Under the Finance Act 2003 companies are now required to notify the Revenue where transactions in employment related securities have occurred. Companies should do so by completing the Form 42 by 6 July in the tax year following in which the reportable transaction took place. The form is over 12 pages long and has to be completed for every “reportable event” and failure to do so will trigger penalty fines.

For the current tax year the government has recently extended the deadline for submitting Form 42 by 2 months to 6 September 2004 (but only in those cases where Form 42 has not been issued already).

Employment related securities?

This includes the acquisition or disposal of securities, granting of options over securities, or acquisitions of securities pursuant to those options, lifting of restrictions (such as risks of forfeiture), acquisition of securities for less than market value, or disposals for more than market value, or any events that have the effect of manipulating the value of the securities other than for genuine commercial purposes.

The rules can also catch the more innocent transactions, such as an issue of subscriber shares, or the transfer of shares to employees from a formation agent. Those operating share schemes such as Enterprise Management Incentive schemes may also be caught by the new reporting requirements, and where employee benefit trusts (EBT’s) have been established, transactions such as purchases or sales of shares between employees and the EBT will also need to be reported. Separate reporting requirements exist for other approved shares schemes that you may operate, and we would suggest that if you are in doubt you request appropriate guidance from ourselves.

Even family motivated transfers of shares may be caught by the new regime, for a person is deemed to have acquired an interest in employment related securities where that opportunity is made available by that person's employer. There is an exception to the extent that the interest is only made available in the course of a persons domestic, family, or personal relationship, but this can be quite narrowly construed by the Inland Revenue.

Reportable events and transactions

As the events and transactions that are reportable to the Revenue are extremely extensive, it will be wise for firms to speak to their professional tax advisors to ask for guidance. The penalties for non compliance in relation to Form 42 completion are harsh. Where companies have received a return and there are no reportable events, they will still have to make a Nil return. Where no return has been issued, the duty to provide information to the Revenue is automatic. Maximum penalties for failure to comply can be an initial £300 for each reportable event and for continued failure £60 per day, per employee.