A combination of technical glitches, and confusion over both the process and the form and content of the on-line templates which companies were required to complete, meant that the 2014-15 year-end reporting turned into a messy and, for many, a stressful exercise. In the event, the deadline for submitting online returns was extended to 4th August 2015, but even then many companies are understood to have failed to have complied and will have incurred a minimum fixed £100 penalty.
The HMRC server ‘went down’ shortly before the 5th July deadline for filing returns, and was restored from 20 July through to the revised deadline of 4th August. It has since become apparent that the fault affected returns uploaded before 20th July and the companies concerned have now been asked to re-submit their returns (without penalty!).
Whilst the seeming inability of HMRC servers to cope with the demand for access to the online PAYE portal clearly did not help, smaller companies struggled to understand and comply with the new requirements. The need formally to register existing EMI share option plans, a step necessary then to be able then to submit an online annual return, regardless of the fact that there may have been no chargeable event in the 2014/15 tax year, caught some unawares and/or bemused by the fact that initial registration of a plan or scheme could be done only by whoever has unfettered access to the company’s PAYE portal. In many cases, the individual responsible for PAYE matters had no knowledge or experience of employee share plans, and those who did had no knowledge, competency, or access to the PAYE portal!
There was a lack of clarity from HMRC as to which companies needed to submit a report: those in relation to which there was no ‘reportable event’ did not need to do so and therefore did not need to register an existing ‘non-qualifying plan’ by the deadline (unless they had EMI share options outstanding, in which case an annual report was required to be submitted, regardless of whether there had been a ‘chargeable event’ in that year).
As regards the form and content of the templates, an obvious annoyance was the inconsistency in the use of terminology, and in references to columns in the templates themselves and in the guidance notes, columns being labelled both numerically and with letters. The legislation refers to ‘rights to acquire securities’, but the templates refer to ‘options’. Some questions were otiose and/or gave rise to unnecessary additional effort in completing the forms: why give details of the ‘grantor’ of an option (the shares may be sourced from a third party)?; why ask for the unrestricted market value (UMV) of shares put under option grants?; why ask for the actual market value (AMV) of shares acquired if a s431 election has been made – the AMV is not relevant to the chargeable amount and, even if ascertainable, is unlikely to have been determined or agreed with HMRC SAV. The number of shares over which options are granted, required to be entered, is not always ascertainable at the time of grant, or until the options are exercised. It was unclear whether cash dividends on option/award shares needed to be shown (apparently not!). In the case of share options, it was unclear if the ‘deductible amount’ (relevant in calculating the chargeable amount on exercise) should include the relief given for employers’ NICs agreed or elected to be borne by the optionholder. Entries required in relation to the lapse or cancellation of a securities option were unclear. Some questions required yes/no answers when they are not necessarily capable of being answered in that manner – e.g. “…are the shares part of the largest class in the company?”
Generally, the need on the part of HMRC to collect the information gathered in a manner which is then capable of being automatically ‘processed’, i.e.. in which questions are only capable of fixed responses (‘yes/no’; a stated number, etc.) rather than, as on the old Form 42, with the possibility of providing a narrative response, meant that companies have had to ‘shoehorn in’ data from which it is unclear in some cases how HMRC can then determine, on a ‘risk’ basis, which cases justify enquiry. The statistics requested and presented may well hide the story behind them and fail to highlight situations (e.g. a complex corporate transaction or reorganisation) in which there might be a legitimate difference of opinion as to the tax effect of the transactions which have occurred.
HMRC has expressed concern at the number of instances in which a scheme has been registered, but no return has been made. This may, in many cases, be as a result of the company having made duplicate registrations, or wrongly registered schemes. Schemes which have been registered may be viewed in the “View Schemes and Arrangements” section of the HMRC online ERS service. Schemes registered in error should be closed and, in such cases, HMRC has recommended that the date shown in “Enter date of final event” be 6 April 2014.
It is to be hoped that, in designing next year’s templates, greater weight is given to the views of HMRC officers and advisers with detailed knowledge of the tax rules and commercial realities, over those of the ‘consultants’ engaged to design the templates and formulate the processes behind them.
HMRC have indicated their willingness to take a relatively ‘light touch’ approach to enforcement of the penalty regime as it applies to the provision of information in the year-end returns where it is clear that companies have made reasonable efforts to complete and submit the online returns in a timely fashion.
Upper Tier Tribunal holds that shares, not ‘money’, were acquired in a tax avoidance scheme
The Upper Tier Tribunal has upheld an appeal by the taxpayers in Tower Radio Ltd and Total Property Support Services Ltd v HMRC [2015] UKUT 0060 (TCC). The decision of the FTT in this case was perhaps the first example of a situation in which HMRC succeeded in arguing that an artificial tax avoidance scheme based on the award of (restricted) forfeitable shares in a specially-formed company (SPV) should be wholly ignored on the basis of “the Ramsay principle” (see Summer 2013 Bulletin). HMRC had argued that the awards of shares were merely ‘wrappers’ for the value of bonuses paid by way of the liquidation of the SPV. The UTT held that the central issue was whether, construing Part 7, ITEPA 2003 purposively and taking a realistic view of the facts, the individual employees each acquired “securities” within the meaning of s420 ITEPA. Did they acquire, not shares, but “money” (within s420(5)(b))? The FTT had failed to direct itself to this primary relevant question. Rather, it had expressed the view that “it did not need to consider the detail of s420(5)(b) or the other minutiae of Part 7”. The appeals by the taxpayers were allowed on the basis that (a) in company law terms, shares were acquired; (b)”shares in any body corporate” (per s420) is a term less susceptible to a non-technical reading than “payment” (with which other cases cited were concerned); (c) the fact that the scheme had no commercial purpose other than obtaining a tax advantage does not preclude the application of Part 7; (d) “securities” is defined in s 420 in a broad way; (e) the shares were held for more than a negligible period and could not be immediately redeemed; (f) the broad “Ramsay approach” was rejected by the Court of Appeal in the UBS/Deutsche Bank cases; and, (g) at the time, the drafting of ITEPA was flawed. This decision is clearly a disappointment for HMRC who are still struggling to secure a clear authority to support challenges to artificial avoidance schemes structured on the basis of awarding restricted shares.
FTT determines the ‘market value’ of unquoted shares
A decision of the First Tier Tax Tribunal in (Foulser and anor v HMRC [2015] UKFTT 220 (TC)), concerning the determination of the ‘market value’ of unquoted shares in a private company, raises potentially interesting points about appropriate multiples, control premiums and discounts for minority holdings. The case related to gifts of unquoted shares in 1997, being gifts by each of a husband and wife into companies held within insurance bonds, of respectively a 51% holding and a 9% holding, each being deemed, for the purposes of CGT, to be disposals at ‘market value’.
The taxpayer and HMRC each had independent share valuations prepared. These produced substantially different values. As the parties were unable to reach an agreement, the case was referred to the Tribunal which proceeded to give its own view as to the market value of the shares. The Tribunal’s decision was much closer to the value and approach preferred by HMRC than that of the taxpayers.
As the facts differ in each situation, it may be inappropriate to seek to draw from this decision of the Tribunal any principles applicable to other situations. It was a very long period of time between the chargeable event and the Tribunal determining the ‘market value’ of the shares and it might have been hard for the Tribunal’s view not to be coloured to some extent, by the benefit of hindsight. The decision was only at the First Tier and it will be interesting to see if HMRC SAV seek to adopt the approach taken by the Tribunal more widely for other share valuations. HMRC have been asked for their views on the decision at the next Fiscal Forum for Share Valuers on 8 October 2015.
HMRC publish report on the use of ‘growth shares’
HMRC have published a Report commissioned from independent researchers into the uses of so-called ‘growth shares’, including ‘ratchets’, ‘flowering shares’, JSOPs and debt-based gearing (“HMRC Research Report 372” – September 2015). The report’s findings, gleaned from interviews with advisers, suggest that the appeal of growth shares for employees lies in the opportunity to see their income increase in relation to the effort, skill and time they put into the business, plus favourable tax treatment. The drawback is that tax and National Insurance Contributions (NICs) are paid up front. The benefits for employers, identified in this research, are: they help company owners to recruit, retain and incentivise employees and encourage attitudes and behaviours that will bring about high levels of growth; until and unless such growth is achieved, equity in the business remains intact; and there can be a tax advantage for employers in some cases as there are no NIC costs to the employer. The key drawback, given by respondents, was that there is usually no deduction for Corporation Tax purposes. The preferred alternative is EMI share options for those companies which qualify. However, those under the control of another company (such as many private-equity backed companies) do not. The Report provides a useful summary and comparison of the different types of growth share arrangement most commonly adopted by companies in the UK. It can be found at https://www.gov.uk/government/publications/employment-related-securities.