Employment Related Securities reporting

With businesses increasingly looking at alternative ways to incentivise their staff and key executives, especially considering the impending Employer NIC rise, thoughts have turned to the use of equity incentives. One key area that is often overlooked is the compliance matters that sit around the use of equity incentives and the reporting that is needed to HMRC on a yearly basis. The implications of not completing this reporting are two fold;

the first being relatively small financial penalties, providing it is less than 9 months late, but these penalties can increase steeply for longer delays;
the second being questions asked on a due diligence process as to why the reporting has not been completed along with the inevitable price chip for any penalties that may be due.

However, one area that is often overlooked is how this information is being used by HMRC to monitor employer compliance. HMRC are using increasingly sophisticated systems to analyse the data provided to them, and using this data to launch targeted enquiries into various tax compliance matters.

The employer reporting when completed correctly can give HMRC valuable insights into a variety of data points including;

What assets individuals have in their personal ownership;
What securities they may be acquiring and whether this is linked to a role that may have its earnings funnelled through a service company;
The valuations that employers are using for the grant of their equity incentives and how robust these valuations may be;
Where non-UK assets may be being acquired;
Cases of excess market value being paid to employees for the disposal of equity incentives; and
Detailed information on the structure of any transactions.

It is therefore imperative that employers get their share scheme reporting right and include the appropriate level of disclosure. The implications of getting this reporting wrong can result in enquiries snowballing into individuals personal affairs and the employers wider PAYE compliance.

What is Employment Related Securities reporting?

An employer needs to report the issue of any Employment Related Securities (“ERS”) to HMRC on a yearly basis, and in the event that no securities have been issued a nil return must still be uploaded to the companies PAYE portal where a scheme has previously been opened.

What is an Employment Related Security?

An ERS is any security acquired be an employee, or those connected with an employee, and can include ordinary shares, preference shares, loan notes and options.

What needs reporting?

The acquisition of any ERS needs reporting, alongside any disposals which take place for more than market value. The reporting should not only cover the acquisition of the securities but also the grant of any options, whether via an approved share scheme or otherwise.

Why is it important?

There are financial penalties associated with the failure to complete the reporting on time, alongside the inevitable questions on a due diligence exercise. However, HMRC are increasingly using the data submitted via the ERS reporting forms to launch targeted enquiries and therefore it is important that it is correct and complete.