ERS update for asset managers
What is an Employment Related Security (or ERS)?
- Shares and certain other interests are “securities” for tax purposes. This definition includes carried interest, which is generally classified as a “unit in a collective scheme”.
- A security will be “employment related” where it is acquired in connection with an employment or directorship. This includes securities acquired by salaried members, and (generally) by members of a partnership who hold directorships with other entities within the group.
What needs to be reported and when?
- An employer is required to submit an ERS return in respect of all their existing share plans, loan notes, and partnership and carried interest arrangements.
- The return must be submitted for each UK tax year, even where no new ERS has been acquired/granted during the period (in which case a nil return should be filed).
- Before submitting an ERS, return the relevant incentive arrangement must be registered with HMRC. Where any arrangement has not been registered, an employer should use HMRC’s online service to complete the registration and be allocated a scheme reference number (please note that HMRC allow up to seven days to provide a scheme reference number – as this is required for reporting ERS an employer should allow a sufficient buffer to ensure that the 6 July filing deadline is still met).
- An ERS return will include information such as the acquisition/award date of securities or carry, the total number of securities/interests acquired/awarded and any exercise price set or paid. HMRC provide a template for the annual return, which we recommend downloading each year to take into account any recent changes, or you can use your own template.
- The deadline for filing an ERS return for the 2022/23 tax year (the period 6 April 2022 to 5 April 2023) is 6 July 2023.
Can an employer settle the PAYE on behalf of their employees?
- Where an employee receives ERS with value, and there generally is a requirement to report the value of the ERS via PAYE, the employer can initially settle the income tax and National Insurance Contributions (NIC) owed on the employee’s behalf where PAYE deduction is not possible (the “Due Amount”). This is not uncommon when employees are awarded carried interest that is “in the money”.
- However, where the employer does not recover the Due Amount from the employee in full by 5 July following the tax year in which the Employment Taxes were due, the unrecovered amount may give rise to a further charge (commonly referred to as a “section 222 charge”).
- Where a section 222 charge arises, the unrecovered amount is treated as additional employment income of the employee (which is subject to further income tax, and employee and employer NIC) and must be reported by the employer on a Form P11D for the tax year in which the ERS was awarded.
- To mitigate a section 222 charge, the employee should “make good” the employer for the unrecovered PAYE (i.e the Due Amount) by 5 July. This can happen by way of a payment in cash/transfer to the employer’s bank account, or through a net pay deduction in any payroll run before July.
What are the penalties for missing the ERS filing deadline?
- If an employer fails to make an ERS report by 6 July, a £100 penalty (per return) will be charged automatically even where the return is only one day late.
- Where a return is outstanding for three months after 6 July, an additional automatic penalty of £300 will be charged, with a further £300 being charged if a return is still outstanding six months after 6 July.
- After nine months of a return being outstanding, HMRC may charge an additional penalty of £10 per day until the return is filed.