Employment Related Securities: 24-25 Return Due 6th July
9th April 2025
Employment Related Securities (‘ERS’) are securities that are acquired in connection with an employment. The ERS legislation aims to tax as employment income any value received by reason of an office or employment on the acquisition, holding or disposal of shares and other securities.
The term securities is broad and includes shares, debentures, loan stock and financial instruments such as options, futures and other contracts.
Employment is defined very widely and covers pre, during and post-employment.
It is very easy to fall foul of the rules due to their complicated nature and how actions can be taken, such as transferring shares, without any thought to their tax implications.
What Is The Issue?
Shares in a company are deemed to be ERS if the right or opportunity to acquire them is made available to an individual by their employer. The fact that shares are acquired by individuals acting in their capacity as shareholders or family members rather than their employment is irrelevant to whether the shares in question are ERS.
When such employees acquire shares or securities without paying market value there is an exposure to an income tax (PAYE and possible NIC where the shares are considered to be readily convertible assets) charge based on the market value of the shares or securities received.
A tax liability may also arise if restricted securities (eg those which are subject to restrictions such as no ready market to sell the shares) have been awarded to employees and the restrictions lifted increasing the value of the shares. Most shares in private companies will be restricted securities. Employees can make a Section 431 election to tax the unrestricted market value at acquisition to potentially reduce future tax liabilities. This election must be made jointly between the employer and the employee within 14 days of the acquisition of shares.
ERS can arise in many situations and when considering any dealings in shares/options the rules must be considered. In some cases, shares and other securities can be within the scope of ERS legislation without any relevant income tax charges arising (although certain reporting obligations will still arise). The only exemption is where the individual has acquired the shares in the normal course of their domestic, family, or personal relationships but this cannot be taken as a given.
HMRC Reporting
The employer must file an ERS return following the end of the tax year (6th April) in which shares have been issued/transferred or options granted/exercised and before 6th July. The return has to report the type of security, the market value, whether the securities are restricted, along with other details. Failure to file a return results in late filing penalties.
Practical Points
It is important to take advice when employees are acquiring shares so that any income tax, PAYE and NIC exposure is minimised. Share schemes can be a great way of incentivising employees whilst keeping the acquisition cost of shares low (and potentially avoiding any income tax, PAYE and NIC charges too in relation to tax advantaged share schemes).
If shares are to be issued, a valuation should be undertaken to support the market value of the shares and the calculation of any tax charges due.
Ensure that the annual ERS returns are filed with HMRC by the due date to avoid penalties.
Where there is a potential sale of the company on the horizon, it is essential to ensure that all past ERS transactions have been fully considered and HMRC reporting obligations are up to date. This area has become one of the greatest risks encountered in pre-sale tax due diligence.
Get In Touch
Please do contact your local Whitings Office if you would like further information on any aspects discussed in respect of the Employment Related Securities rules, share schemes or valuations of private company shares.
Disclaimer - All information in this post was correct at time of writing.
