On 28 November 2005, the Chancellor of the Exchequer announced changes made to the reporting requirements of Employment-Related Securities on Form 42. When an employer issues shares to employees, the value of the issue may be subject to both income tax and NICs. The issue is disclosed to HMRC on Form 42, which allows HMRC to check that the statutory rules are being properly applied, and provides them with data that enables them to assess the impact of changes in policy.
In order to reduce the compliance burden and administration costs for new small companies whose founder shareholders are also directors or employees, it will no longer be necessary for Form 42 to be filed in these circumstances where certain detailed conditions are met.
As the amendments are effective immediately, the change will impact new companies issuing subscriber shares to employees in the tax year ended 5 April 2006.
The published guidance states that where a limited company is incorporated in the UK and initial subscriber shares are acquired either: directly on incorporation; on transfer from a company formation agent; or from another person forming the company (e.g a solicitor or accountant), a report on Form 42 will not be required provided:
- all the initial subscriber shares (and no form of security other than shares) are acquired at nominal value; and
- the shares are not acquired by reason of or in connection with another employment; and
- the shares are acquired by a person who is a director or a prospective director of the company, or someone who has a personal relationship with the director and the right or opportunity is made available in the normal course of the domestic, family or personal relationship of that person.
As a consequence of theses amendments in the circumstances where a Newco is incorporated as part of a private equity transaction there may be no requirement to submit a Form 42.
All other issues of shares and securities to employees continue to need to be reported on Form 42. HM Revenue & Customs have developed a new shorter Form 42 for 2005/06 that will be issued 6 April 2006.
For further details please click here.
http://www.hmrc.gov.uk/shareschemes/form42-guidance.pdf - This will open a PDF in a new window.
