Companies with employee or director owned shares or options need to submit annual returns for 2006/07 by July 7 - we look at the process and the pitfalls.

EMI & approved plans

Special forms apply for companies that operate EMI and approved employee share plans, HMRC recently issued forms for 2006/07 so here are the links:


The forms for the three option plans are relatively straight-forward to complete involving (typically) option grants and exercises. The SIP form can be complex but we would expect it to be dealt with by your SIP administrator.

Unapproved arrangements and "Form 42"

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

The HMRC issued revised guidance in February for 2006/07 stretching to 52 pages to help employers complete the form. 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

#  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.

Who has to file a Form 42?
Returns can be made by any one of several "responsible persons" (see page 52 of the guidelines) 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 6 of the guidance).

Deadlines and penalties
HMRC no longer issue returns but they may send a notice to file a Form 42. You can download the forms and complete and send them manually or electronically but, in either case, they must be made by July 2007.

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

HMRC guidance on Form 42

The guidance 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)

dividend reinvestment plans operated by listed companies are excluded but this is subject to a compliance review

timing and format reports can be made before the end of the tax year and need not be on form 42 providing the report contains the same information.