All employee share schemes need to be registered with HMRC in order to qualify for the tax advantages, and an annual return must be submitted to HMRC for each registered share scheme by 6 July following the tax year end.
This annual return must be submitted online through the ERS system, even if there is no activity in the scheme during the tax year. The penalties for not submitting the ERS annual return are similar to those for a late SA return: £100 for missing the deadline and £300 if the return is still outstanding after three months.
In the case of Talkative Ltd v HMRC the Company registered two employee share schemes in January and March 2018, but failed to submit the annual returns for these schemes by 6 July 2018. The £100 penalty notices were issued on 17 July 2018. As neither annual return had been submitted by 6 October 2018, further £300 penalties were issued for both schemes.
At the FTT the company’s accountant claimed he wasn’t aware that annual returns were required. He also said that no return was filed because no notice to file was received. Neither of these arguments was well received by the FTT, which upheld the penalties.
Unlike for SA returns, a notice to file is not required to be issued to trigger an obligation to file an ERS return. The adviser should have been aware of the need to file the ERS returns for the share schemes which were only registered a few months earlier.
If you have registered employee share schemes, make sure the ERS returns are submitted on time. If the share scheme is no longer needed, deregister it by following the steps set out in the link below.
Talkative Ltd v HMRC TC07172
How to deregister a share scheme
HMRC have today issued ERS bulletin 28 confirming that as the EU have prolongated the scheme the scheme continues to operate in the same way as before. Accordingly any options granted between 7th April and 15th May (the date the EU confirmed the prolongation) will qualify as approved options.
See the bulletin here
We have learned today that the EU has now approved a prolongation of the Enterprise Management Scheme (the “EMI scheme”). The commission decision only applies until the UK ceases to be a member state. See https://bit.ly/2k3mzo5 which deals with the latest EU decision.
HMRC are to issue a bulletin to confirm the position shortly.
The enterprise management incentive (EMI) scheme is the most popular share option scheme, as it is designed for companies that have gross assets of no more than £30 million.
On 4 April 2018 HMRC announced that the EU State Aid approval for the EMI scheme was due to run out on 6 April, as it hadn’t been renewed in time. This means that any EMI share options issued from 7 April 2018 onwards won’t qualify for tax relief.
It is not clear whether the tax relief for any existing EMI share options continues to apply where those options have not been exercised. HMRC has said that it will continue to apply its current guidance and practice regarding existing EMI options, so it will consider those options to be approved share options for now.
The UK Government is trying to negotiate the reinstatement of State Aid approval for the EMI scheme, but no one knows whether this approval will be backdated to 7 April 2018. Tax relief for the EMI scheme may only apply from the date the approval is reinstated or from a date to be specified in the future. It is possible that the State Aid approval may not be renewed for the EMI scheme before the UK leaves the EU on 29 March 2019.
The implications for employers are not pretty. Any share options granted which do not qualify for tax relief are a benefit in kind subject to PAYE and NIC. The company would normally be able to claim a deduction for corporation tax purposes of the cost of granting the options, but this deduction doesn’t apply if the options are part of an unapproved share scheme.
Shares acquired through an EMI scheme also carry an entitlement to entrepreneurs’ relief on disposal, where the qualifying option was granted at least one year before the disposal of the shares. The employee is not required to hold 5% or more of the ordinary share capital for such EMI-derived shares.
We can help with any questions you may have concerning the EMI scheme, the implications of issuing unapproved options and other opportunities such as the CSOP scheme.
HMRC have published a report setting out the statistics in respect of the 4 shares schemes that have advantages to employers and employees. In their summary they say:
Employee share schemes are used by companies to grant options to buy shares or award shares directly to their employees. HMRC offers four share schemes that have tax-advantages to both employers and their employees. Company Share Option Plan (CSOP) and Enterprise Management Incentives (EMI) are for certain employees chosen at the discretion of the employer. Save As You Earn (SAYE) and Share Incentive Plan (SIP) are for all employees.
The value of EMI and CSOP share options granted increased by 23% and 20% respectively between 2013-14 and 2015-16. SIP share values have reduced by 6%. The value of tax relievable gains on EMI and CSOP share options exercised have increased by 23%, this is mainly driven by the large increase in EMI gains in 2015-16.
Click here To see the full report
Employee share schemes have their own reporting regime called ERS online.
The first year for which annual reports had to be submitted using ERS online was 2014/15.
To file the ERS report the employer, or tax agent, must submit a spreadsheet in a particular format. Templates are provided for the four tax advantaged share schemes (CSOP, SIP, EMI and SAYE), other arrangements or schemes under which employees have acquired shares must be reported using the “other employment related securities schemes” template.
The HMRC templates are in open document (ODS) format, so the employer has to download the right software to use them. HMRC say that the CVS format is acceptable if employer wishes to construct their own spreadsheets, but CVS spreadsheets often fail to submit. There have been problems with these spreadsheet templates since 2015, and this year the whole ERS online system has been down for some weeks.
As the statutory deadline for submitting the annual share scheme reports for 2016/17 is 6 July 2017, some employers are starting to panic. Late on 23 June HMRC released the June 2017 issue of the Employment-related Securities Bulletin, which revealed the ERS reporting deadline has been extended by concession to 24 August 2017. Penalties will apply if the share scheme reports are not received by this extended deadline.
HMRC emphasis that an annual report is due for every share scheme registered with ERS, even if there are no events in the year, in which case a nil report is required. Where the share scheme was closed in the year an annual report must still be submitted for that tax year.