If your business offers employees shares or options, whether through an EMI scheme or another share-based arrangement, ERS reporting should be part of your annual compliance calendar.
These returns give HMRC information about companies operating share incentive plans and help identify events that may trigger employment income tax, National Insurance contributions, and 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.
Early planning makes a significant difference. 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 common ERS compliance pitfalls that can create penalties, delay filings or undermine confidence in your share scheme records. If you need help with the ongoing administration and management of your equity plans, talk to our employee share scheme solicitors.
Contents:
- ERS compliance: essential facts for employers
- 1. Staff changes leave you in the dark
- 2. Historic filings are missed and incorrect
- 3. Missing National Insurance numbers cause delays
- 4. Supporting documents are hard to find
- 5. Share allotment classification is unclear
- 6. Share allotment date is unclear
- 7. There is no clear audit trail
- What are the penalties for ERS non-compliance?
- When should you get advice on ERS reporting?
- How to make ERS compliance easier to manage
ERS compliance: essential facts for employers
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 following the tax tear in which it begins. This applies regardless of the type of scheme you choose.
You’ll also need to file an annual ERS return (including nil returns for live schemes) with HMRC by 6 July following the end of the relevant tax year, reporting on the previous tax year. You can only complete the filing once the scheme or arrangement is registered, and HMRC can take up to seven days to issue the ERS scheme reference after registration, so it’s sensible not to leave this until the deadline.
Even if there have been no changes or events to report, you must submit a nil return for every scheme registered on HMRC’s ERS online service unless the scheme has been properly ceased.
Typical reportable events include:
- Granting or exercising share options
- Releasing, assigning, cancelling or lapsing share options, particularly where money or value is received, for example, when an employee leaves
- 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 their relevant value which may apply on an employee exit
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, or can’t access the Government Gateway account needed to file the return. 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 may be a suitable way to deal with this, but it is sensible to take advice before filing where NI numbers are missing.
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.
What are the penalties for ERS non-compliance?
Failing to register or notify your scheme correctly, missing the ERS filing deadline, failing to submit a nil return where required, or making inaccurate or incomplete submissions can result in significant penalties. These include:
- An initial £100 penalty for late filing (per scheme)
- An additional £300 if the return is still outstanding 3 months after the deadline
- A further £300 if still outstanding 6 months after the deadline
- Possibly £10 per day after nine months until the return is filed
Up to £5,000 for a material inaccuracy in a return for a tax-advantaged scheme where the inaccuracy is careless or deliberate
When should you get advice on ERS reporting?
You should consider taking advice if there have been share option grants, exercises, lapses, employee exits, share reorganisations, missing historic returns, unclear allotment records or gaps in supporting documents. Advice is also sensible before a funding round, sale process or due diligence exercise, where incomplete share scheme records can create avoidable questions for investors, buyers or their advisers.
How to make ERS compliance easier to manage
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.
