Reporting Obligations – Employment Related Securities
The 6 July 2008 deadline for submitting Form 42 is fast approaching. This form requires the ‘responsible person’ (usually the employer, although one company is able to take responsibility for a group) to report events concerning employment-related shares and securities occurring in the previous tax year. As 6 July 2008 is a Sunday, the form will need to be filed before the weekend.
The Requirement to Submit a Form 42
A responsible person will need to complete a Form 42 where:
- it receives a ‘Notice to File a Form 42’ from HM Revenue & Customs (“HMRC”), even where there is nothing to report; or
- reportable events have occurred during the previous tax year.
Reportable events broadly cover any dealing in options or securities in the company by an employee or office holder or a relative of an employee or office holder. Events are reportable even when they occur for full market value, without restrictions and through an individual acting in a private capacity, in which case the responsible person may not even be primarily aware of the event. Furthermore the reporting obligations may apply after an employee has left employment, as securities only cease to be ‘employment-related’ seven years after the employee has left.
Penalties may apply in two cases; firstly for failing to report by 6 July and secondly for failing to comply with a notice to make a return. Each of these carries a £300 initial penalty plus a maximum £60 daily fine for each day the information or return remains outstanding. HMRC can apply either or both of the penalties.
Exceptions
Certain exceptions apply so that not all events concerning employment-related securities will need to be reported.
Founder shares
The exception in relation to founder shares covers the acquisition of shares directly on incorporation or the transfer of shares from a company formation agent or other person forming the company such as solicitors and accountants. These exceptions will only apply if certain conditions are met. The shares must be issued at nominal value and they must be issued to a director or a prospective director. HMRC has concluded in its guidance that ‘the majority of newly incorporated companies should meet the above conditions and will not have to complete Form 42 in respect of the founder shares’.
Circumstances where a report may not be required
HMRC also refers to a further list of circumstances in which disclosure may not be required. These include shares for share exchanges, rights issues, bonus issues, scrip dividends, transfers in the normal course of domestic or personal relationships and shares acquired independently, through a broker for example, by employees or directors. The last case applies where the relevant shares are listed on a recognised stock exchange (which includes the London Stock Exchange and PLUS Market but not AIM) and the opportunity to acquire the shares is open to all employees. HMRC’s guidance runs through each of these and details when reporting will not be required (see pages 9 to 12 of HMRC guidance).
Share Options and Approved Schemes
It is not necessary to list individual share options on Form 42—simply a summary of all of options granted. It is also worth bearing in mind that each of the HMRC-approved share option schemes (Save as You Earn schemes, Company Share Options Plans and Share Incentive Plans) have their own reporting forms and therefore need not be detailed on Form 42. In relation to Enterprise Management Incentives, only options granted in excess of £100,000 should be reported on Form 42.
Market Value
It may be useful to note that where market values are required to be entered on the form it is not necessary to have a formally agreed valuation. HMRC guidance (at page 49) states that simply the ‘best available value at the time of the particular transaction’ will suffice, although prescribed methods are set out for securities listed on a recognised exchange. Nevertheless, if this value is different from the value upon which PAYE/NIC was operated, then a brief note should be sent explaining the difference.
This update was written by Mark Stapleton (+44 20 7184 7591; mark.stapleton@dechert.com).
