HMRC Form 42: Reportable Events, Filing, and Penalties

Form 42 is the informal name for HMRC’s Other Employment Related Securities Annual Return, the report UK employers use to tell HMRC about share transactions with staff that sit outside a tax-advantaged scheme. If your company granted unapproved options, issued shares to employees below market value, or lifted restrictions on existing awards during the tax year, you need to file one. The deadline is 6 July following the end of the tax year on 5 April, filing is done online through the ERS service, and missing the date triggers an automatic £100 penalty on day one.

Who Has to File

Any UK employer that provided employment-related securities to a director or employee during the tax year has a reporting obligation. Tax-advantaged plans — CSOP, SAYE, SIP, and EMI — each have their own dedicated return. Form 42 is the catch-all for everything else: unapproved option plans, direct share awards, growth shares, restricted stock, and any other arrangement that transfers securities to staff without qualifying for special tax treatment.

Overseas parent companies that give shares or options to UK-based employees are inside the net too. Being non-UK does not remove the reporting obligation where the recipient works in the UK.¹

What Counts as a Reportable Event

The scope is wider than most people expect. HMRC’s guidance under ITEPA 2003 Part 7 treats the following as reportable:²

Grants, exercises, assignments, releases, or lapses of unapproved options, and any cash or benefit received in connection with them.
Acquisitions of shares by an employee or director for less than market value, including nil-cost awards.
Events that lift or vary a restriction on shares, such as a forfeiture provision falling away at the end of a vesting period.
Conversions of one class of security into another.
Actions that artificially increase or decrease the market value of employees’ securities.
Discharges of notional loans arising from below-market acquisitions.
Disposals of securities for more than market value, where the excess is treated as employment income.

Corporate actions like bonus issues, rights issues, and share-for-share exchanges involving employees can also be reportable, even if no tax bill falls out of them. The test is whether the transaction is connected with employment, not whether it produces immediate tax.

Register the Scheme First

You cannot file until the underlying scheme or arrangement is registered on HMRC’s ERS online service, and that step is not instant. Registration runs through PAYE Online, so the company needs an active PAYE registration first.³ HMRC posts an activation code that has to be used within a short window, and every distinct arrangement needs its own registration — a one-off director award, an ongoing option plan, and a restricted share agreement are three separate schemes for these purposes.

Leaving registration until the last week of June is a common way to end up filing late. Start well before the deadline.

Valuing the Shares

For listed companies, market value is the quoted price on the relevant date. For private companies, valuation is where most of the risk sits, because the number you report is what HMRC will scrutinise if a compliance check is opened.

HMRC’s own manual takes a workable line: for the purposes of the return, you do not need a formally agreed valuation. It should be “the best available value at the time of the particular transaction.”⁴ A recent funding round price, an accountant’s valuation, or a documented directors’ assessment can all support the figure, provided the reasoning is written up and retained.

If you want certainty before filing, HMRC’s Shares and Assets Valuation (SAV) unit will agree valuations in advance for EMI schemes using form VAL231, and those agreed values are valid for 90 days.⁵ For non-tax-advantaged arrangements there is no formal clearance route, but companies can approach SAV informally to agree a methodology, which is useful for complex share structures.

Whatever route you take, keep the valuation report, the underlying financial data, and any correspondence with SAV. HMRC can request that evidence years later, and a documented number is far easier to defend than a bare figure.

How to Submit

Filing is done through the ERS online service. You can key data into the portal directly or upload a file. The service accepts ODS files based on HMRC’s downloadable template and CSV files that match the same structure.⁶ Column headers and tab names must match HMRC’s specification exactly. A misnamed sheet or an extra column will cause the upload to fail, so validate the file before the deadline rather than on it.

The template contains nine tabs covering the different categories of reportable event. You populate only the tabs relevant to your transactions, but each demands granular data: employer PAYE reference, the employee’s full name and National Insurance number, the class and number of securities, the exact date of the event, the market value at that date, and the consideration paid. From April 2026, net-settled option exercises can be reported in a single row per employee showing the gross entitlement, rather than the two rows previously required.⁷

The deadline is 6 July after the tax year ends. For 2025–26, that means 6 July 2026.¹ When the upload succeeds, the system issues an acknowledgement — save it. That receipt is your proof of timely submission if HMRC later says the return was not filed. Keep the return and its supporting documents for the tax year plus six years.⁷

Nil Returns and Closing a Scheme

If your scheme is registered but no reportable events happened during the tax year, you still owe a nil return by 6 July. HMRC treats a missing nil return exactly like a missing return with transactions, and the penalty regime applies in full.¹ The nil return itself is a simple confirmation submitted through the ERS service, but the obligation continues every year until you formally close the scheme.

Closing is done by entering a final event date on the ERS service. That stops future nil return obligations, but you still owe a return for the tax year in which the final event date falls.⁸ Ceasing a PAYE scheme does not automatically close a linked ERS scheme; the two are separate registrations and both need to be dealt with.

Late Filing Penalties

The late filing regime is automatic and escalating. HMRC does not issue warnings first, and the penalties run whether or not any tax turns out to be due:⁹

£100 on the day after 6 July, even if the return is only one day late.
A further £300 once the return is three months late.
Another £300 at six months late, on top of the earlier charges.
Daily penalties of £10 per day from nine months late until the return is submitted.

Penalties apply per scheme. A company with three registered schemes and three late returns runs three separate penalty streams.¹⁰ Paying the £100 does not buy time; the return still has to be filed to stop further charges.

Late payment of any income tax or National Insurance that should have been collected through PAYE will also attract interest. HMRC’s late payment rate was 7.75% as of January 2026, set at Bank of England base rate plus 4%, running from the date tax should have been paid until it is paid, uncapped.¹¹

Penalties for Inaccuracies

Filing on time but getting the figures wrong is a separate exposure. Penalties are calculated as a percentage of the potential lost revenue — the tax that would have been underpaid if the error had gone undetected:¹²

Careless error: up to 30% of the potential lost revenue.
Deliberate but not concealed: up to 70%.
Deliberate and concealed: up to 100%.

The percentage reduces if the company makes an unprompted disclosure — telling HMRC about the error before they find it. For tax-advantaged scheme returns, a separate fixed penalty of up to £5,000 applies to a material inaccuracy.¹³

The practical consequence is that a share valuation error is not just a paperwork issue. If HMRC concludes your reported market value was too low, the underpayment attracts interest and a behaviour-based penalty on top. Documented valuation reasoning and prompt correction of any error found later are the main tools for reducing that exposure.

Appealing a Penalty

A penalty notice can be appealed if you had a reasonable excuse for the late filing or inaccuracy. The appeal is normally due within 30 days of the date on the penalty notice.¹⁴ HMRC may accept a late appeal if the delay was short or a reasonable excuse prevented earlier action.

HMRC’s published examples of what may count include:¹⁵

Serious or life-threatening illness, or an unexpected hospital stay.
The death of a partner or close relative shortly before the deadline.
Computer or software failure while preparing the return, or a problem with HMRC’s own online service.
A fire, flood, or theft that destroyed records needed for the return.
Unpredictable postal delays.

What does not qualify: finding the online system difficult, not receiving a reminder, lack of funds, or simply making a mistake. Relying on a third party who then fails to file can be a reasonable excuse, but HMRC scrutinises those claims and expects you to show you took reasonable care in choosing and monitoring the person. Once the excuse no longer applies, the return has to be filed without further unreasonable delay.

Non-UK Employers

Overseas companies with UK employees have the same 6 July obligation. One carve-out applies to short-term business visitors covered by an EP Appendix 4 arrangement: where no UK income tax or National Insurance would be due, HMRC no longer requires non-tax-advantaged ERS data to be reported for that individual, and this applies to previous and future tax years. If the visitor was UK resident when the options were granted, or UK tax and NIC are due for any other reason, the reporting obligation stays.¹

A non-UK company that does not run a UK PAYE scheme cannot access the ERS online service in the normal way and should contact HMRC to arrange an alternative filing route, which may involve paper submission. That conversation needs to start well before 6 July. Unfamiliarity with the UK system is not a reasonable excuse.

1
GOV.UK. Employment Related Securities Bulletin 64
2
GOV.UK. Employment Related Securities and Arrangements (480: Chapter 23)
3
GOV.UK. PAYE Online for Employers
4
GOV.UK. Employment Related Securities Manual – ERSM140090 – Reporting Requirements – Form 42
5
GOV.UK. Get a Share Scheme Valuation From HMRC
6
GOV.UK. Other Employment Related Securities: Technical Note
7
GOV.UK. Employment Related Securities Bulletin 63
8
GOV.UK. Employment Related Securities: Submit Returns
9
GOV.UK. Check How to Deal With an Employment Related Securities Penalty
10
GOV.UK. Employment Related Securities Manual – ERSM140080
11
GOV.UK. HMRC Interest Rates for Late and Early Payments
12
UK Parliament. Finance Act 2007, Schedule 24 – Penalties for Errors
13
GOV.UK. Penalty for an Inaccuracy – CC/FS32
14
GOV.UK. Disagree With a Tax Decision or Penalty
15
GOV.UK. Disagree With a Tax Decision or Penalty: Reasonable Excuses