20th March 2013
OVERVIEW
The Budget announcements confirmed both previously announced
proposals and a number of new reliefs to be introduced at various future
dates. Taken together, these will, when they are all brought into
effect, mean that companies which recognise the benefits of encouraging
share acquisition by employees, and participating employees, will be
able to benefit from the most generous UK tax regime to date. This will
particularly be the case for independent privately-owned and unquoted
companies. Such companies should look again at the attractions of HMRC-approved employee share plans and, for those companies which qualify, employee management incentive (EMI) share options.
Extending the availability of tax reliefs for employee share
acquisitions has been accompanied by proposals for tightening up
perceived abuses of the existing regime. In particular, immediate
restrictions are to be imposed upon the availability of relief from
corporation tax for accounting charges recognised in respect of employee
share acquisitions.
Although the announcement of a restricted relief from income tax on
the acquisition of shares in an employer company by an employee in
exchange for giving up certain employment rights would, at last, mean
that the Chancellor’s much heralded earlier proposal for the
introduction of “employer shareholder” status (intended to take effect
from 1st September 2013) made some sense, the draft legislation (in the
Growth and Infrastructure Bill) was thrown out by the House of Lords
shortly after the Chancellor ended his Budget speech !
Following the Nuttall Review of Employee Ownership, we have been
working with the Department of Business, Innovation and Skills (BIS) to
develop model documentation for an employee-owned company. This
initiative was given a welcome boost by the announcement that the
Government will both introduce relief from capital gains tax on the sale
of a controlling interest in a business into an ’employee ownership
structure’, and look at further incentives in this area. Although no
further detail has been given, and all such proposals will be subject to
consultation, it is hoped that such incentives and any new reliefs will
be tied in with measures to give effect to the recommendations of the
Office of Tax Simplification on unapproved share schemes on which the
government will consult shortly with a view to changes being made in the
Finance Bill 2014.
The government is to consult on measures to remove the presumption of
self-employment for partners in LLPs, to tackle the disguising of
employment relationships through LLPs and counter the artificial
allocation of profits to partners in LLPs and other partnerships to
achieve a tax advantage. This may well call a halt to the recent stream
of incorporated businesses converting to LLPs and put a stop to the
practice of individual partners splitting profits between themselves and
a corporate partner of which the individual has control.
SPECIFIC CHANGES ANOUNCED OR CONFIRMED
Changes to HMRC approved CSOP, SAYE option plans and SIPs
A number of changes to such HMRC approved plans
were first recommended by the OTS and accepted by the Government in
2012. Draft legislation to give effect to these amendments was first
published in December 2012. In brief, the changes include:
- SAYE and SIP
plans may adopt their own definition of when a participant is to be
treated as retiring (so as to qualify for favourable tax treatment). The
requirement for including a specified age in these and CSOPs is withdrawn; - The withdrawal of SIP shares, and early exercise of an SAYE
option, upon certain cash takeovers of the company will attract
favourable tax treatment. In the case of SIP awards, this will remove
the existing risk of penal clawbacks of tax relief if the company is the
subject of an early takeover. Likewise, there will be no income tax
liability of a CSOP option is exercised before the third anniversary of grant upon certain cash takeovers; - Removal of the limit on tax-free reinvestment of dividends on SIP shares;
- The ‘material interest test’ (which denies participation to
employees holding substantial interests) is to be removed in relation to
a SIP and SAYE share options. In the case of CSOPs,
the threshold level of interest is to be raised from 25 to 30% to align
it with the corresponding threshold level in relation to EMI share options; - The use of ‘restricted shares’ is to be permitted but, for the
purposes of determining the value of shares for scheme purposes, shares
subject to restrictions are to be valued as if they are not restricted.
These changes will, for example, allow private companies to use shares
which are subject to employee pre-emption provisions and other
restrictions on transfer or the exercise of rights attaching to shares; - Changes will be made to the rules relating to the acquisition of ‘Partnership Shares’ under a SIP
out of deductions from salary over an ‘accumulation period’. The number
of shares acquired may be determined by reference to the market value
at either the start or end of the accumulation period. This will remove
an existing ‘trap’ which arises if the market value of a share rises or
falls over the accumulation period; - There is to be a more generous limit on the reinvestment of dividends in ‘Dividend Shares’ under a SIP;
- 7-year savings contracts linked to SAYE share options are to be abolished.
All of these changes are expected to take effect from Royal Assent of the Finance Act 2013.
The draft legislation has since been revised so as to:
- protect the entitlement of existing SAYE participants who reach a specified age to exercise their option at that time and still qualify for tax relief;
- widen the range of circumstances in which tax-free exercise of SAYE and CSOP options or tax-free payments for SIP shares will be available on the cash takeover of the plan company;
- ensure that ‘Partnership Shares’ acquired under a SIP may not be subject to forfeiture provisions;
- allow companies flexibility to limit the amount of cash dividends that can be reinvested in SIP ‘Dividend Shares’; and
- make a number of other technical and consequential changes.
Most of these changes will have effect from Royal Assent of the
Finance Bill 2013, although those relating to the reinvestment of cash
dividends paid on SIP shares take effect from 6 April 2013.
Entrepreneurs’ relief on a disposal of shares acquired upon exercise of an EMI share option
As announced in 2012, the requirement for a person to hold 5% or more
of the ordinary share capital in a company to qualify for
Entrepreneurs’ Relief from CGT (a reduced rate of 10%) is to be removed
in relation to shares acquired upon the exercise of an EMI option.
The draft legislation first published was later revised to allow the
period during which an EMI option is held to count towards the
qualifying 12-month holding period requirement. It is understood that
the relief will apply to disposals of EMI shares
made after 6 April 2013. It was announced in the Budget that the relief
will also apply to a disposal of shares acquired in exchange for EMI
option shares upon a corporate reorganisation or share-for-share
exchange (thereby removing an anomaly in the original proposal).
“Employee shareholder” status
The idea that a company may issue shares to a selected employee in
exchange for the employee giving up certain employment law rights (but
giving no other consideration) was intended to be legislated for in the
Growth and Infrastructure Bill currently before Parliament. The
proposals have been widely criticised as not having been fully thought
through. Until now, although relief from CGT upon a disposal of such
shares with an initial value of up to £50,000 (at the time of
acquisition) had been announced, there was no provision for relief from
income tax and NICs upon acquisition of the shares by the employee.
It was announced in the Budget that an employee acquiring shares
under such an arrangement would be deemed to have given cash
consideration of £2,000 so that, in effect, there would be no charge to
income tax and NICs on the first £2,000 of share value received.
Further, the legislation was to be revised to prevent a charge to income
tax arising on a distribution if the company buys back shares which
have been acquired under such an arrangement and would otherwise be
subject to the CGT exemption. Changes were also announced to allow the
employer company CT relief for the issue of shares under such
arrangements.
Such reliefs would, at least, have made some sense of the original
proposal, although a number of technical details remained outstanding
such as, for example, as a matter of company law, how and by whom the
nominal value of newly-issued shares would be paid up.
That said, the relevant clause of the Growth and Infrastructure Bill
was voted down by the House of Lords within a few hours after the
Chancellor delivered his Budget address !
Exemption threshold for employment-related ‘taxable cheap loans’
and ‘notional loans’ arising upon the acquisition of employment-related
securities at an undervalue
The limit, of £5,000, on the amount of a ‘taxable cheap loan’ (and a
‘notional loan’ arising upon the acquisition of employment-related
securities at an undervalue) which is exempt from being a taxable, and
reportable, benefit, is to be raised to £10,000 with effect from 6 April
2014. This will make more attractive to smaller companies the idea of
inviting employees to subscribe for newly-issued shares (or following
implementation of company law changes to reflect proposals made in the
Nuttall Review, shares out of treasury) on the basis that the employee
agrees to pay full market value for the shares, but the consideration is
left outstanding unpaid or is to be satisfied on a deferred payment
basis out of salary deductions. It is important to note that deferred
payment for the purchase of shares from an employees’ trust will attract
an immediate and penal charge to income tax and NICs under the
‘disguised remuneration’ rules. It follows that such arrangements should
use only shares issued by the employer company or another member of the
same 51% group. If under such an arrangement the employee acquires
shares with a market value of less than £10,000, there should be no
annual charge to income tax on the benefit of either an actual loan by
the employer to fund the acquisition of such shares or, if the agreed
consideration is left outstanding unpaid, a notional loan. It is
important to note that a loan to an employee by any person other than
the employer company or another member of the same 51% group will also
give rise to an immediate penal charge to income tax and NICs under the
‘disguised remuneration’ rules. Care should be taken, as the exempt
threshold applies to the aggregate of outstanding balances on all such
loans to an employee.
Introduction of a general anti-abuse rule (GAAR)
The GAAR will apply to abusive tax arrangements entered into on or
after Royal Assent to the Finance Bill 2013. The GAAR as first published
has been revised following consultation. It will provide for the
counteraction of tax advantages that are abusive on a just and
reasonable basis, and may take a number of forms appropriate to the
particular tax in question. The taxes covered will be income tax, NICs,
corporation tax, CGT, inheritance tax, petroleum revenue tax, stamp duty
land tax and the proposed annual tax on ‘enveloped dwellings’.
Counteraction must first be notified by a designated HMRC officer and,
unless after consideration of taxpayer representations, that officer
decides that it ought not to apply, the arrangements must be referred to
an advisory panel, to be established by the Commissioners for HMRC, for
its opinion(s).
In addition, the government is to consult on new proposals to target
the promoters of tax avoidance schemes, the intention being to tackle
both the supply of and demand for such schemes. The proposals are to
include the ‘naming and shaming’ of promoters.
We are aware of organisations which have, for example, been promoting
schemes for the avoidance of ‘disguised remuneration’ charges in what,
on any reasonable view, is a most egregious and frequently technically
dubious, manner!
Restriction of corporation tax relief for employee share acquisitions
Draft legislation intended to restrict the availability of relief
from corporation tax (CT) in relation to employee share acquisitions has
been published for inclusion in the Finance Bill 2013. In particular,
CT relief is to be available in relation to employee share acquisitions
only to the extent that it is expressly provided for in the Corporation
Tax Act 2009 (as amended). This is intended to rule out relief under
general rules for certain accounting charges associated with such
employee share acquisitions – as certain well-known firms of accountants
have been encouraging companies to claim. Further, in the case of
employee share options, no relief is to be allowed unless the shares are
in fact acquired pursuant to the option. This will not disallow a CT
deduction for any amount of a cash cancellation payment which is taxed
as earnings of the employee but will, for example, mean that no relief
is available under the CTA 2009 rules if the option shares are not in
fact acquired by reason of the option lapsing or being cancelled or
released pursuant to any arrangements. These restrictions will take
effect in relation to any accounting period ending on or after 20 March
2013 but will not apply to a deduction for an accounting period
beginning before 20 March 2013 but ending on or after that date if the
acquisition of shares occurs before that date. Likewise, in the case of a
share option, the restriction will not disallow a deduction for an
accounting period beginning before that date but ending on or after that
date, if the option was granted before 20 March 2013 and the shares
cannot be acquired pursuant to the option because it lapsed or was
cancelled before that date.
The changes made will not disallow deductions for:
- expenses incurred in setting up or administering the scheme
- the cost of borrowing for the purposes of the scheme; or
- fees, commission, stamp duty, SDRT and similar incidental expenses of acquiring the shares.
Close company loans to participators (s455 CTA 2010)
It had been hoped that the government would take heed of the pitfalls
for close companies in making loans to employees and employees’ share
trusts, where a penal charge to tax arises under s455 if the loan is
made to an actual or deemed participator in the company. As yet, there
is no mention of the prospect of such relief. Indeed, changes taking
effect from 20 March 2013 will:
- charge close companies on loans and other payments they make via ‘intermediaries’ to their participators; and
- update the repayment rules with an anti-avoidance provision.
It is understood that the arrangements targeted involve the making of
loans and other payments to participators in a close company via
intermediaries such as LLPs, partnerships and trusts in which the close
company and at least one participator are members, partners or trustees.
As yet, it is unclear if the new provisions will catch a situation in
which, for example, a first-time loan is made by a close company to an
employees’ trust to fund the acquisition of shares (by subscription or
purchase). Until now, if the trust did not already hold shares or
options to acquire shares, such a loan has generally been considered
outside the scope of s455. There is to be an exception to the charge for
certain trustees, but until the legislation is published, the scope of
the changes remains unclear. Other arrangements targeted include the
repayment of a loan before the end of the 9-month period provided for in
s455, followed shortly by an advance of a new loan on similar terms.
PROPOSALS FOR FUTURE CHANGES
Further streamlining of HMRC approved CSOP, SAYE share option plans and SIPs
Provisions for removing the current system of advanced HMRC review and approval of CSOPs, SAYE share option plans and SIPs,
and its replacement by a system of self-certification, will be
introduced in the Finance Bill 2014. Meanwhile, much of the detail needs
to be worked through, including the preparation of more detailed and
certain HMRC guidance to enable companies and their advisers to have
greater certainty as to HMRC’s views and opinions on myriad technical
points relating to the legislation governing such schemes.
Simplification of unapproved share scheme
The Government will consult shortly on some (but not apparently all) of the recommendations by the OTS made in its review of unapproved share schemes
with a view to changes being legislated for in 2014. Hopefully, these
will include the principal recommendations for (a) changing the timing
and basis of charging income tax on the acquisition by employees of
unquoted and non-marketable shares and (b) the introduction of a ‘safe
harbour’ employees’ trust affording protection against the risk of
certain anti-avoidance provisions applying to transactions by and with
such a vehicle. For further details of the OTS recommendations click here.
Proposals for new reliefs relating to employee-owned companies
Following the Nuttall Review of Employee Ownership, the government
has already promoted a number of technical changes to company law which
will allow private and unquoted companies to buy back, and fund the
buy-back of, their own shares more easily and allow such shares to be
held in treasury. A question mark remains over whether such changes will
be of real practical value unless changes are also made to the tax
treatment of the proceeds of a sale back to the company so that the
vendor is treated as making a CGT disposal. Under current rules, if the
shares have been held for less than 5 years, part of the consideration
received is taxed as dividend income. Although there was no reference in
the Budget to such a change, reference was made to the government
intending to consult on the introduction of a new relief from CGT upon
the disposal of a controlling interest in a business into an employee
ownership structure. This should be seen alongside the development by
the Dept for BIS of model documentation for an ’employee-owned company’
(work undertaken by Pett Franklin
at the invitation of BIS). Tantalisingly, reference was also made to
the government also looking at “further incentives in this area,
including measures targeted at employees through indirect ownership
models”. We assume that the latter reference is to those companies, such
as John Lewis Partnership, of which a controlling shareholding is held
by an employees’ trust. Legislation will be introduced in the Finance
Bill 2014. There is stated to be an annual limit of £50 million on
government funding from 2014-15 to support employee ownership.
Abolition of stamp duties on shares quoted on AIM and other ‘growth markets’
The government proposes to consult on the abolition of stamp duty and
SDRT on transactions in shares in companies quoted on such markets.
This will reduce the burden of cost of administering employee share
schemes using existing shares in AIM-listed companies. Legislation will
be included in the Finance Bill 2014.
The misuse of partnerships
The government will consult on measures to :
- remove the presumption of self-employment for partners in LLPs so as
to tackle the disguising of employment relationships through LLPs; and - counter the manipulation of profit/loss allocations by partnerships
including a company, trust or other vehicle to secure tax advantages
(by, for example, reducing the rate of income tax paid on an
individual’s profit share and that of a corporate partner which he owns)
Legislation will be introduced in the Finance Bill 2014.
Contact us
To discuss any of these or other points arising from the 2013 Budget, please call or email your usual contact at Pett Franklin. We shall be pleased to talk further about how the changes will affect your own company or options.
Click here to view the Budget announcements 2012