Companies with employee or director owned shares or options need to submit annual returns for 2008/09 before 7 July 2009, we look at the process and the pitfalls.

EMI & approved plans

The special forms for the three tax-qualified 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.

Unapproved arrangements

Form 42 covers all other reportable events and is therefore rather complex:

Form 42 must be completed when ‘reportable events’ occur within a relevant tax year. HMRC issued revised guidance in July 2007 to help employers complete the form, see

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.

HMRC guidance on Form 42 covers areas of difficulty, the key points are:

  • incorporations 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.

Remittance basis from 6 April 2008

Form 42 includes a new reporting requirement from previous years following the recent Residence and Domicile review.

The remittance basis may apply where an individual who acquires securities on or after 6 April 2008 is resident but either not ordinarily resident or not domiciled in the UK. Where the employee has had both UK and non-UK duties during the ‘relevant period’ (the period in which income was earned), the income derived from securities may be apportioned. The part relating to non-UK duties is chargeable to tax when remitted to the UK. Where any part of the reportable income is taxable on this basis, the employee’s name and National Insurance number must be provided.

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.

Nil returns

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 paper returns but they may send a notice to file a Form 42. This means it is the responsibility of companies to obtain, complete and file the Form 42. You can download the forms and complete and send them manually or electronically but, in either case, they must be made by 7 July 2009.

Failure to submit a Form 42 by the deadline may lead to financial 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.