Welcome to Form 42 Clarification @efaze.com

The Inland Revenue have clarified their position on the requirement to report share options and transfers on Form 42 returns. Failure to return the notifiable event on Form 42 to the Inland Revenue by 6 July 2004 may result in a £300 fine per reportable event.

Please note, those companies that haven't received Form 42 will be granted an extension to file of two months. The date for filing will therefore be 30 November 2004.

Reportable events per section 421k ITEPA 2003 are:-

1. an acquisition of securities, an interest in securities, or a securities option
2. an event which is a chargeable event in relation to restricted securities
3. an event which is a chargeable event in relation to convertible securities
4. artificial enhancement of market value of securities
5. disposal of securities and interests in securities that were acquired for less than market value
6. securities and interests in securities disposed of for more than market value
7. charge on benefit from securities or interest in securities
8. the assignment or release of a securities option acquired pursuant to a right or opportunity available by reason of the employment of the person who acquire the securities
9. the receipt of a benefit in money or money's worth which is received in connection with such a securities option.

The Inland Revenue have answered the following questions regarding their interpretation of section 421k ITEPA 2003:-

Does Form 42 have to be submitted on incorporation of a company in respect of the subscriber shareholders?

If this is the company formation agent then that is not a reportable event. If this refers to the prospective directors then this is likely to be a reportable event.

Often companies are bought "off the shelf". Where this is the case and the purchasers take over the shares of the formation agents, is the transfer from agent to the purchaser a reportable event?

Yes, the transfer is likely to be in relation to prospective employment. It is also important to remember that in these circumstances although company registration agents are strictly exempted from the duty to report the acquisition by the agent's own nominee subscribers, the transfer or re-allocation of those shares to any client is a reportable event. The responsibility for filing the form is the employers in the first instance, the person from whom the shares were acquired and ultimately the acquiring person.

What about the situation where an existing director/employee transfers shares to another director/employee or prospective director/employee? Is this reportable on Form 42?

Yes.

Does the form have to be completed where shares are issued to someone who is not an employee/director at the time of the issue but becomes one at a future date? What is the date by which such a reportable event need be submitted on Form 42?

This may be a reportable event but it will depend on whether the shares are employment related securities made available by reason of employment or prospective employment. The company will know why it is issuing shares to someone who is not an employee/director and the likelihood is that it relates to prospective employment and reportable events. Reportable events must be notified to the Revenue - by 6 July if you have been sent Form 42 or 30 November if you have not received Form 42 - in the tax year following that in which the reportable event takes place.

The Inland Revenue interpretation of the legislation indicates they regard any share transfer between 6 April 2003 to 5 April 2004 by Directors/Employees in a company as being notifiable on Form 42. The form can be downloaded from http://www.hmrc.gov.uk/forms/form42.pdf

One of my clients has set up a company with his wife. They are both directors of the company and have issued themselves shares and intend to remunerate themselves using dividends. There is no "share scheme" here. I understand there is a form that I may need to complete. Please advise.

Yes. Form 42 issued by the Inland Revenue needs to be completed in relation to employment related securities. As they are officers of the company and have shares issued in that capacity, even where there is no amount chargeable to income tax, under the new rules the issue must be reported on form 42. In addition, if the wife later gives or sells further shares to her husband, because he has acquired more shares "by reason of his employment" this too is reportable. Of course whether or not it was by reason of his employment is another matter for debate.

This will also hit large companies. A public share issue to which employees may just happen to subscribe will present a reporting headache for the employer - they may not even know that employees bought shares.

What is a reportable event?

A reportable event for 2003/04 occurs where an individual has acquired shares by reason of a current, former or prospective employment or directorship in the period 6 April 2003 to 5 April 2004. Even where a company is bought off the shelf and the purchasers take over the subscriber shares from formation agents, the Revenue’s view is that the transfer is likely to be by reason of prospective employment and must be reported.

Do I need to use Form 42?

The Inland Revenue have indicated a letter or spreadsheet detailing the information required by Form 42 including share transfers will be acceptable
or a Form 42 Substitute

Where can I get help with form 42

simply click here

Useful links

Inland revenue FAQ site
http://www.hmrc.gov.uk/shareschemes/faq_emprelatedsecurity-general.htm  and

http://www.hmrc.gov.uk/shareschemes/faq_emprelatedsecurity-ch1.htm

Form 42 link
http://www.hmrc.gov.uk/forms/form42.pdf

Form 42 deadline extension information
http://www.hmrc.gov.uk/shareschemes/form42-extension.htm

Share scheme site
http://www.hmrc.gov.uk/shareschemes/