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Getting a fair share

Getting a fair share

A Guide to: Getting employee schemes right

Heather Tulloch, Senior Manager/Consultant

heather.tulloch@ashcroftllp.com

25 April 2022

Incentivising employees through the use of shares or options is becoming more commonplace; talented recruits are demanding more than a good remuneration package and companies are trying to retain such talent.

What are the rules?
It is not altogether surprising that HMRC want to know about such schemes and that any shares or options which are given at a discount to employees may incur an employment tax liability, under rules known as “Employment Related Securities” (ERS).

However, what often surprises people is that the ERS rules are widely drafted and catch transactions outside of organised schemes. The employing company is obliged to report these transactions, in addition to any reporting requirements and tax liability that might arise for the employee or director in question.
 
Employment Related Securities – what’s caught?
As we’ve said the rules are very widely drafted and are complex but broadly where an employee or director, or someone connected to them, acquires shares in the employing company (or a connected company) the ERS rules will be in play. They apply where the shares are acquired from the company or someone connected to the company, such as a director.

Exemption
The only exemption from the rules is where the share are acquired in the course of domestic, family or personal relationships such as a transfer between spouses or passing shares down to younger generations.

To tax or not to tax
If the transaction takes place at market value then no tax liability will arise. If the shares are acquired at a discount then the employee or director will be liable for income tax on the discount. In certain circumstances the discount can also be subject to employees and employers NI, but this requires the shares to be readily convertible into cash i.e. the shares are listed, or there is some other mechanism in place to allow the sale of the shares.   

Scheme types

Approved schemes – filing requirements
Where an HMRC approved scheme has been set up, such as an EMI scheme, you will hopefully already be aware of the requirement to notify HMRC of any grants of options during the year and then to complete an annual return by 6 July following the end of the tax year. The annual return is required every year, even if there are no reportable transactions, until the scheme is formally closed. Late filing penalties apply if the annual return is missed

Unapproved schemes or one-off transactions – filing requirements
Where there have been reportable transactions the company is required to register an unapproved ERS scheme with HMRC, and then file an annual return by 6 July following the end of the tax year. As with approved schemes the annual return is then required every year, even if there are no reportable transactions, until the scheme is formally closed.

How we can help?
We can assist with the annual compliance requirements for approved or unapproved schemes, and we can also assist with setting up EMI schemes if this has piqued your interest. Please get in touch with your usual Ashcroft contact.

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