What Is Employment Related Securities

Employment-related securities are shares or other financial securities that someone acquires because of their employment, or because an opportunity to acquire them was made available through that employment.

That can include securities offered by an employer, a company connected with the employer, or another connected person. The term is wider than “employee shares”. It can cover shares, share options, loan notes, debentures and loan stock.

This matters because UK tax rules can apply to the arrangement, and employers may have reporting duties to HMRC. The right treatment depends on the details of the award, the people involved and how the securities were provided.

Which shares and securities can be covered

The word securities has a broad meaning here. It does not refer only to shares in a company.

The main examples include:

• Shares — an ownership interest in a company.
• Share options — a right or opportunity to buy shares, usually under set terms.
• Loan notes — written promises that a company will repay money, often with interest or other conditions.
• Debentures — a type of company debt or borrowing instrument.
• Loan stock — debt issued by a company, usually in the form of securities that can be held or transferred.

So, a person does not need to receive ordinary shares for the employment-related securities rules to be relevant. A loan note given as part of a work arrangement may also need to be considered.

The security itself does not always have to be issued directly by the employer. An opportunity provided by a company linked to the employer can also fall within the rules. For example, an employee might receive an option over shares in a parent company rather than shares in the company that employs them.

The key question is usually not simply, “What type of asset is this?” It is also, “Why was this person given the chance to acquire it?”

How the employment connection is established

An employment connection exists when the securities are acquired, or made available, because of a person’s employment.

That can be straightforward. An employer may offer shares to a director as part of their pay package. It may give employees share options to reward their work or encourage them to stay with the business. These are clear examples of a connection with employment.

The link can also be less obvious. The opportunity may come from a connected person, meaning someone or an organisation linked to the employer. A group company, for example, might provide the shares or options even though the employee works for another company in the same group.

The label used by the employer does not settle the issue. Calling something a bonus, investment, loan or private arrangement does not automatically take it outside the employment-related securities rules. The surrounding facts matter, including:

• who made the securities available;
• who received them;
• the person’s role or employment status;
• why the opportunity was offered;
• whether the arrangement was part of pay, reward or retention;
• and the terms attached to the securities.

An employee, director or other worker may therefore need to consider the rules even where the arrangement does not look like a standard share scheme.

This is also why a general explanation cannot decide the tax position in a particular case. Two arrangements involving the same type of share or loan note may be treated differently if the facts are different.

Examples of employment-related securities arrangements

Here are some common ways employment-related securities may arise.

Shares given or sold to an employee

A company may give an employee shares, or allow them to buy shares on terms linked to their work. The shares may be in the employer or in a connected company.

The arrangement can still be employment-related if the employee pays for the shares. The important point is the connection between the opportunity and the employment, not simply whether the shares were free.

Share option arrangements

An employer may give a person an option to buy shares later. The option might become available after a period of service or when certain work-related conditions are met.

An option is different from a share. It gives the holder a right or opportunity to acquire shares in the future, rather than ownership of those shares straight away. Even so, share options are included among the securities that may be covered.

Loan notes and loan stock

A company may issue a loan note or loan stock as part of a transaction involving an employee or director. These instruments represent money owed by the company rather than ownership of it.

They may be less familiar than shares, but they still appear in the employment-related securities rules. The fact that an instrument is debt rather than equity does not, by itself, remove the employment connection.

Debentures

A debenture is another form of company borrowing. If it is made available because of someone’s employment, it may need to be considered under the same rules.

The details matter. A debenture connected with a person’s work may have a different tax and reporting result from an ordinary investment bought independently on the open market.

How employment-related securities differ from ordinary employee shares

There is no separate type of share called an “employment-related share”. A normal company share can become an employment-related security because of the way it was offered or acquired.

That distinction is useful. A person who buys shares through an ordinary investment account is not automatically dealing with employment-related securities. The employment link is what brings the special rules into the picture.

By contrast, a person who receives the same class of shares through an employer’s reward arrangement may be dealing with ERS. The shares themselves may look identical, but the reason for the acquisition is different.

This also answers two common questions:

• Are shares the same as securities? No. Shares are one kind of security. Securities can also include options, loan notes, debentures and loan stock.
• Are securities considered stock? Stock can refer to certain company interests or debt instruments, but it is not the only type of security covered by the term.

“Employee shares” is therefore a useful everyday phrase, but it is narrower and less precise than employment-related securities.

What HMRC expects employers to report

HMRC has guidance covering employment-related securities scheme registration, returns, scheme notifications and penalties.

In practical terms, an employer needs to identify arrangements that may fall within the rules and check whether HMRC reporting is required. This is not limited to issuing shares. It can include relevant options, loan notes, debentures or loan stock.

The employer may need to:

• register an employment-related securities scheme;
• notify HMRC about a new scheme or arrangement;
• submit an annual ERS return;
• report transactions or events involving the securities;
• keep records that support the information submitted.

A scheme is the structure or arrangement through which the securities are provided. It might be a formal share option plan, or it might be a less formal arrangement involving a small number of directors.

The person receiving the security does not usually control the employer’s HMRC filing. However, employees and directors should keep their own records. They may need information about the award when checking their tax position, preparing a tax return or speaking to an adviser.

Employers should not assume that no report is needed just because:

• the company is small;
• only one person received the securities;
• the securities were provided by a connected company;
• the arrangement was described as a loan;
• or no cash changed hands at the time.

Those facts may be relevant, but they do not answer the reporting question on their own.

ERS returns, scheme notifications and relevant deadlines

An employment-related securities return, often called an ERS return, is the report made to HMRC about a registered employment-related securities scheme for the relevant reporting period.

It can contain information about awards, options, acquisitions, disposals or other events covered by the scheme. The exact information depends on the arrangement.

A scheme notification is different. It tells HMRC about a scheme or arrangement that needs to be brought to its attention. Registration and notification are not the same as filing the annual return, although they are connected parts of the reporting process.

A sensible process is:

1. Identify the arrangement. List shares, options, loan notes, debentures and loan stock made available to employees or directors.
2. Check the employment link. Consider whether the opportunity came from the employer or a connected person.
3. Check the HMRC category. Look at the relevant ERS rules and scheme requirements.
4. Register or notify where required.
5. Prepare the return using the scheme records.
6. Submit it by the relevant HMRC deadline.
7. Keep evidence of the award and the submission.

Deadlines are important. A business should check the deadline that applies to the relevant tax year and scheme rather than relying on a general assumption. It should also check whether a return is needed for a scheme that had no activity during the year, since the filing position can depend on the scheme and HMRC requirements.

If an arrangement has ended, the employer may also need to deal with the scheme’s closing position. Simply stopping the use of a scheme does not necessarily remove every administrative step.

Exemptions, tax considerations and possible penalties

Some employment-related securities arrangements may qualify for an exemption or special treatment. An exemption means that a particular rule does not apply when the stated conditions are met.

Exemptions are usually condition-based. They should not be treated as a general answer for every employee share award. A small change in the price paid, the documents, the timing or the people involved may affect the result.

The main tax questions can include:

• whether the employee receives a taxable benefit;
• how the value of the security is worked out;
• when any tax charge arises;
• whether income tax or another tax treatment applies;
• and what happens when the security is later sold or transferred.

The fact that an arrangement is exempt from one reporting or tax rule does not automatically mean that every related obligation disappears. An employer should check the relevant HMRC requirements rather than assuming that “exempt” means “nothing to report”.

Employment-related securities tax can be complicated because the arrangement may involve both employment income and an investment asset. The value, timing and terms can all matter. Directors and employees should also remember that an employer’s reporting position and an individual’s personal tax position are related but not identical.

Penalties for getting the reporting wrong

Employment-related securities penalties may arise when an employer misses a required notification or return, submits incorrect information or fails to follow the reporting rules. The consequences can depend on what went wrong and how late or inaccurate the filing was.

A business should act quickly if it finds an error. It should review the relevant HMRC guidance, correct the position where possible and keep a record of the steps taken. Waiting can make an administrative problem harder to fix.

The rules are UK-specific. They also do not answer questions about whether employee shares are a good investment, whether they are “worth it”, or whether an employee should accept a particular award. Those are separate financial and commercial decisions.

If you are setting up an arrangement, receiving shares or options, or dealing with an ERS return, speak with a qualified UK tax adviser before reporting it or making decisions based on its tax treatment.