Shares Archives - Business N2K

Every UK company is required to file an Annual Return.

This is not to be confused with the annual statutory accounts or annual corporation tax return. The Annual Return is a snapshot of the foundations of the Company at the made up date so it includes details such as:

Company Name
Registered Office
Directors / Company Secretary
Share Capital
Activities

It is due every year (the clue is in its name!) and it is often on an odd date as it runs to the anniversary of the date of incorporation of the company – so unless you incorporated your company on say 31 December then you’ll no doubt have some random odd date as your made up date. You can change it although Companies House do send you a reminder via fairly formal looking letter in advance.

You have 28 days from the made up date to file the return. It is a criminal offence not to file the return on time and, although I’ve never seen formal proceedings initiated where returns are late, the most likely impact is that your company will be unilaterally struck off! So say a month after the due date you mind find that your company is being listed in the Gazette as formal notification that it is due to be struck off and then a couple of months later you may no longer have a company! (Don’t quote me on exact timings but I would suspect this is in the right ball-park.)

You should file your annual return online if possible by visiting the Companies House website and filing it through the portal there. You will need your log in details including authentication code so make sure you have all your paperwork together. It is also cheaper to file it online (£13) compared to filing on paper (£40).

If you are having any problems, I suggest you get your accountants to help you as part of the annual service.

Cash is often tight for early stage start-ups.

So often, as well as the founders taking little or no cash out of the business as salary in its early days, the first (brave!) employees also end up having to share this pain.

To help ease this, it is common for employees to be offered shares in the company in lieu of salary (in full or in part). This seems like a sensible option, as the first employees they are treated like sort of quasi-founders, and by taking a small slice of the equity they have the potential to share in the upside of equity ownership if all goes well in exiting further down the line.

This can therefore work well commercially, however, it can cause a headache from a tax perspective….

The UK tax rules related to shares issued or transferred to employees are unfortunately tightly drawn. This results in shares passed to employees being treated for tax as if they were received at full market value – even if no cash changed hands – and therefore as ‘earnings’.

So, say I reward you with 500 ordinary shares in my early stage start up company for the hard work and dedication you’ve put in so far and for accepting a reduced salary, HM Revenue & Customs (HMRC) would treat these shares as employee related income subject to income tax (and possibly even National Insurance). Any employment related tax would be due on the market value of the shares at the date of issue or transfer less any amount paid (if any). The logic behind this is that had the company had cash and paid a salary instead then this would have been subject to tax via PAYE in the normal way so there should be no difference…

But so many start up and early stage companies do not think of this – why should they?

In very early stage companies this may be less of an issue but in situations where there has been external investment or where there is valuable proprietary intellectual property (IP) or even where the founders have a track record of success and there is significant ‘hope value’ or likelihood of success (and therefore value) then extreme care is required.

Complex rules like these, quite frankly, should not be inflicted on new and emerging companies, however, they can and do bite so it’s better to be forewarned (and armed) than to risk stumbling into this headache later down the line which could ultimately disrupt investment or exit opportunities – or at least result in a distracting tax investigation!