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Revenue answers questions about tax form 42
21 June 2004
News
that companies are facing penalties if they fail to notify the Revenue by 6 July on form
42 about directors' and employees' company share transactions, caused confusion
and protest on TaxZone last week.
The story has already received over 40 comments and numerous emails were sent to the editors. In addition, various tax offices were contacted by readers.
TaxZone sought further guidance from the Revenue on the use of form 42, based on the queries received from readers. Here are the answers we got back:
Form 42 Questions and Answers:
Q1 Many professional advisers were clearly unaware of the obligation on their clients to complete this form, and perhaps some kind of time extension could be considered as well as providing further guidance?
A There is no time extension and guidance in the form of frequently asked questions (which we are being asked) will be made available.
Q2 Is the Revenue sending out form 42 to all existing companies on the Companies House register? If so, when will these forms be received. If they have already been sent out, when was this done?
A Forms 42 have been issued to all companies that have previously registered with the Revenue as having an unapproved (non-tax advantaged) share scheme. We will not know of non-registered companies so there is a requirement that they must make a report whether or not they have received a form 42.
Q3 There have been complaints from advisers that the PDF version of the form on the Revenue website is unprintable. Can an improved version be posted online? Can the form be ordered by email?
A We have checked the pdf version and have been advised that it is printing. If difficulties persist then if the person right clicks on the pdf link and saves the file to their own hard drive they should be able to print the document. Copies can be obtained by phoning the Share Scheme line (020 7438 6718 or 4202).
Q4 Does form 42 have to be submitted on incorporation of a company in respect of the subscriber shareholders?
A 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. The share scheme website has details of frequently asked questions and question 1(h) gives further background.
Q5 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?
A Yes, the transfer is likely to be in relation to prospective employment. It is also important to remember that in these circumstances there will be more than one responsible person - the employing company and the formation agents. Obviously only one of them needs to provide the information, but it would be sensible for the formation agents to either make the notification themselves, or have a mechanism in place to ensure that it is done by the company.
Q6 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?
A Yes
Q7 As the rules start from 6 April 2003, what about shares issued/transferred before that date?
A Companies may have to report transactions relating to those shares if they occur after 6 April 2003, but the earlier receipt of the shares will have been covered by the previous notification requirements in section 465 ITEPA 2003.
Q8 Does form 42 have to be used or will an alternative, such as a letter or a phone call/fax, suffice?
A The form 42 makes it clear that spreadsheets or substitute forms (this can include a letter) may be used but they must give the details specified on form 42.
Q9 Where a company has completed form CT41G, does form 42 have to be completed as well?
A Yes, as the CT41G will not usually give details of share awards/allocations. But we are aware that some companies/accountants do give such details when sending in the CT41G. Where that is the case we will not be asking companies to supply the same information by completing a form 42.
Q10 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?
A 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 issuing shares to someone who is not an employee/director and the likelihood is that it relates to prospective employment and reportable. Reportable events must be notified to the Revenue before 7 July in the tax year following that in which the reportable event takes place.
Q11 Presumably companies should not wait for the Revenue to issue form 42, as companies are obliged to complete the form without any prompting?
A Correct, companies must provide the information unprompted and therefore not wait for a form to be issued.
Big tax fines for companies missing 6 July deadline
New reporting requirements mean companies are facing penalty claims should they fail to notify
the Revenue in time about directors' and employees' company share transactions, warn Grant
Thornton.
Companies will have to disclose to the Revenue details of company shares and unapproved share options issued to their directors and employees if this is by reason of a former, current or prospective employment; a very wide definition. Companies should do so by completing Form 42 to meet the 6 July deadline.
However, what should not be overlooked is that it is critical all companies do this irrespective of whether the employees face an income tax and national insurance liability from the transaction.
Newly incorporated businesses may be particularly affected as they may be unaware of the new requirements. Failure to comply will be costly. If an individual, who has shares in a company and subsequently becomes a director or employee of that company, the acquisition of shares is reportable to the Revenue. A £300 penalty applies to each 'reportable event'. This is often the case for a husband and wife in a small business and they may be potentially liable to penalties of £600 or more if they do not report a share issue. In addition, there is a daily penalty of up to £60, if the failure to notify continues.
Large companies could face huge penalties. If unapproved share awards to 1,000 employees are unreported, the penalties could be £300,000.
Stephen Quest, tax partner at Grant Thornton, commented, "The Revenue is firing a parting shot at businesses and is threatening to pursue late filers. The costs for newly incorporated businesses, which miss the deadline, will be significant. For the larger corporates with many thousands of employees, missing the deadline could leave them with a penalty bill that runs into millions."
This could spell trouble ahead as the numbers of companies who are yet to report may produce a deluge for the Revenue at a busy period of the year. This is in addition to other company year end reporting requirements. These potential penalty claims will therefore be far more wide-reaching than would have been the case previously, as record numbers of businesses have incorporated in recent years following the Government's introduction of the zero rate of corporation tax in April 2002. In 2002-2003 alone, there were 322,000 new incorporations up from 225,000 in 2001-2002.
Companies would be wise to move quickly to avoid getting caught up in a possible backlog.
Quest continued, "Bearing in mind the recent incident when the Revenue admitted sending out incorrect self-assessment penalty notices, we are urging businesses to meet this requirement as soon as possible to avoid any possible doubt about the date their forms are submitted. We may witness a repeat episode due to the sheer numbers of companies involved - there could well be a flood of submissions close to the deadline."
Quest concluded, "Companies concerned should seek clarification on the Inland Revenue website. As a safe rule, Form 42 should be submitted for all new companies apart from those formed wholly as subsidiaries of other companies. However, if they remain unsure, they should seek professional advice."
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