There have been a number of consultation documents issued recently.
Government discussion paper on the idea of a ‘safe harbour’ trust
The government has issued a discussion paper on the idea put forward by the OTS that there should be provision made for a ‘safe harbour trust’ (referred to in the document as a “new employee shareholding vehicle”, the term “employee trusts” presumably carrying connotations of tax avoidance) aimed at those companies wishing to make arrangements purely for the purpose of genuine equity based rewards and remuneration for employees as opposed to tax planning activity.
The idea is that such a vehicle would provide shelter from:
- the risk of inheritance tax charges under certain circumstances unless certain rules are followed
- the risk of double taxation if the trust is UK resident and not itself outside the scope of UK capital gains tax;
- the ‘loans to participators’ rules applicable to ‘close companies’
- the ‘transactions in securities’ rules;
- charges to stamp duty or SDRT on the purchase of shares by the trustees, or by employees when they purchase shares from the trustees;
- the ‘disguised remuneration’ rules
As is the case of a company owned by a new-style “employee ownership trust”, the fact that a company might be controlled by such a ‘safe harbour’ corporate trustee should not mean that it is prevented from establishing a SIP, SAYE share option scheme, or CSOP or using tax-favoured EMI share options.
The document suggests that the government is broadly sympathetic to the idea provided suitable safeguards against avoidance are in place. In this regard, the OTS has proposed that, for example :
- the vehicle should be UK resident;
- it should normally be able to acquire only ‘own company’ shares which are fully-paid up and non-redeemable;
- beneficiaries should be limited to employees and former employees (rather than the wider category used in the Companies Act 2006, which includes spouses, civil partners and minor children or step-children ), the latter only within a restricted period;
- property held within the vehicle must be applied only for the specific purpose of encouraging or facilitating employee shareholding ;
- any breach of these conditions would mean the exemptions would no longer apply, possibly retrospectively, unless the breach is proven to be trivial or accidental.
The document also puts forward the ideas of restricting the trustees’ powers to borrow, set up sub-trusts, and waive dividend and voting rights and the possibility of restricting the period in which shares may be held in the vehicle.
It is perhaps regrettable that the document makes no reference to the related idea that the existing ‘dividend tax’ charge, on shares sold back to the issuing company within 5-years of acquisition, should be removed in the case of employment-related securities held by employees who have left the company (as has been done in relation to ‘employee shareholder shares’ – see the Winter 2013 Bulletin). This might in practice, in the case of very small companies, remove altogether the need for such a shareholding vehicle and the associated costs.
Responses must be submitted by email by 10 October 2014.
HMRC consultation on the idea of taxing the acquisition of shares when they become ‘marketable’
One of the principal ideas for change put forward by the OTS in its final report published on 16 January 2013, was that of moving the point in time at which an employee is charged to income tax (and NICs) on the acquisition of employment-related securities (“ERS”) to the first time at which their value is capable of being realised. Tax and NICs would then be charged by reference to their unrestricted market value or, if they are sold within 14 days, the actual amount realised on sale. This is different from the existing concept of whether, for PAYE and NIC purposes, an ERS is a “readily convertible asset”.
The idea, intended to bring the taxation of ERS more closely into line with the taxation of other employment-related benefits and avoid employees suffering ‘dry’ tax charges on the acquisition of ERS which are not immediately convertible into money, is the subject of a consultation by HMRC, open until 10 October 2014 seeking views and evidence of the potential impact of what, if implemented, would involve a significant change to the taxation of ERS.
The consultation document published on 17 July 2014 raises concerns about the possibility of avoidance and, unhelpfully perhaps, appears to suggest that the ‘marketable security’ regime should, from the time of acquisition, overlay the existing RCA rules. The idea, as originally proposed to the OTS, was that:
(a) ERS should be chargeable to income tax and NICs (under PAYE) only when they are first capable of being immediately sold for a consideration equal to their actual (restricted) market value (from which time they would be subject to the existing rules relating to restricted ERS); but that
(b) an employee should be capable of electing for ‘unmarketable’ ERS to be treated as ‘marketable’ and ‘unrestricted’ (and therefore immediately chargeable to tax and NICs by reference to their unrestricted market value) at any time from their acquisition.
Crucially, the OTS recommendation, and the Consultation Document, refer instead to the idea that the charge to tax on becoming ‘marketable securities’ should be by reference to their ‘unrestricted’ market value and that an election to advance the tax point should be available only at the time of acquisition of the shares.
Unless such an election has been made, until the ERS become ‘marketable’ (and therefore taxed) an employee would be charged to income tax and NICs under PAYE on any dividends or other benefits, received in connection with the shares, as ‘earnings’.
The document fails to acknowledge the fact that, whilst some employees benefit from substantial growth in value of ERS, there are many who see little or no benefit or growth in value of the shares, often for reasons wholly outside of their control and who, under the existing regime, suffer tax on ERS from which they do not ultimately benefit. The fact that the Exchequer currently benefits from tax on the acquisition of shares which may have a taxable value yet are de facto incapable of immediate sale for cash and the taxed value of which may never be realised appears to have been ignored in estimating the Exchequer impact of the proposal which is stated as being expected to result in a decrease of receipts “to the magnitude of £100ms over the first five years”! The proposal is as much to do with ‘fairness’ as it is with ‘simplification’. Responses should be sent in by email by 10th October 2014.
Call for evidence on the use of employment-related securities in remuneration packages
In 2010, the government announced it proposed to issue a consultation on ‘geared growth’ plans (see Spring 2010 Bulletin). In the event, this was not proceeded with. It seems however that the issue has not been entirely forgotten. In an effort to understand more about current remuneration practices, the Government has issued, on 18th June 2014 a Call for Evidence (in response to recommendations for changes to the tax treatment of certain employment benefits made by the Office for Tax Simplification (OTS) on what, why, and how different forms of remuneration are provided and what the future of remuneration looks like.
Question 8 seeks information on the perceived advantages, effectiveness of such packages and the extent to which they are tax-driven. In particular, information is sought on the extent to which employees may benefit from growth in excess of that available to non-employee investors, what award characteristics enable this, and why employers choose to award such ‘growth shares’ rather than shares of the type held by non-employees.
Responses must be submitted by email by 9 September 2014.
HMRC consultation on the taxation of internationally-mobile employees
HMRC has published a consultation on proposed changes to the NICs treatment of employee-related securities awards made to internationally mobile employees intended to ensure that that any employment-related securities income attributable to days when the employee was not in the UK social security system will be disregarded and not subject to a liability to NICs. It is accompanied by draft legislation. Responses should be sent in by email by 16th October 2014.
Consultation on listed share valuation
HMRC have announced a consultation on a proposed simplification of the rules by which valuations of listed shares is achieved.