HMRC reporting requirements for ERS
Mark Eade looks at the HMRC reporting requirements for employment-related securities (ERS) in the context of private equity businesses
Mark Eade looks at the HMRC reporting requirements for employment-related securities (ERS) in the context of private equity businesses.
Why is it relevant?
There is an annual reporting requirement for businesses that have awarded employment-related securities, or the right to acquire such securities, to UK-based employees and directors. ERS is widely defined and includes shares and stocks, through to awards of carried interest.
In our experience, while the ERS reporting requirement on an award of shares to a UK employee is generally widely understood, the inclusion of carried interest awards to UK-based employees or directors (who may, for example, only be directors of a portfolio company in a structure) is an area not as widely known.
We have recently assisted several such clients in bringing their ERS reporting requirements up to date, typically identifying the award of carried interest made to individuals, considering which are employees or directors in the business, and making the relevant disclosures to HMRC.
Further dialogue is then often needed around the initial market value of the award to the relevant individual, which may not have been reviewed in detail at the time of the award.
We would also remind people of the importance of considering making a valid section 431 election within the strict time limit of 14 days of the carried interest award. This is important for the individual receiving the carried interest as in most situations it increases the likelihood the return will be taxed as Capital Gains Tax rather than Income Tax rates.
Who does it affect?
Businesses in the private equity sector that have awarded shares, stocks or carried interest to individuals who are employees or directors within the business.
What do you need to know?
Employers have an obligation to inform HMRC regarding any such awards of employment-related securities on an annual basis, with reports due no later than 6 July following the Income Tax year in which the awards were made.
Reportable events can include the grant and exercise of share options, award of shares, and other securities to UK employees or directors, through to awards of carried interest. It can also be necessary to report matters such as changes in rights associated to the securities, or off-market transactions.
The return should be completed and submitted through your HMRC online portal. If you have not been required to submit returns previously, be aware that initial online registration can take some time, so we would recommend getting in touch as soon as possible. If you have previously submitted returns, then you will need to submit a ‘nil’ return even if there were no reportable events this year.
The reports which must be made to HMRC are not designed to report carried interest, as they are set to report more common things likes shares and securities. We have since spoken with HMRC to agree how best to answer the specific questions on the standard ERS report when carried interest is being issued.
It is also worth noting that once carried interest has been issued to employees or directors in any year, a nil return is required for subsequent periods in which no carry is issued. Penalties will be levied by HMRC if a return has not been filed by 6 July for the relevant year.
What should you do next?
Review whether any employment-related securities, or the right to acquire such securities, to UK- based employees and directors have been awarded. If so, has an ERS return been filed with HMRC? If not, ask your advisor what is needed to complete this return.
If securities / carried interest are being awarded in the current tax year from 6 April 2023, or going forward, to consider any corresponding ERS return requirements and keep a record of any such award to ensure that ERS returns are filed by the relevant due date.
We have a proven track record of assisting client with their reporting requirements, so please get in touch with your usual Blick Rothenberg contact or Mark Eade to discuss the above and see how we can assist with any future planning.