The Employment Related Securities (ERS) annual return is a yearly filing that employers must submit to HMRC if they give employees or directors shares, share options, or other equity-related benefits. This includes formal share schemes like EMI options, as well as one-off share awards or founder equity issued because of someone’s employment.
You must submit ERS annual returns online to HMRC by 6 July following the end of the tax year which ends on 5 April, and for as long as a scheme is registered, you must file even if nothing happened during the year (a “nil return”).
Why does the ERS annual return matter?
The ERS return is important because it is how HMRC tracks:
- option grants and exercises
- discounted share transfers to employees
- tax-advantaged schemes (EMI, CSOP, SAYE, SIP)
- whether PAYE and National Insurance were handled correctly on these transactions
It is only through the ERS annual return that HMRC receives the information and if you fail to report the information to HMRC via the ERS annual return submission it could have significant negative impact on your business.
For startups and growth companies, it is especially important to file the ERS annual return as;
- EMI tax reliefs are extremely valuable for the employees and for the Company so that they can keep key staff members. It would be very damaging if the Company lost their EMI perks to their employees due to failing to report the scheme/schemes to HMRC. It may even be staff members that could sue the Company for the loss of the promised tax benefits.
- poor filings can create hidden tax liabilities.
- investors and acquirers check ERS compliance during due diligence.
A messy ERS history can become a real problem during fundraising or an acquisition.
We have a long experience of dealing with tech companies and have witnessed several examples where either the Company has forgotten to report their EMI Option scheme to HMRC or filed the incorrect information. It has caused additional stress in a due diligence scenario either at the time of an exit or at the time of fund raising. From our experience it is the risk of a potential tax liability that can scare of both investors and potential buyers. The risk is often largest if the potential investor or buyer is based in a different jurisdiction and therefore isn’t familiar with the UK tax regulations.
Furthermore, if you miss filings or report incorrectly, HMRC can impose:
- automatic penalties,
- interest charges,
Why people find the ERS filing tedious
ERS reporting is notorious for being administrative and detail-heavy. Common reasons include:
1. The rules around ERS are broader than people expect
Many founders think:
“We just issued founder shares.”
But HMRC may still treat that as employment-related securities if the shares were by reason of their employment or directorship and so would need an ERS submission.
It is not uncommon that companies accidentally trigger reporting obligations without realising it.
2. There are multiple ERS templates and scheme types
HMRC requires different filings for:
- EMI
- CSOP
- SAYE
- SIP
- “Other” arrangements
Using the wrong template can cause rejections or inaccurate filing of the ERS submission.
3. Getting set-up for ERS services is not quick and easy
Before an agent can assist with ERS reporting, Companies must register their ERS schemes online with HMRC directly, and this can be quite a drawn-out process.
Whilst this step cannot be completed on behalf of the Company, we can guide you through the process.
- Before you can register your ERS scheme, you must first be registered as an employer, and have enrolled for and activated the PAYE online service for employers.
- If you need to register as an employer, it can take up to 30 working days to get your PAYE reference number, and enrolling for and activating PAYE online services usually takes 24 hours.
- Once you’ve added the PAYE online service, you can register your ERS scheme, and HMRC may take up to a further 7 days to issue the ERS Scheme reference number online.
HMRC’s portal; a cumbersome process
Before an agent can assist with your ERS reporting, they must be authorised as your ERS agent, which can also take up to 30 working days to receive authorisation reference.
- It is not possible to access, view or amend returns after submission, making it critical to retain accurate records.
- Even duplicate or inactive schemes may still require returns until properly terminated.
- The submission process is highly sensitive to data formatting, and can throw up confusing errors.
- It may be necessary to register separate schemes for HMRC purposes, even where the Company only has a single share options policy
4. Data gathering is painful
What may look like “just one grant” still requires that you need to gather a lot of information which may take some time to pull together. This is a list of some of the details that may be required.
- grant dates,
- exercise prices,
- market values,
- vesting,
- leavers,
- share transfers,
- PAYE withholding,
- internationally mobile employees.
5. What if there is a lack of accurate records?
The process becomes especially tedious if there is a lack of accurate records.
This is the most common issue that we experience. The Company has not kept a record of all their granted options and may not have kept the original contracts, or there are different versions of the contracts. We have had instances when the vesting schedules have been omitted or where the Company has agreed different vesting periods to different employees.
We have also had occasions when the employer hasn’t used a lawyer when drafting the option agreement, so whilst there is a contract it is lacking some crucial information needed when preparing the Company’s first ERS annual return.
If the Company has grown fast and has granted a number of options during a year it can be hard to keep up to date with the administration of the Company’s option information. There is some tech available on the market to support with the house-keeping of a company’s options. Whilst that certainly can help in keeping up to date records, a good understanding of how these schemes work is still necessary to ensure reporting is accurate and complete.
6. Review of the eligibility
At the time of preparing your ERS annual return you also want to check that the Company is still eligible for the option scheme that they are using. Has anything changed in a way that could jeopardise for example your EMI scheme?
7. HMRC does not remind you
Unlike many other tax filings, HMRC generally does not send reminders. Companies often discover the obligation only after penalties arrive.
In summary
For many startups, the annual ERS filing becomes:
- a record tracking and administrative exercise;
- a compliance risk review,
- and a tax risk review,
That’s why accountants and lawyers push companies to keep equity records clean throughout the year instead of trying to reconstruct everything in June before the 6 July deadline.
At Metric we recognised this issue and, to omit the compliance and tax risks, we have created an ERS spreadsheet that can be used throughout the year to capture any ongoing option activities. This information can then be used to to not only facilitate the end of year tax submissions but can also be used as the source information for calculating any share option charge for accounting purposes in the Company’s annual accounts.
Even if the ERS annual return appears straightforward, it is worth recruiting an accountancy firm that understands the importance of the submission and can support you with your option administration. Most of our clients make use of the highly tax efficient EMI scheme [add link to the EMI page] and so we are well suited to supporting you with any share option administration needs.
