A UK Compliance Guide for Founders

Employee share options are a popular way for UK start-ups and scale-ups to attract and retain talent. But when an employee actually exercises their share options, many founders are surprised by how much compliance follows.

The exercise of options is not the end of the process, it is the trigger for a series of legal, Companies House, and HMRC obligations. Missing any of these steps can cause issues later, particularly during fundraising, due diligence, or EMI reviews by HMRC.

In this guide, we explain exactly what must happen when employees exercise share options in the UK, including key deadlines and common mistakes to avoid.  Please note that deadlines may vary depending on specific circumstances.

Step 1: Check the company has authority to allot shares

Before shares can be issued, the company must have the legal authority to do so.

This usually means:

  • The Articles of Association permit the issue of the relevant share class, and
  • The directors have authority to allot shares under section 551 of the Companies Act 2006, or via the articles.

In early-stage companies this is often overlooked, especially if:

  • the authority has expired, or
  • new share classes were introduced in later funding rounds.

If authority has expired, a shareholder resolution must be passed before the allotment.

Step 2: The employee exercises their option

The process begins when the employee submits a formal option exercise notice in line with the option agreement.

This notice should clearly state:

  • how many options are being exercised,
  • the exercise price, and
  • the date of exercise.

If the options are not nil-cost, the exercise price must be paid, and evidence retained (for example, a bank transaction).

The exercise date matters as many of the legal deadlines run from this point.

Step 3: Directors approve the allotment of shares

A common misconception is that exercising an option automatically creates shares. It does not.

A director decision is legally required to allot shares.

This can be documented via:

  • board meeting minutes, or
  • a written directors’ resolution.

The approval should cover:

  • the number and class of shares,
  • the issue price,
  • the allotment date, and
  • the authority relied upon.

These minutes are not filed at Companies House, but companies are legally required to keep them. HMRC frequently request them when reviewing EMI share options.

Step 4: Shares are formally allotted

Once approved, the shares are formally allotted to the employee.

⏱️ Critical timing rule

Shares must be allotted within 2 months of the option being exercised.

This deadline is frequently missed, particularly in founder-led businesses where the focus is elsewhere. Late allotments can invalidate paperwork and complicate HMRC reviews.

Step 5: Update the register of members

Immediately upon allotment, the company must update its register of members.

This register is the legal record of share ownership, and must include:

  • the shareholder’s name,
  • the number and class of shares,
  • the allotment date, and
  • the amount paid or unpaid.

Importantly, ownership is proven by the register, not by the share certificate.

Step 6: Issue share certificates

Unless the shares are held electronically, the company must issue share certificates to the employee.

⏱️ Deadline: within 2 months of the allotment date

While often treated as administrative, missing certificates are regularly flagged during due diligence.

Step 7: File Form SH01 with Companies House

Every allotment of shares must be reported to Companies House using Form SH01 (Return of Allotment of Shares).

⏱️ Deadline: within 1 month of the allotment

The SH01 confirms:

  • the number of shares issued,
  • the share class,
  • nominal value, and
  • consideration received.

Late or missing SH01 filings are one of the most common issues identified during investment rounds and exits.

Step 8: HMRC reporting for share options

If the options are EMI options, the exercise must be reported through the EMI annual return.

If they are non-EMI options, the exercise is reported under Employment Related Securities (ERS).

⏱️ Deadline: 6 July following the end of the tax year

HMRC may request supporting evidence, including:

  • option agreements,
  • exercise notices,
  • board minutes,
  • SH01 filings, and
  • the register of members.

Incomplete records can lead HMRC to question whether EMI conditions were met.

Step 9: Review the PSC register

If the allotment causes an individual to cross a PSC threshold (for example, owning more than 25% of the shares or voting rights), the PSC register must be updated.

Any changes must then be filed with Companies House within the required timeframe.

Common mistakes when shares are allotted on option exercise

We regularly see the following issues:

  • options exercised but shares never formally allotted,
  • no board minutes or written resolutions,
  • SH01 forms filed late or not at all,
  • register of members not updated,
  • HMRC notified but Companies House filings missing.

These problems often only surface during:

  • fundraising rounds,
  • exits, or
  • HMRC EMI reviews.

At that point, fixing them is possible but far more time-consuming and expensive.

Why getting this right matters

A clean and well-documented share allotment process:

  • protects EMI tax advantages,
  • avoids Companies House penalties,
  • gives investors confidence, and
  • reduces risk during due diligence.

For founders, this is one of those areas where getting it right once saves significant pain later.

How Venn Accounts can help

At Venn Accounts, we regularly support start-ups and scale-ups with:

  • EMI and non-EMI option compliance,
  • share allotments and Companies House filings,
  • HMRC ERS reporting, and
  • cleaning up historic option exercises before fundraising.

If employees have exercised options and you’re unsure whether everything was handled correctly, it’s worth reviewing the position now, before it becomes an issue.