Sole director allotting new shares caught by ERS?

Can a sole director issue new shares to themselves without having to report it as an ERS?

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Hello there!

Can the sole director of  a close company (no other employees or shareholders) issue themselves new ordinary shares (following correct procedures with board minutes, SH01 and all that jazz) after starting to trade without having to report it as an Employment Related Security?

Assume 1 ordinary £1 share issued on incorporation, then 99 of the exact same type of ordinary shares issued several years later at £1 par value after the company had started trading. Would this share issue be classified as 'by reason of employment' and not as arising due to a family relationship, even though the sole director is the only person actually able to make the decision for themselves in the first place?

Common sense says yes, of course this is allowed, but is there any specific legislation or, less robustly, HMRC guidance that states this?

Thanks guys.

Replies (18)

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By Matrix
18th May 2020 17:04

I would reclassify the shares as 0.01p instead. In answer to your question, in practice I probably would not register an ERS scheme as there is no transfer of value, the shareholder still holds 100%. I don’t have the guidance or legislation to confirm though.

Thanks (1)
Replying to Matrix:
Badger
By Conniving Badger
18th May 2020 17:14

Thanks Matrix.

I agree that reclassifying the shares makes more sense, but I was just wondering about the actual reporting requirements for issuing new shares in a situation like this. I'm sure the majority of people would just not bother reporting it in any case, as there's no gain or loss like you say and no tax implications.

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Replying to Conniving Badger:
Psycho
By Wilson Philips
18th May 2020 17:19

Nothing to report. He has 100% of the value of the company before the issue and 100% of the value of the company afterwards.

Thanks (3)
Replying to Wilson Philips:
Badger
By Conniving Badger
18th May 2020 18:15

Thanks WP, appreciate your help.

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By Tax Dragon
19th May 2020 09:54

I was left bemused by an Abbey Tax convention which included a piece on ERS. As I understood what was said, if the additional shares went to the existing director-shareholder, that would be reportable, but if they went to say her husband, it wouldn't.

It all sounded most bizarre.

However, that's irrelevant to you. You should though be aware of example 3 on page ERSM140040 before you decide whether to report. Wilson's logic that you held 100% before and after is not tested in any section in Part 7 that I can think of.

Thanks (1)
Replying to Tax Dragon:
Psycho
By Wilson Philips
19th May 2020 18:04

I was reflecting on an argument that I had with HMRC on this very point. Inspector conceded that where the issue of bonus shares to a sole shareholder was in substance no more than a division of existing shares then it would be nonsensical to insist on a return. However:

That was in the days of paper Forms 42 when HMRC took a more relaxed stance on penalties.

That was one Inspector’s view.

I agree that the statute does not, strictly, exclude the need for a return in such circumstances, otiose though it would be. (It does, though, provide that no ERS should arise.)

Thanks (1)
Badger
By Conniving Badger
19th May 2020 16:18

Thanks TD.

I was under the impression that additional shares issued to a spouse who's also a director or employee would be reportable under the ERS rules, as the 'by reason of employment' classification would trump the personal relationship exemption in this case. However, in the situation you mention where the spouse is not an employee, I guess they were suggesting the family exemption would therefore apply hence no report necessary? But then surely this depends on how the sole director/shareholder spouse would be treated: if they'd be caught by the 'by reason of employment' classification, surely their non-director spouse would then be deemed a connected person and thus the shares would be reportable as if the director had received them?

I agree about example 3 of ERSM140040, though the fact that this involves 2 directors who aren't necessarily related provides room to differentiate it from the sole director situation. It's not clear though based on the information provided! To my mind, a sole director/shareholder issuing themselves more shares is a complete non-event as nothing material has actually changed in terms of overall share value, so having to report it is the epitome of a waste of time.

I understand that things like rights and bonus issues are generally reportable under the ERS legislation unless the company is listed on a recognised stock exchange, but again a bonus issue to a sole director/shareholder would seem to also be a non-event in terms of any change in overall value.

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Replying to Conniving Badger:
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By Tax Dragon
19th May 2020 16:41

I don't disagree about it being a waste of time. But the fact is that the shares are ERS as defined in statute. The reporting obligations are in statute. HMRC, being the body to which reports are made, has discretion to permit you not to make reports. The way it has exercised its discretion is set out in the manual. It has (for no obvious reason) chosen to distinguish allotments before trading has commenced (no report needed - if the conditions set out are met) from those post trade-commencement (report needed). You are in the latter category - trade has commenced. So HMRC appears (to me anyway - and apparently to Abbey Tax) to expect you to waste your time making the report.

Thanks (1)
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By Matrix
19th May 2020 18:24

Out of interest has anyone ever had a handover from a previous accountant where there is an annual filing for an ERS scheme? I haven’t and I just find this compliance non-sensical, impossible to explain to clients and how can you charge a proper fee. I just don’t think there can be much compliance.

It would be at least a few hundred pounds to issue the new shares, register the scheme, file the annual return etc. Then you would have to do ongoing nil returns forever.

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Replying to Matrix:
Psycho
By Wilson Philips
20th May 2020 09:37

Matrix wrote:
Then you would have to do ongoing nil returns forever.

You are quite wrong there

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Replying to Wilson Philips:
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By Matrix
20th May 2020 09:46

Do you close ERS schemes then? Please expand.

Although setting one up is bad enough since the client has to do it from their GG if I recall.

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Replying to Matrix:
Psycho
By Wilson Philips
20th May 2020 13:07

Yes, it's a pain that the client has to set it up but it can be done in minutes.

And, yes, all you have to do is enter a final event date and the 'scheme' is closed. (Again, only the client can enter this date, but it ain't difficult)

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Badger
By Conniving Badger
19th May 2020 22:17

Thanks TD and WP, your help is much appreciated.

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By Justin Bryant
20th May 2020 10:19

Is there not a loophole here in that (assuming it's otherwise ERS reportable) unless/until the shares are added to the share register there is nothing to report since shares are not issued (c.f. allotted) until that point (so this loophole would benefit lazy people)? (This is potentially relevant to my recent question re retrospective changes to the share register.)

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Replying to Justin Bryant:
Psycho
By Wilson Philips
20th May 2020 14:52

It might benefit lazy people in that respect but on the other hand they would be denying themselves dividend entitlement. Of course, you would just declare dividends on the shares actually allotted, but that brings into question the reason for awarding bonus shares to a sole shareholder in the first place. If they want to avoid the reporting requirement by not updating the registers the whole exercise becomes rather pointless.

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Replying to Wilson Philips:
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By Justin Bryant
20th May 2020 16:31

Yes; that would stop a dividend payment dead in its tracks for a typical sole director shareholder and means I'm talking nonsense of course. Thanks so much for your highly erudite input as usual.

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7om
By Tom 7000
20th May 2020 10:36

I remember filling in 100s of form 42s for the shares issued on incorporation until they changed the rules and those didnt have to be reported. Of course thats not answering the question....

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By dwgw
20th May 2020 13:11

I agree with everyone who says reporting such a non-event is a ridiculous waste of time and the ownership of value (which is surely what ERS is all about) hasn't changed at all.

BUT Tax Dragon makes a good technical point.

What I would add is that, if your client might ever sell the company, I'd recommend going through the ERS return filing rigmarole, nonsensical as it is. I advised a vendor recently whose sale floundered on this very point. The buyer's advisers insisted there was an ERS issue - and anyone who's acted in a transaction knows what buyer's advisers can be like when they get their teeth into a discovery. Such merriment!

It was the biggest sticking point in the transaction. Happily, buyer and seller reached a common sense agreement between them and the deal was done. But I'd always advise belt and braces now - and hate having to accept it's simultaneously ridiculous and "good advice".

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