ERS Schemes – Obligation to notify HMRC
ERS reporting is a topic which is often overlooked, but it is something all business owners should be aware of and pay attention to at this time of year. Here, Shaun Little sets out what is involved and what employers should do next to ensure they comply with the requirements.
There are many different ways in which business owners can incentivise their employees beyond the obvious salary and bonus double act. One of the main tax-efficient approaches taken by employers is the implementation of an Enterprise Management Incentive (EMI) scheme and subsequent grant of options to directors/employees under the scheme. This is a well-trodden path, as is the requirement to notify any such scheme to HRMC within 92 days of the date of the grant of options under the scheme (although we will take this opportunity to note that this is a hard deadline and failure to report any such scheme within the timeframe results in the options no longer being valid).
Rather than granting options, some employers choose to incentivise their workforce by gifting or issuing shares or other forms of securities to directors or employees. These forms of incentivisation are collectively referred to as ‘employment related securities’ (ERS) schemes and also carry with them a requirement to register each such scheme with HMRC and file an annual return in relation to each registered scheme.
Who does the ERS regime apply to?
The ERS regime covers a wide range of transactions and will catch any transaction relating to shares, loan stock and debentures which are held by any employee, or a person connected to that employee. The regime also covers one-off awards or gifts of shares.
Generally speaking, almost any transaction relating to shares or securities and involving directors, employees or people in similar roles is likely to be a reportable event and will therefore be caught by the regime.
There are penalties for non-compliance with the regime so it is key for companies to assess whether there have been any transactions which may fall under the regime and to complete the relevant steps to report to HMRC on those transactions.
What are the HMRC requirements?
There is an obligation to register all ERS schemes with HMRC via their online services portal and to file an annual return in respect of each such scheme. The deadline for doing so is by 6 July following the tax year in which the relevant scheme is established (i.e. any scheme established within the tax year ending 5 April 2023 must be registered by 6 July 2023). The following schemes cannot be registered after 6 July:
- Share Incentive Plans;
- Save as you Earn; and
- Company Share Option Plans.
Not all ERS schemes are tax advantaged. The obligation to register schemes without a tax advantage only applies where there is a reportable event.
‘Reportable events’ covers a wide range of events including (but not limited to):
- the issue or transfer of securities;
- the grant or exercise of share options or of other rights to acquire shares;
- the assignment or release of taxable securities options for consideration;
- a share for share or share for loan note exchange;
- the share transactions on a management buyout;
- a rights issue or a bonus issue to employees by an employing company;
- a change in the rights of shares held by employees; and
- a sale of securities that are ‘restricted’.
Penalties for late reporting
Financial penalties will arise if a return is not received by 6 July following the tax year to which the return relates. These may be imposed on each ‘responsible person’, which includes:
- the employer;
- the person from whom securities or options were acquired; and
- the person by whom the securities were issued.
A key point to note is that HMRC no longer issues notices to file or reminders, so it is the sole responsibility of the company to ensure the relevant returns are submitted on time.
Late submissions may also affect a company’s credit rating and lead to closer scrutiny from HRMC.
The process for registering and reporting on ERS schemes can be done online and involves a bit of administrative hassle. It is recommended to engage an agent (such as a tax adviser or accountant) to assist with the reporting process as it can be a complex process to get right.
Registration of ERS schemes can take up to 5 working days and the appointment of an agent to file the return on behalf of a company can take up to three weeks so it is crucial to act sooner rather than later to meet the deadline and avoid any potential penalties.
Please do not hesitate to get in touch if you have any questions regarding the regime and the reporting requirements.
By Davina Mordanti