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If you have provided employees with shares, options or securities by virtue of their employment, you will need to file a special kind of annual return to HMRC. This applies whether the payments were made on a one-off basis or are part of an ongoing plan.
These types of payments are known as employment-related securities (ERS) and the return which is required is called the employment-related securities return. The reporting date is different for the ERS return than for other types of tax reporting, but if you miss the deadline you will be slapped with a penalty fine.
Here, we look into ERS returns in more detail, including the filing deadline you need to meet each year.
What Is Covered By ERS?
There are a variety of schemes and payments which are considered to be caught under the ERS bracket, and as an employer, it is essential that you understand the full extent of the scheme.
Any types of securities or shares which are awarded will be classified as ERS, including loan stock, units from a collective investment scheme and debentures.
Some examples of ERS payments could include:
- Company Share Option Plans
- Share Incentive Plans
- Save As You Earn
- Schemes previously filed under Form 42 (classified as non-tax advantaged plans)
- UK participants in overseas ERS schemes
There may be other examples of ERS payments that you make to your employees; any payments of this type of nature will need to be formally reported.
Do I Need To File An ERS Return?
All of the company ERS schemes will need to be registered with HMRC at inception. The wording can be rather deceptive as even single payments are still considered to be plans or schemes and must be reported to HMRC.
When you set up the scheme you should register with HMRC via the online portal straight away, and self-certify for tax advantages plans. You will need to already be registered with HMRC as an employer to be able to do this.
Once you have registered the plans, you will also need to make annual ERS returns. This is the case even if there are no reportable events in the tax year. If this is the case, the return must be made but reported as nil.
In other words, if there are options that have not yet been fully exercised and they are not lapsed or expired, the employer must include them in an annual ERS return even if there is no activity.
These options will continue to be considered as employment-related securities for up to seven years after the individual has left the employment. This means for this seven-year period, while there remains options to be exercised, the employer must continue to file annual ERS returns.
Common Problems With ERS Returns
The ERS return is rather tricky and it is not unusual for problems to occur. HMRC takes a strict approach with ERS returns and if they are late or contain errors, penalty fines will be issued.
Part of the difficulty is that the definition of employment-related securities is fairly broad and many different types of schemes and payments are caught by this category. Any types of options or shares which were acquired by virtue of employment are included, even if not purchased for market price. This definition includes options as well as shares, and covers some consultants and non-executive directors as well as regular employees.
A company buying back their own shares, and creating an uplift in the value of the shares that other employees holds is a reportable event. This can often be missed.
Another common omission is after the registration of share allotment following a capital event with Companies House; employers frequently forget to notify HMRC about the ERS. Registering the information with Companies House does not fulfil the obligations that an employer has under ERS reporting.
Due Date For The ERS Tax Return
As mentioned above, HMRC has strict dates for the completion of an ERS tax return and it is vital that employers meet their obligations in time in order to avoid a fine.
The deadline is 6th July following the tax year in which the scheme was registered, and annually thereafter. For example, the tax filing deadline for ERS returns for the tax year 2020/2021 was 6th July 2021.
Exemptions For ERS Tax Returns
There are some circumstances that provide an exemption for ERS tax returns but it is important to be crystal-clear whether these apply. Mistakes or oversights are not treated lightly by HMRC and are not considered a satisfactory reason to be excused from receiving a penalty fine.
The events which may mean an ERS tax return does not need to be made includes:
- Scrip dividends
- Share for share exchange
- Flat Management Companies
- Normal exchange of shares between family members or within personal relationships
- Members’ clubs (which have been formed as companies)
- Bonus or rights issues
- Dividend reinvestment plans
- Shares which have been acquired by employees independently
You should always get professional advice before determining whether an event can be excluded from ERS reporting.
Penalties For Late Filing
HMRC is known for issuing penalties for late returns and the ERS return is no exception. Any individual who does not file on time will face an escalating series of penalties; the later the return, the higher the fine will be.
The standard charge for filing a late return is £100. This will be payable if you do not submit your return by 6 July 2021 (or annually thereafter). This increases to £300 after three months, £600 after six months and after nine months, an additional penalty of £10 per day is added.
If an ERS scheme is registered in error, a nil return for the year must still be made before the scheme can then be formally closed.
If errors are made in the ERS tax return, HMRC may also charge penalties but the scope of these will depend on individual circumstances. In the worst case scenario, the penalties can run into thousands of pounds so it is important to be accurate with the return.