With the 6 July employment related securities reporting deadline fast approaching, here is a reminder of the key rules.
What is an employment related security (or ERS)?
Shares and certain other interests are ‘securities’ for tax purposes. This definition includes carried interest, which is generally classified as a ‘unit in a collective scheme’.
A security will be ‘employment related’ where it is acquired in connection with an employment or directorship. This includes securities acquired by salaried members, and (generally) by members of a partnership who hold directorships with other entities within the group.
What needs to be reported and when?
An employer is required to submit an ERS return in respect of all their existing share plans, loan notes, and partnership and carried interest arrangements.
The return must be submitted for each UK tax year, even where no new ERS has been acquired/granted during the period (in which case a nil return should be filed).
Before submitting an ERS, return the relevant incentive arrangement must be registered with HMRC. Where any arrangement has not been registered, an employer should use HMRC’s online service to complete the registration and be allocated a scheme reference number (although note that HMRC allows up to seven days to provide a scheme reference number; as this is required for reporting ERS, an employer should allow a sufficient buffer to ensure that the 6 July filing deadline is still met).
An ERS return will include information such as the acquisition/award date of securities or carry, the total number of securities/interests acquired/awarded and any exercise price set or paid. HMRC provides a template for the annual return, which we recommend downloading each year to take into account any recent changes, or you can use your own template.
The deadline for filing an ERS return for the 2022/23 tax year is 6 July 2023.
Can an employer settle the PAYE on behalf of their employees?
Where an employee receives ERS with value, and there generally is a requirement to report the value of the ERS via PAYE, the employer can initially settle the income tax and NICs owed (together, ‘employment taxes) on the employee’s behalf. This is not uncommon when employees are awarded carried interest that is ‘in the money’.
However, where the employer does not recover the employment taxes from the employee in full by 6 July following the tax year in which the employment taxes were due, the unrecovered amount may give rise to a further charge (commonly referred to as a ‘s 222 charge’).
Where a s 222 charge arises, the outstanding employment taxes are treated as additional employment income of the employee (which is subject to further income tax, and employee and employer NICs) and must be reported by the employer on a form P11D for the tax year in which the charge arises.
To mitigate a s 222 charge, the employee should ‘make good’ the employer for the unrecovered PAYE before the 6 July deadline. This can happen by way of a payment in cash/transfer to the employer’s bank account, or through a net pay deduction in any payroll run before July.
What are the penalties for missing the ERS filing deadline?
If an employer fails to make an ERS report by 6 July, a £100 penalty (per return) will be charged automatically even where the return is only one day late.
Where a return is outstanding for three months after 6 July, an additional automatic penalty of £300 will be charged, with a further £300 being charged if a return is still outstanding
six months after 6 July.
After nine months of a return being outstanding, HMRC may charge an additional penalty of £10 per day until the return is filed.
With the 6 July employment related securities reporting deadline fast approaching, here is a reminder of the key rules.
What is an employment related security (or ERS)?
Shares and certain other interests are ‘securities’ for tax purposes. This definition includes carried interest, which is generally classified as a ‘unit in a collective scheme’.
A security will be ‘employment related’ where it is acquired in connection with an employment or directorship. This includes securities acquired by salaried members, and (generally) by members of a partnership who hold directorships with other entities within the group.
What needs to be reported and when?
An employer is required to submit an ERS return in respect of all their existing share plans, loan notes, and partnership and carried interest arrangements.
The return must be submitted for each UK tax year, even where no new ERS has been acquired/granted during the period (in which case a nil return should be filed).
Before submitting an ERS, return the relevant incentive arrangement must be registered with HMRC. Where any arrangement has not been registered, an employer should use HMRC’s online service to complete the registration and be allocated a scheme reference number (although note that HMRC allows up to seven days to provide a scheme reference number; as this is required for reporting ERS, an employer should allow a sufficient buffer to ensure that the 6 July filing deadline is still met).
An ERS return will include information such as the acquisition/award date of securities or carry, the total number of securities/interests acquired/awarded and any exercise price set or paid. HMRC provides a template for the annual return, which we recommend downloading each year to take into account any recent changes, or you can use your own template.
The deadline for filing an ERS return for the 2022/23 tax year is 6 July 2023.
Can an employer settle the PAYE on behalf of their employees?
Where an employee receives ERS with value, and there generally is a requirement to report the value of the ERS via PAYE, the employer can initially settle the income tax and NICs owed (together, ‘employment taxes) on the employee’s behalf. This is not uncommon when employees are awarded carried interest that is ‘in the money’.
However, where the employer does not recover the employment taxes from the employee in full by 6 July following the tax year in which the employment taxes were due, the unrecovered amount may give rise to a further charge (commonly referred to as a ‘s 222 charge’).
Where a s 222 charge arises, the outstanding employment taxes are treated as additional employment income of the employee (which is subject to further income tax, and employee and employer NICs) and must be reported by the employer on a form P11D for the tax year in which the charge arises.
To mitigate a s 222 charge, the employee should ‘make good’ the employer for the unrecovered PAYE before the 6 July deadline. This can happen by way of a payment in cash/transfer to the employer’s bank account, or through a net pay deduction in any payroll run before July.
What are the penalties for missing the ERS filing deadline?
If an employer fails to make an ERS report by 6 July, a £100 penalty (per return) will be charged automatically even where the return is only one day late.
Where a return is outstanding for three months after 6 July, an additional automatic penalty of £300 will be charged, with a further £300 being charged if a return is still outstanding
six months after 6 July.
After nine months of a return being outstanding, HMRC may charge an additional penalty of £10 per day until the return is filed.
