Employment Related Securities Annual Return: US Founders

If your UK company has issued shares or granted options to anyone who works for it — including you as founder — an employment related securities annual return is due to HMRC by 6 July following the end of each tax year, even in a year when nothing happened. The scheme must be registered online before any return can be filed, and penalties begin automatically the day after the deadline.

This is one of the most reliably missed UK filings among US founders running British companies. It is not part of the corporation tax return, it is not part of the payroll, and it is not part of the confirmation statement filed at Companies House. It sits on its own, in a separate HMRC online service, and in our experience at Jungle Tax nobody in the founder's existing advisory chain believes it is theirs. Meanwhile, for a founder who is also a US person, the same share award that triggers the UK obligation is also a US income item — and a UK reporting failure very often surfaces an unreported US one at exactly the same moment.

What is the employment related securities annual return?

UK tax law treats securities acquired "by reason of employment" as a distinct category — employment related securities, or ERS — governed by Part 7 of the Income Tax (Earnings and Pensions) Act 2003. The definition is deliberately wide. It catches shares and options given to employees, to directors, to non-executive directors, and to founders themselves. It catches awards made by the company and, in many cases, awards made personally by an existing shareholder to someone who works for the business.

Where a company has ERS in issue, the "responsible person" — in practice the employing company — must report to HMRC each year. The mechanics are:

• The share plan or arrangement is registered once, through HMRC's ERS Online Service, which sits inside PAYE for Employers.
• Registration produces a scheme reference number.
• An annual return is then due for that scheme for every tax year from registration until the scheme is formally ceased — including years with no activity, where a nil return is required.
• The deadline is 6 July following the 5 April year end. For the 2025-26 tax year, that was 6 July 2026; for 2026-27, it is 6 July 2027.

Why founders miss it

The obligation falls into a gap. The corporation tax adviser prepares the CT600 and does not touch equity records. The payroll bureau operates PAYE on salaries and does not see the cap table. The company secretary files at Companies House. The US accountant is looking at Form 1040. Nobody is looking at the ERS service — and unlike self assessment, HMRC does not issue a notice to file or a reminder. The first contact is usually the penalty.

The second reason is a false assumption about materiality. Founders reason that because nothing was sold, no cash changed hands, or the shares were worth very little, there is nothing to report. The return is an information return: it is due on the event, not on the tax.

Which events are reportable?

The reportable universe is broader than "we granted some options". The following are the events we most often find unreported when we review a UK company owned or run by a US person:

Acquisitions of securities

• Shares issued or transferred to an employee, director or office holder — including subscription at, or shortly after, incorporation where the recipient is or becomes an employee or director.
• Growth shares, hurdle shares and alphabet share classes issued to a management team.
• Shares acquired at less than market value, which can create a notional interest-free loan charge that continues to be reportable in later years until it is discharged.
• Shares transferred personally by a founder to a new joiner or adviser — reportable even though the company is not the transferor.
• Carried interest and co-investment interests held by executives in fund and management-company structures.

Options and other rights

• Grant of a non-tax-advantaged ("unapproved") option — reportable in the year of grant.
• Exercise, assignment, release, lapse or cancellation of such an option, including a cash cancellation payment.
• EMI options, which carry a separate notification obligation as well as an annual EMI return.
• CSOP, SAYE and SIP arrangements, each of which must be registered and reported separately.

Post-acquisition chargeable events

• Lifting or variation of restrictions attaching to shares — for example the release of a leaver provision, a drag-along change, or the conversion of growth shares on an exit.
• Conversion of one class of securities into another.
• Disposal of shares by an employee for more than market value.
• Receipt of a benefit connected with the securities.
• Company buy-back of shares from a departing employee or founder.

Awards to genuine third-party consultants sit in a grey area: where the working relationship is employment-like, or the individual is also an office holder, the securities are very likely to be employment related. Awards acquired purely through a family or domestic relationship, and genuine arm's length investment by outside investors who do not work for the company, are outside the regime — but the exclusion is narrower than founders assume, and a family member who is also a director is inside it.

Registration first, then the return — the sequence that trips people up

You cannot file an employment related securities annual return for a scheme that has not been registered. HMRC's own guidance on telling HMRC about your employment related securities is explicit that a company must be registered as an employer and enrolled for PAYE online before an ERS scheme can be registered at all. This is the single most common cause of a genuinely late filing: the founder discovers the obligation in late June, tries to file, and finds that registration is a prerequisite and takes time to process. Working backwards, the sequence is:

1. Register the company as an employer and enrol for PAYE Online, if that has not already happened.
2. Enter the ERS service and register the arrangement, choosing the correct scheme type.
3. Wait for the scheme reference number to be issued — allow days, not minutes, and longer at peak.
4. Complete the relevant HMRC template (the "Other" template for non-tax-advantaged arrangements) and upload it, or key the data in directly.
5. Repeat annually until the scheme is ceased by entering a final event date.

Scheme type	Separate registration?	Annual return	Founder-relevant notes
Other (non-tax-advantaged)	Yes — one registration can cover all such arrangements	Required every year, nil return if no events	Where most founder share issues, growth shares and unapproved options are reported
EMI	Yes, separately	Required every year once registered	Grant notification is a separate obligation; missing it can cost the tax advantages
CSOP	Yes, separately	Required every year	Self-certification is tied to the 6 July deadline following the tax year of first grant
SAYE	Yes, separately	Required every year	Rare in early-stage companies
SIP	Yes, separately	Required every year	Rare in early-stage companies

What are the penalties for a late employment related securities annual return?

The penalty regime is automatic and escalating. HMRC does not need to demonstrate loss of tax, because this is an information return. Per HMRC's published guidance on dealing with an employment related securities penalty:

Time after 6 July deadline	Penalty	Cumulative
One day late	£100 automatic	£100
Three months late	Further £300	£400
Six months late	Further £300	£700
Nine months late	£10 per day, with no statutory cap	Open-ended
Materially inaccurate return	Up to £5,000	Per return

Two points make this far more expensive than the headline figures suggest. First, penalties apply per registered scheme: a company with an EMI scheme and an "Other" registration that misses both is penalised twice. Second, they apply per tax year. A founder who registered a scheme in 2021, filed once, and then forgot is potentially looking at four or five separate penalty tracks running in parallel, several of which have passed the nine-month daily-penalty threshold.

Penalties can be appealed where there is a reasonable excuse and the return was filed without unreasonable delay once that excuse ended. Not knowing the obligation existed is, on its own, a weak argument. A properly evidenced appeal is worth making, but the priority is always to get the outstanding returns filed first — an appeal made while returns remain outstanding rarely succeeds.

What if the scheme was never registered at all?

This is the more common founder position: not a late return, but no registration and no returns since the company issued its first shares to a team member. HMRC publishes a route for this. Its guidance on late registrations for employment related securities asks companies to contact the share schemes team in writing, explain why the deadline was missed, and then register and bring the outstanding returns up to date.

Founders hesitate here, because registering appears to advertise several years of non-compliance. In practice, the alternative is worse: the daily penalties continue to accrue, EMI options that were never properly notified may lose their tax advantages entirely, and the unreported events remain live for any future purchaser's due diligence. Equity non-compliance is one of the first things a buyer's counsel finds, and it is routinely priced into the deal — or parked in an indemnity — at a multiple of what remediation would have cost.

The US side: the same award is also on your Form 1040

Here is where a UK administrative failure turns into a cross-border problem. If the founder, or any recipient, is a US citizen, green card holder or otherwise a US person, the award reported to HMRC is simultaneously a US tax event — often with different timing, different valuation and different elections. Our guide to US-UK equity compensation for dual filers covers the mechanics in depth; the points that matter to an ERS clean-up are these.

Restricted shares: section 83(b) and section 431 are not the same election

Both regimes let a recipient elect to be taxed up front on unrestricted value rather than later on growth, but they are separate elections on separate clocks. The UK section 431 election must be made jointly by employee and employer within 14 days of acquisition and cannot be made late. The US election under section 83(b) must be filed with the IRS within 30 days of transfer, and can now be made on the IRS's standardised form for that purpose. A valid section 431 election does nothing for US purposes; a valid 83(b) does nothing for UK purposes. Founders who signed one and not the other are the norm, not the exception, and the mismatch is usually discovered years later during an ERS review.

Options: an EMI option is not a US qualified option

The UK tax-advantaged status of an EMI or CSOP option is a purely domestic concept. The IRS does not recognise it. For US purposes an EMI option is almost always treated as a non-qualified option: ordinary income arises on exercise on the spread between market value and exercise price, reportable on the US return, whether or not the UK charges anything at that point. The UK charge on a qualifying EMI option may not arise until sale, and then as capital gain. The result is income taxed in the United States in one year and in the United Kingdom in a different year — with no foreign tax in the earlier year to credit, and no US tax in the later year to relieve.

Issuing shares can change your Form 5471 position

A US person who owns or controls a UK limited company is generally within the Form 5471 regime. Issuing shares or admitting an option-holder to the register changes ownership percentages, and can create a new filing category — for example where a US person acquires or disposes of an interest crossing the 10% threshold in the year. The penalty for a missed or incomplete Form 5471 starts at $10,000 per form per year, and an incomplete international information return can leave the statute of limitations open on the entire US return, not just the international part. The IRS's overview of Form 5471 sets out the filer categories.

Why a UK reporting failure surfaces a US one

The evidence you assemble to file an overdue ERS return — grant dates, share classes, valuations, exercise dates, recipient identities — is precisely the evidence that determines what should have appeared on the US return. In practice a founder who has not filed employment related securities annual returns for three years usually also has three years of US returns with an equity item missing, and often a Form 8938 or FBAR gap alongside it, once the UK company's accounts and any share-sale proceeds are taken into account.

That is a solvable position. Where the failure was non-wilful, the IRS streamlined filing procedures remain the standard route to bring US returns up to date, and it is far better to make the correction proactively than to have it emerge on an exit. The same evidence pack drives both sides of the fix, which is why we sequence them together rather than letting a UK adviser and a US adviser work in isolation. The same principle applies to other quietly missed UK employer reporting — see our note on UK benefits in kind and unfiled years.

US and UK treatment side by side

Issue	United Kingdom (HMRC)	United States (IRS)
Annual information return	ERS annual return per registered scheme, due 6 July	Company-level reporting on Forms W-2/1099 where applicable; founder reports on Form 1040
Nil filing required?	Yes — nil return due every year until the scheme is ceased	No equivalent standing annual equity return
Up-front election on restricted shares	Section 431 election, 14 days, joint employer and employee	Section 83(b) election, 30 days, filed with the IRS
Tax-advantaged options	EMI and CSOP; often no income tax on exercise	EMI and CSOP not recognised; generally taxed as non-qualified options on exercise
Late filing exposure	£100, then £300, then £300, then £10 per day; up to £5,000 for inaccuracy	$10,000 per international information return per year, plus an open statute of limitations
Trigger for review	No notice to file — the penalty is often the first contact	Foreign account and entity data reaching the IRS under FATCA

A remediation sequence that works

1. Build the equity history first. Every issue, transfer, grant, exercise, lapse and buy-back since incorporation, with dates, classes, prices and recipients, cross-checked to the statutory registers and Companies House filings.
2. Identify which arrangements need which registration type — most founder-led companies need an "Other" registration and, if options were granted under an EMI scheme, an EMI registration too.
3. Flag the valuation points. Unrestricted market value at each acquisition drives both the UK charge and the US income item; retrospective valuation support is much harder to build after an exit than before.
4. Contact HMRC's share schemes team where registration is late, explaining the position before registering.
5. Register, obtain reference numbers, and file every outstanding year, including nil years.
6. Run the same events through the US return to identify unreported income, missing elections, and any Form 5471, 8938 or FBAR gaps.
7. Choose the US correction route — amended returns, or a streamlined submission where the failure was non-wilful.
8. Appeal the penalties where there is genuine reasonable excuse, with documentary evidence, once the returns are in.

The 2026 EMI changes widen the reporting net

From 6 April 2026 the EMI regime was substantially expanded: the gross assets limit rose from £30 million to £120 million, the employee headcount limit from 250 to 500, and the total value of unexercised options a company may have outstanding from £3 million to £6 million. The maximum option life extended from ten years to fifteen, and that extension can be applied to existing options by amendment, unlike the other changes.

For scale-ups that had outgrown EMI, that is genuinely good news. It also means more companies will now register an EMI scheme — and each registration creates a standing annual return obligation that persists for every subsequent tax year, whether or not another option is ever granted. Companies that move from unapproved options to EMI frequently end up with two live registrations and file only one return.

Common mistakes we see

• Believing that no reportable event means no filing. Once registered, a nil return is still due.
• Registering the scheme but never ceasing it after the plan wound down, leaving an open obligation generating penalties indefinitely.
• Treating founder subscriptions as outside the regime because "we are the owners" — founders who are directors are office holders, and the shares are usually employment related.
• Reporting the company's grants but omitting a personal transfer of shares from one founder to a new hire.
• Filing an EMI notification and assuming that discharges the annual return.
• Filing the UK return correctly and never reflecting the same award on the US return.
• Leaving the section 431 window to expire while the US 83(b) election is filed — or the reverse.

Where specialist help changes the outcome

Most of the damage in these cases is not the original error; it is the delay. Penalties compound, valuations become harder to support, elections cannot be made retrospectively, and an exit timetable removes the option of a considered correction. A joined-up review — UK registration and returns on one side, US income, elections and information returns on the other — usually costs a fraction of what a rushed pre-completion clean-up does. For founders weighing an exit, our cross-border tax preparation team and our US-UK specialists handle both sides from a single evidence pack.

If your UK company has issued shares or granted options and you are not certain that every annual return has been filed — or you have received a penalty notice and do not know how many years are behind it — contact our cross-border team for a confidential consultation. We will establish exactly which registrations and returns are outstanding, quantify the exposure on both sides of the Atlantic, and put a correction plan in place before the daily penalties, or a buyer's due diligence, do it for you.