7 ERS compliance pitfalls and how to avoid penalties

If your business offers employees shares or options, whether through an EMI scheme or any other type of share-based arrangement, you need to file an Employment Related Securities (ERS) return with HMRC each year.  

These returns provide general data to HMRC about companies operating share incentive plans and also critically provide information about events which trigger employment income taxes and employer corporation tax deductions.

However, unlike many other business filings, you won’t get a reminder from HMRC when the deadline is approaching. That means if you leave it until the last minute, it’s all too easy for things to slip through the cracks, and the penalties for late or incorrect filings can quickly stack up.

The good news? A bit of forward planning goes a long way. By getting your records organised now and setting up clear processes, you can avoid the stress of a last-minute rush and keep your business clear of costly errors or compliance snags.

Here are seven of the most common ERS compliance headaches you might encounter, and some practical steps you can take to steer clear of trouble. If you need help with the ongoing administration and management of your equity plans, talk to our employee share scheme solicitors.

1. Staff changes leave you in the dark

Often, the person responsible for ERS reporting leaves the company, and their replacement inherits little or no information about previous reportable events. Without thorough and up-to-date records, filings can be late or incomplete, increasing the risk of HMRC penalties.

2. Historic filings are missed and incorrect

Poor data management and limited understanding of ERS rules can result in missed filing deadlines or incorrect submissions. HMRC issues a £100 penalty for late returns, followed by £300 after three months and another £300 after six months. If the return remains outstanding nine months later, further daily penalties can apply, even if there is nothing to report.

3. Missing National Insurance numbers cause delays

HMRC’s electronic filing system will not accept returns unless a National Insurance number is provided which can cause an issue if an individual does not have an NI number. This might be relevant if an individual is not liable to pay NIC because they are non-UK resident. Missing NI numbers can delay your submission, leading to avoidable complications or late submissions. There is a workaround, and you should and talk to employee share scheme solicitors for expert assistance.

4. Supporting documents are hard to find

Key supporting documents for ERS returns, such as award agreements, valuations, exercise notices and section 431 elections, are sometimes lost, scattered across emails, or not retained at all. Without quick and reliable access, demonstrating compliance is more difficult in audits or if questions arise from HMRC.

5. Share allotment classification is unclear

When preparing ‘Other’ ERS returns, it is not always clear whether share allotments were made to investors, employees or consultants. Sorting through the data manually can be time-consuming and increases the risk of reporting errors or misclassification.

6. Share allotment date is unclear

The date that shares are acquired must be reported in the annual return. Where there is no clear paper trail, there can be confusion and inconsistencies over which date to report. This date is significant as employment taxes may arise on acquisition dates as well as corporation tax deductions for employers, so it is critical to get these dates right.

7. There is no clear audit trail

Keeping track of every share issuance, option award, adjustment, lapse, and certificate merge over time is complex. Relying on manual logs or spreadsheets quickly becomes unreliable and can cause errors, leaving you exposed if HMRC requests a detailed audit trail.

ERS compliance - essential facts

If you set up any kind of share-based incentive scheme for your employees, whether that is EMI, CSOP, SAYE, SIP or even an unapproved option or a growth share plan, you will need to remember one very important step: register the scheme with HMRC by 6 July at the latest after the tax year it begins. This applies regardless of the type of scheme you choose.

You are also required to file an annual ERS return with HMRC every year between 6 April and 6 July, reporting on the previous tax year but you can only complete this filing once the scheme is registered. That’s why it’s so important to register in good time.

Even if there have been no changes or events to report, a nil return is still needed to meet your obligations. Planning ahead for these deadlines can help you avoid any last-minute problems or accidental penalties.

Typical reportable events include:

• Granting or exercising share options
• Lapsing or cancelling share options, for example, when an employee leaves (you can read more about what happens to EMI schemes when an employee leaves in our article).
• Exchanging tax-advantaged options, such as in the case of a company takeover
• Adjusting options due to share reorganisations
• Certain post-acquisition events, such as selling shares for more than r their value which may apply on an employee exit

Potential penalties for non-compliance

Failing to register your scheme, missing the ERS filing deadline, or making inaccurate or incomplete submissions can result in significant penalties. These include:

• An initial £100 penalty for late filing
• £300 added after three months
• Another £300 after six months
• Possibly £10 per day after nine months
• Up to £5,000 for material inaccuracies that are deemed careless or deliberate

Simplifying ERS compliance

ERS compliance does not have to be stressful. With clear processes and good record-keeping, you can stay ahead of deadlines, avoid penalties, and have full confidence in your reporting.

Crucially this will also give confidence to a buyer and their advisers, if you are thinking of selling the company. Robust recordkeeping will save a lot of time and cost during due diligence processes which can be very time-consuming, costly and fraught processes.

If you would like expert support managing your ERS obligations or are thinking about setting up an employee share scheme, our team can guide you through every stage, from qualifying for EMI and preparing EMI valuations to drafting scheme rules and keeping your reporting accurate and up to date.

We also offer a share plan management dashboard to simplify ongoing administration and help you stay compliant with ease.

For more practical guidance, you can read our article on using a platform vs solicitor vs a hybrid approach for managing share option schemes.