual does not intend to stay more than three years and does not show any signs of intending to stay, such as buying property or entering into a long lease in the UK, then it is possible that he may not be ordinarily resident in the UK. Clearly this affects not only the tax treatment of shares but also a number of other valuable tax reliefs which are available.

Yet ultimately, the availability of the relief is not based solely on the employer’s actions but also on the employee’s intentions. This can lead to some interesting conundrums. Say a company has every intention of returning an employee to his home country after two years, but the employee has every intention of making the UK his home for a considerably longer period, if necessary by changing employer.

The employer may well consider the employee resident but not ordinarily resident, but the employee’s intention to stay beyond the three-year limit would make him resident and ordinarily resident. Conversely, the employer may wish the employee to come to the UK for a considerable period of time but the employee may have no intention of staying that long. These factors can have a very significant (and complex) effect on the treatment of employees’ participation in the share scheme.

Clearly there are issues of confidentiality at stake. Moreover, the intention may not be a work-related one, but could relate to either the making or breaking of personal relationships. This can be a delicate subject to deal with, particularly where the tax manager is requesting what can be perceived as personal information from senior employees and directors.

In its thirst for information, the Inland Revenue requires companies to find out large amounts of personal information about their employees and to retain this information for a very long time, currently six years.

By virtue of the tax laws, companies are required to hold a substantial amount of information on employees, including their marital status, employment history, whether they are on income support (for example, tax credits) and whether they have disabilities. Indeed, the position is more burdensome in multinational companies, where the requirements to hold personal data for individuals may differ from one country to another.

The conclusion must be that there is a limit to the information that it is comfortable for a company to hold and collect from its employees. The only alternative to the requirement for companies to hold so much information seems to be for the tax and benefits system to be less governed by individuals’ personal circumstances. Even the most organised and stable of individual’s intentions can be clouded in secrecy and ambiguity.

Whilst it may appear inequitable for an employee’s personal circumstances to have such a bearing on an employer’s compliance requirements, there is no indication that this will change in the near future. Tax managers face the ongoing task of ensuring systems and procedures are in place to capture relevant information for statutory returns whilst recognising the sensitivity of the information being held.

The views in this article are solely those of the writer and do not in any way represent the views of HHG PLC or any of its subsidiaries

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.