Find out about reporting net settlement cases, notifying errors and replacement in Enterprise Management Incentive (EMI) options and working time requirement.
Employment Related Securities (ERS) bulletins give information and updates on developments relating to ERS, including tax-advantage employee share schemes.
We publish ERS bulletins when:
- articles or updates are available
- HMRC has any item to bring to your attention quickly
Any reference to Income Tax (Earnings & Pensions) Act 2003 (ITEPA) is to the current legislation.
Net settlement and annual reporting requirements
Employers usually have an obligation to account for PAYE and National Insurance contributions when shares are acquired under a non-tax advantaged employee share plan.
The employer must then recover from relevant employees, the PAYE, employees’ National Insurance contributions and, where officially transferred to them, employer’s National Insurance contributions.
The employee may do this by selling a number of the shares received in order to yield sufficient cash to reimburse their employer. This is often referred to as ‘sell to cover’, and results in the employee getting beneficial ownership of 100% of the shares subject to award, although a portion of these shares are immediately sold.
Or the employee may reimburse their employer by way of ‘net settlement’ of the share award.
Under net settlement a company uses its own cash to settle the PAYE and employee’s National Insurance contributions (and where relevant the transferred employer’s National Insurance contributions) that is due to HMRC based on the full value of the shares under option or award.
The company then issues fewer new shares to employees. So the value of the shares received by each employee is equal to the post-tax (net) value that the employee would have enjoyed if they’d received all the shares and sold some to cover the PAYE and National Insurance contributions due.
A share-based award, which is structured as a ‘securities option’ for Income Tax purposes, is granted with a 3 year vesting period.
The terms of the award contain a net settlement facility.
The employer has an obligation to operate PAYE and employee’s National Insurance contribution at a combined rate of 42% of the value of the award on vesting.
On vesting of the award, the market value of the underlying shares is £20,000 and the award is settled by the employee:
- being issued with new shares worth £11,600
- receiving a cash payment of £8,400, which is immediately withheld and remitted to HMRC in respect of the PAYE and employee’s National Insurance contributions due
On vesting, employees acquire the relevant shares for nil consideration.
Receipt of the shares is subject to Income Tax in the employee’s hands as specific employment income, as is the cash payment made on net settlement.
HMRC has considered how best to report ‘net settlement’ and you should report the transaction on the ‘Other_Options_V3’ tab of the Other_templates_2015-16_V4 (42)’:
- on one row report the acquisition of the actual number of the securities that will be awarded to the employee in column number 31 (along with other relevant information in the other columns)
- on another row report the cash cancellation or receipt of a benefit by entering ‘yes’ in column 38 and the value of the cash received in column 39 (along with other relevant information in the other columns)
Notifying HMRC of errors in Enterprise Management Incentive (EMI) options
In ERS Bulletin 31 we published guidance on ‘Realisation of notification errors made more than 9 months after the EMI option grant’.
We’ve reviewed this guidance and found an error that we want to correct.
Instead of saying ‘If you realise you have made a mistake after 9 months of granting an EMI option’, it should say ‘If you realise you have made a mistake after 9 months of notifying HMRC of the grant of an option’.
We are sorry for any inconvenience caused.
Replacement EMI options and working time requirement
When issuing replacement EMI options the individual being granted the new options must be an ‘eligible employee’ of the acquiring company at the time the new option is granted.
As one of the eligible employee requirements is the commitment of working time, it’s HMRC’s view that a new working time declaration should be completed on the issue of the replacement options so as to also meet the requirements for notifying options to HMRC.
We have updated the following guidance manuals.
Employment Related Securities Manual sections:
Reminding you of the Save As You Earn (SAYE) extended pause
In September 2018 we extended the savings holiday period for participants of company SAYE schemes from 6 to 12 months. This is available to all who participate in this scheme. If you take a savings holiday this will result in the extension of your original contract to reflect the number of months you have not contributed to the scheme.
You can find more information about this in Etassum34140.
Most common ERS issues and top things to remember
You can find more information about these in ERS Bulletin 26 (March 2018).
Cease a scheme registered in error or that is no longer required
Please note that ceasing a PAYE scheme does not mean any registered share scheme will also cease. You must cease the share scheme independently in ERS online and file any outstanding returns (even nil returns) to prevent late filing penalties being charged.
HMRC’s new contact address for share schemes enquiries
We’ve changed our postal address, so from 18 March 2019 you should write to us at:
Charities, Savings and International 1
Changes to HMRC email addresses
We’ve been making changes to our email addresses in HMRC. You may have noticed that instead of our email addresses ending in @hmrc.gsi.gov.uk, they’ll end @hmrc.gov.uk. Any emails that you send to our old email addresses will still redirect to us.
Contacting us for advice
Make sure you include the relevant share scheme reference number, if you have one when contacting us about share schemes. If you have not provided the share scheme reference we may not be able to respond to or answer your query.
You can find more information on how to identify your share scheme reference number in ERS Bulletin 25.
Contact HMRC about ERS Bulletins
If you have any questions, feedback or suggestions for future articles you should email: Shareschemes@hmrc.gov.uk.