Reporting employee share transactions

Following the end of the tax year, companies have until 6 July to file their share schemes’ annual returns.

Filings are required on Form 42 where:

  • Options are granted, exercised or released for consideration;
  • Shares or other securities are acquired by employees (even if the employees have purchased the shares at market value);
  • Restrictions on employees’ shares are lifted or varied;
  • Shares or securities are converted into another class or type of security;
  • A return may also be needed if an employee disposes of shares or if he or she has received a benefit from holding those shares.

The reporting obligation applies to options, shares and securities held by current and former employees and directors.

A company will also have to file separate returns if it has granted EMI options, or has a Share Incentive Plan (“SIP”), Sharesave (also known as a Save As You Earn plan or “SAYE”) or has a Company Share option Plan (“CSOP”).

2013/14 is the last year that HMRC will accept paper forms.  In future, Form 42 and the annual returns for EMI, SIP, SAYE and CSOP will need to be filed electronically.

If Form 42 is not submitted before the deadline the company may suffer a penalty of [£300] per entry (for example, if an employee is granted an option, exercises it and then sells the  shares for more than their market value, there will be three line entries for that one employee) and if the delay is protracted, HMRC can apply for a daily penalty of £60 per line entry to be levied until the return is made.

Similar penalties apply to the returns for EMI, SIP, SAYE and CSOP, with the added risk that non-compliance could threaten the tax-favoured status of these plans.

In practice these penalties are rarely levied, with HMRC instead focusing on stubborn defaulters. However, such failures are factored-in when HMRC is assessing the risk rating of a business and, where a company is undertaking a transaction, purchasers and investors will ask for sight of any returns as part of their due-diligence process.  We are aware of cases in which a prospective purchaser has cited poor compliance among their reasons for seeking to reopen negotiations on pricing.

Now is a good time to begin chasing clients to ensure that they identify whether they have a filing obligation and to begin collecting the information needed to file the returns.  Our team has comprehensive experience of assisting with the preparation and filing of these returns, if you do have any questions or need any assistance, please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann.