Companies with employee or director owned shares or options need to submit annual returns for 2007/08 before 7 July 2008, we look at the process and the pitfalls.
EMI & approved plans
The forms for the three option plans are relatively straight-forward to complete involving (typically) option grants and exercises. You should also be aware that other events such as option surrenders and adjustments for changes in share capital need to be reported too.
The SIP form can be complex but we would expect it to be dealt with by your SIP administrator.
Form 40 for reporting EMIs has been simplified since last year as:
· details of EMI options granted are no longer required to be reported again on form 40 (they must still be reported within 92 days of grant on Form EMI 1 in order to qualify for tax relief); and
· companies do not need to complete the summary box on page 8 if there has been no activity in the year – they can simply tick box 7 to declare a nil return.
Form 42 covers all other reportable events and is therefore rather complex: http://www.hmrc.gov.uk/shareschemes/without-advantages-form-42.pdf
HMRC issued revised guidance in July 2007 to help employers complete the form, see http://www.hmrc.gov.uk/shareschemes/form42-guidance-2007.pdf
Form 42 (broadly) covers:
- the acquisition of securities (or interests in securities);
- the grant, exercise assignment or release of unapproved securities options or the receipt of benefits in relation to such options (e.g. payment for failure to exercise an option);
- chargeable events in relation to restricted securities or interests in such securities;
- chargeable events in relation to convertible securities or interests in such securities;
- artificial enhancements to the market value of securities;
- discharges of notional loans relating to securities;
- disposals of securities at an over-value; and
- receipt of special benefits from securities or interests in such securities;
These events are reportable where the securities (or options) are made available to an employee or director by the employer (or anyone connected to the employer) by reason of employment.
Securities (or options) provided by an employer (or anyone connected to the employer) are deemed to be made available by reason of employment (with limited exceptions for personal, family or domestic arrangements). An employee or director includes former employees or directors in the last 7 years and prospective employees and directors.
Many events are therefore reportable even where no tax is ever likely to be at stake.
Who has to file a Form 42?
Returns can be made by any one of four "responsible persons" (see page 52 of the HMRC guide) but it is usually most convenient for the parent company to make one return for the whole group. If no notice to file is issued, the employer (as a responsible person) is still required to make a return if there have been any reportable events in the period.
If no reportable events have happened but a notice to file has been issued, the responsible person must submit a nil return (see page 47 of the guidance).
Deadlines and penalties
HMRC no longer issue returns but they may send a notice to file a Form 42. You can download the forms and complete and send them manually or electronically but, in either case, they must be made by July 2008.
Failure to submit a Form 42 by the deadline may lead to penalties including:
- an initial penalty of up to £300 per reportable event; and
- if failure continues following the initial penalty up to £60 per return per day until the return is submitted.
Penalties can be imposed on each responsible person. HMRC say they do not impose penalties automatically and will give at least two warnings before taking a responsible person to the Commissioners.
HMRC guidance on Form 42
The guidance covers areas of difficulty, the key points are:
- ncorporations of new companies are not reportable if these are straight-forward (i.e. the director subscribes for shares at par and there are no other securities issued) nor are further allotments of shares to the initial subscribers at nominal value (unless in connection with another employment);
- share for share exchanges and issues are reportable (as the legislation says any replacement or further shares acquired by virtue of existing holdings are deemed to be by reason of employment) but there is a limited exception for listed companies where the offer is available to all shareholders and the employee acquires the shares independently of the company (e.g. through a broker);
- rights and bonus issues are reportable except for listed shares where the opportunity is available to all shareholders independently acquired shares are reportable except for listed shares acquired truly independently (e.g. through a stock broker); and
- dividend reinvestment plans operated by listed companies are excluded but this is subject to a compliance review.