Employment Related Securities (ERS)

Companies who have issued shares or other securities to their employees or directors need to consider whether they have a requirement to report this to HMRC under the ERS legislation by 6th July following the tax year in which the shares or securities were issued.

The reporting requirements extend to include any companies who have share option schemes in place, even where no activity has happened in the year. This includes EMI, CSOP, SAYE and SIP schemes.

What are Employment Related Securities?

The definition of Employment Related Securities is very broad and includes any issue of shares or other securities which includes loan stock, debentures, restricted stock units, and units in collective investment schemes.

What types of transactions are reportable for ERS?

The list of reportable events is extensive, but the most common transactions that we see as being reportable include the following:

• Acquisition of shares in a company by an employee or director. This could be as part of a management buyout, as an incentivisation package, or on the restructuring of a group.
• Any company which has a share option scheme in place. Most commonly this is EMI, but any share option scheme should be reported annually to HMRC regardless of whether there has been any activity in the year.
• Disposals of securities and or interests in securities for more than their market value at the time of which the disposal was made.
• Any company which has assigned or released a security option which has been acquired by the reason of the individual’s employment or because of the reason of the employment of any other person.
• A company which has done anything that can artificially enhance the market value of a security.
• The lifting of restrictions on restricted securities (e.g., shares awarded to an employee which are subject to a forfeiture restriction if the employee leaves the company within a specified period).

What are the tax implications of ERS?

Employment Related Securities (ERS) can be tax-efficient—but only when structured and managed correctly. If not, they can trigger unexpected Income Tax and National Insurance liabilities for both the employee and the employer.

The rules are complex and seeking advice is recommended but here are they key taxes to consider:

Income Tax and National Insurance Contributions (NICs)

When an employee receives shares or share options as part of their employment, they may be liable to Income Tax and NICs at the point when:

• Shares are acquired at less than market value
• Options are exercised, and the market value of the shares exceeds the exercise price
• Certain restrictions on shares lift (such as forfeiture conditions)
• Receive restricted or convertible securities

Restricted securities are those which are subject to conditions like forfeiture or performance hurdles and may trigger tax charges either on acquisition or when restrictions are lifted, unless appropriate elections under ITEPA 2003 s431 are made.

Convertible securities, which can be converted into other securities or shares, may also result in tax at conversion or disposal, depending on how they’re structured e.g. in a listed company or any company expecting an imminent sale.

These charges are typically based on the difference between the market value of the shares and what the employee paid (if anything).

For employers, any Income Tax and Class 1 NICs due on employment-related securities must be accounted for via PAYE if the shares are considered readily convertible assets.

Capital Gains Tax (CGT)

If the shares are held after acquisition and later sold, any increase in value from that point forward is usually subject to Capital Gains Tax. This is where tax-advantaged schemes like EMI can be really beneficial.

Corporation Tax Relief

Companies can typically claim a Corporation Tax deduction on the value of shares provided to employees, based on the market value at the point of acquisition, less any amount paid by the employee. This can help reduce the overall cost of offering ERS.

How can we help?

• Tailored Guidance
  We’ll help you choose the share scheme that best suits your business needs and your employees’ interests, ensuring maximum tax efficiency.
• Compliance and Reminders
  Our team will provide annual reminders to ensure you stay compliant with ERS filings to HMRC, so you never miss a deadline.
• Avoiding Penalties
  With our expert support, you can avoid costly penalties and ensure that all tax filings are submitted correctly and on time.

Why Stratos?

At Stratos, we specialise in providing expert advice on Employment Related Securities and the various schemes available to employees. Whether you’re a small business or a large corporation, we have extensive experience guiding companies through the complexities of ERS.