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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Reporting Requirements - Form 42

Some terms explained

By reason of employment
Employment-related securities and securities options
Cash and Account balances
Securities that cease to be employment-related - 7 Year Rule
Market value to be used
Meaning of market value
NICs Agreements
NICs Elections
Non-commercial actions
Readily Convertible Assets (RCAs)
Restricted securities
Restricted securities elections (for sections 1b, 1c, 2 Security Type B, C and D)
Restricted securities elections – Forms
Responsible persons

By reason of employment {#}These are securities and securities options which are:

  • acquired because of employment, or
  • deemed to have been acquired because of employment.They are deemed to have been acquired because of employment when the opportunity to acquire them is made available to employees by an employer or a person connected with an employer.
  • shares in any body corporate (wherever incorporated) or in any unincorporated body constituted under the law of a country or territory outside the United Kingdom ,
  • rights under contracts of insurance other than excluded contracts of insurance,
  • debentures, debenture stock, loan stock, bonds, certificates of deposit and other instruments creating or acknowledging indebtedness,
  • warrants and other instruments entitling their holders to subscribe for securities ,
  • certificates and other instruments conferring rights in respect of securities held by persons other than the persons on whom the rights are conferred and the transfer of which may be effected without the consent of those persons,
  • units in a collective investment scheme,
  • futures, and
  • rights under contracts for differences or contracts similar to contracts for difference (other than contracts of insurance).For the purposes of Form 42, the following are not securities:

Cheques {#}Cheques and other bills of exchange, bankers’ drafts and letters of credit (other than bills of exchange accepted by a banker).

Cash and Account balances {#}Money and statements showing balances on a current, deposit or savings account.

Property {#}Leases and other dispositions of property and heritable securities.

Insurance {#}Rights under contracts of insurance (within the meaning of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001) in relation to periods before 2 December 2004.

  • the employer (in most cases this will be the company the employee worked for, or
  • the company which issued the securities to the employee, or
  • a person connected with the employer or the company which issued the securities to the employee.

Market value to be used {#}For the purposes of completing Form 42 it is not necessary to have a formally agreed valuation of the securities. The market value to be shown should be the best available value at the time of the particular transaction.

Where the value you enter on the form differs from that on which PAYE and NICs was operated, you should attach a note to this form explaining the difference. If, after the submission of the form, you determine that a different value is more appropriate, then that revised value should be used in your Corporation Tax computation and by employees in their Self-Assessment Tax Returns. There is no need to send in a revised Form 42.

When we have received the completed Form 42 we may enquire into the valuation used and it may then be necessary for us to consult with Shares and Assets Valuation who may then contact you or your agent to check the valuation used. This check may show a different valuation but provided that the valuation reported on Form 42 is the best available at the time of the transaction, then the subsequent agreement of a different value, will not mean that the form is incorrect.

If, however, the valuation shown is not the best available and is, for example misleading, then we will regard the form as incorrect and penalties may be imposed.

Meaning of market value {#}Market value has the same meaning as it has for the purposes of Taxation of Chargeable Gains Act 1992 in accordance with Part VIII of that Act.

Section 272(1) of TCGA 1992 defines market value in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.

For shares or securities quoted in the Stock Exchange Daily Official list, except where in consequence of special circumstances prices quoted in that list are by themselves not a proper measure of market value, the market value would be as follows:

  1. the lower of the two prices shown in the quotations for the shares or securities in The Stock Exchange Daily Official List on the relevant date plus one-quarter of the difference between those two figures, or

  2. halfway between the highest and lowest prices at which bargains, other than bargains done at special prices, were recorded in the shares or securities for the relevant date.

If the shares are not quoted on a recognised stock exchange, the market value is the price which the asset might reasonably be expected to fetch on a sale in the open market. For the above, it shall be assumed that in that market, there is available to any prospective purchaser of the shares all the information which a prudent purchaser might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm’s length.

NICs Agreements {#}Paragraph 3A(2) of Schedule 1 to Social Security Contributions and Benefit s Act 1992 (SSCBA 1992) allows employees and employers to enter into agreements. These agreements allow employers to recover whole or part of any secondary NICs payable in respect of gains treated as remuneration. If an agreement has been entered into, complete the relevant columns showing the amount of employer’s NICs paid by the employee.

NICs Elections {#}Paragraph 3B(1) of Schedule 1 SSCBA 1992 provides the basis for formal joint elections. The elections transfer the employer’s NICs to the employees. If an election has been made, complete the relevant columns showing the amount of employer’s NICs paid on the gain made the employees.

Non-commercial actions {#}Non-commercial actions include anything done

  • other than for a genuine commercial purpose
  • as part of a scheme or arrangement designed to avoid tax and NICs
  • between companies in a group of companies on terms other than would be expected from persons acting at arm’s length.

Readily Convertible Assets (RCAs) {#}Shares and certain securities are RCAs if:

  • the securities can be sold or otherwise realised on a recognised investment exchange, such as the Stock Exchange, The New York Stock Exchange, etc, or
  • trading arrangements are in place in respect of the shares at the time the taxable income is provided, or
  • trading arrangements are likely to come into existence in accordance with arrangements or an understanding in place at the time the taxable income is provided.From 10 July 2003, shares and other employment- related securities are deemed to be RCA’s and subject to PAYE and NICs, regardless of whether or not they fall within the above definitions, unless they are shares for which the company is entitled to a Corporation Tax deduction by reason of Schedule 23 to the Finance Act 2003.

The flowchart at ERSM140100 may help you decide if PAYE is due or not.

There is any contract, arrangement or condition which makes provision whereby a freedom or right, conferred by the employment-related securities, is restricted, including restrictions on the right of disposal or retention of the security or proceeds from its disposal, and

The market value of the employment-related securities is less than it would be but for that provision.

Employment-related securities are not restricted securities if the only reasons for which they would be restricted are:

  1. The employment-related securities are unpaid or partly paid shares which may be forfeited for non-payment of calls and there is no restriction on the meeting of calls by the person by whom they are held, or

  2. That person may be required to offer for sale or transfer the employment-related securities on the employee ceasing, as a result of misconduct, to be employed by the employer or a person connected with the employer.

Restrictions on securities can be divided into those described as “conditions of forfeiture” and other restrictions. A “forfeitable security” means one that may have to be surrendered and for which you may get back less than its then market value.
  • that the effect of any forfeiture condition on removing the charge on acquisition should be ignored, or
  • for the relevant purposes their market value at the time of the acquisition is to be calculated as if they were not, and
  • sections 425 to 431 are not to apply to the employment-related securities.If such an election is been made, tax will be charged on the unrestricted market value of the securities on the acquisition and there is no further charge when the restrictions are lifted.

Restricted securities elections - Forms {#}Approved forms of election for each of the three possible elections (sections 425(3), 430 & 431) are available at

ERSM30450. These provide separate forms for employer and employee to enable the employer to elect once for a number of employees.

If there is a need to tailor an election to particular circumstances the Employee Share and Securities Unit will consider approving appropriate revised forms. In particular, some employers may wish to sign under seal, and/or require employees’ signatures to be witnessed and we will be willing to consider such revisions as appropriate.

Responsible persons {#}Responsible persons are the employer, any host employer, (that is, person treated as the employer), the person from whom securities or options were acquired and the person by whom securities were issued.

In most cases, the employer, as one of the responsible persons, will usually make the report and complete the declaration. However, if the company has delegated the responsibility to make a report to another person, for example an agent holding a current Form 64-8 for the company, the agent can make the report on behalf of the company.