Many happy returns- or else
The number of companies offering employee share schemes is rising strongly every year. And so is the number of companies who fail to submit the correct returns to HM Revenue & Customs. The deadline for the tax year 2010/11 is 6th July 2011 now just days away.
We never tire of extolling the benefits of equity based rewards the 21st Century way to attract, motivate and retain valued members of staff. But with these benefits come significant obligations, and those diligent people at HMRC are never short of ideas for making taxpayers pay a heavy price for their mistakes.
No returns at all
In most cases, where a company provides benefits in the form of equity, they have to submit a return. But every year, surprisingly enough, we come across companies who have failed to submit a return at all. It seems that hundreds of unquoted companies make awards of shares to employees and fail to realise that any transfer of that nature is potentially taxable must be reported. Such awards will generally be a benefit in kind and must be reported by means of a special return known as a Form 42. In many cases they should also, of course, be reported via PAYE or on the P11D.
There are some exceptions to this rule. If shares are being subscribed for directly on incorporation, or on transfer from a company formation agent, no report is required if all the initial shares are acquired at nominal value, no other kinds of security are being acquired and the shares are being acquired by a person who is a director or prospective director of the company concerned. The shares mustn't be acquired in relation with an employment with some other company. It is also OK not to submit a report if the shares are genuinely being acquired as a result of a family relationship.
The basic idea is that if the company is truly off-the-shelf with no intrinsic value, then there is no taxable value to report. But many new companies are in fact formed with well developed commercial plans and they certainly do have a value at inception. This can give rise to uncertainty in relation to reporting requirements and professional advice should be sought.
Doing it by numbers
The UK is fortunate in having a variety of government sponsored share schemes that deliver real tax advantage to participants. This is generally achieved by allowing the gains to be treated as capital gains instead of income, and therefore taxed at much lower rates. The tireless folk at HMRC have devised a separate return for each of these schemes, and given them numbers, as follows:
- The Save-As-You-Earn-Share (SAYE) scheme: number 34
- The Company Share Option Plan (CSOP): number 35
- The Share Incentive Plan (SIP): number 39
- The Enterprise Management Incentive (EMI): number 40
All the above, of course, being additional to the form 42 mentioned above. It is not known what became of numbers 36, 37, 38 and 41 but we understand there is someone available at HMRC who would be more than happy to tell us.
A catalogue of errors
HM Revenue & Customs has revealed that, of those companies who do file the correct return, many complete them wrongly. Among the most common mistakes are:
incorrect or incomplete details, such as incomplete names, NI numbers, dates, and whether PAYE was accounted for;incorrect handling of National Insurance Contributions;filing under the wrong company name or "forgetting" to include some of the participating companies or employees; orjust completing the wrong return.
Worth the candle?
HMRC can and does impose penalties for errors in filing share scheme returns. For forms number 34, 35 and 40 the maximum penalties are a fixed charge of 300 and a daily penalty of up to 60 for each day the returns are overdue. The penalties normally commence after HMRC has given a warning.
For form 42, the penalties are more severe and are calculated by reference to each reportable event. So if a group of employees received shares awards, and these were not properly reported, the penalty would be charged in relation to each employee. On the other hand, HMRC will generally give companies a reduction in the penalty if the company can show that it took reasonable care in completing the report, or makes voluntary disclosure of an error which has been made.
Completing share scheme returns correctly requires detailed knowledge of the relevant legislation. If you would like to discuss any of the issues raised in this article, please call us on 020 8949 5522 and ask to speak to one of our advisers.