Overview of Form 42 and Schedule 22

The current controversy surrounding Form 42 stems from the inclusion of new anti-avoidance measures included in the 2003 Finance Act (Schedule 22). This Schedule covers the tax treatment of unapproved employee share and share option schemes. Many professional advisors have criticised both the timing and the complexity of the new rules - they were also included without consultation with potentially affected groups and tax & accounting organisations.

Put simply, Schedule 22 of the FA 2003 is aimed at firming up existing tax law rules which charge tax made by employees from unapproved share and share option schemes and transactions.

This is where Form 42 comes in... the new rules have imposed new administrative requirements on beneficiaries of such share schemes and particularly their advisors. If shares are issued by reason of a person’s employment, this is now known as a "reportable event".

The problem comes in that the new rules are so wide-ranging, that pretty much all ordinary share-related transactions may now be "reportable".

Small Business Groups have been particularly angered by this move in that the new rules enable the Inland Revenue to scrutinise even further the share structure of all companies, such as when a husband and wife set up a Limited Company and divide the shares between them (even if this is not relevant for tax reasons).

Form 42 has therefore added more fuel to the Section 660 ("Husband and Wife Tax") debate in that information collected by the form could faciliate the Inland Revenue's efforts to scrutinise the structure of small family companies in their tax raising efforts.

Therefore, if you simply buy a new limited company "off the shelf", the share transfer to you from the holding agents would now be viewed as a "reportable event" and Form 42 would need to be filled in.

You are required to complete Form 42 with the Company Secretary's signature and send it to the Revenue before 7 July 2004. If this form has been issued to you on or after 8 June 2004 you have 30 days from the date of issue. Regardless of whether the Revenue have sent you a notice to complete Form 42 or not, the completed form should still be sent in by 7th July in the relevant tax year.

NOTE - for the 2004 tax year, the deadline has been extended to 6th September, as per our recent update.

More details and examples of how Form 42 applies can be viewed on the ICAEW site.