Share Schemes – Annual Reporting Requirement

All employee share schemes need to be registered with HMRC in order to qualify for the tax advantages, and an annual return must be submitted to HMRC for each registered share scheme by 6 July following the tax year end.

This annual return must be submitted online through the ERS system, even if there is no activity in the scheme during the tax year. The penalties for not submitting the ERS annual return are similar to those for a late SA return: £100 for missing the deadline and £300 if the return is still outstanding after three months. 

In the case of Talkative Ltd v HMRC the Company registered two employee share schemes in January and March 2018, but failed to submit the annual returns for these schemes by 6 July 2018. The £100 penalty notices were issued on 17 July 2018. As neither annual return had been submitted by 6 October 2018, further £300 penalties were issued for both schemes.

At the FTT the company’s accountant claimed he wasn’t aware that annual returns were required. He also said that no return was filed because no notice to file was received. Neither of these arguments was well received by the FTT, which upheld the penalties.

Unlike for SA returns, a notice to file is not required to be issued to trigger an obligation to file an ERS return. The adviser should have been aware of the need to file the ERS returns for the share schemes which were only registered a few months earlier.

If you have registered employee share schemes, make sure the ERS returns are submitted on time. If the share scheme is no longer needed, deregister it by following the steps set out in the link below.

Talkative Ltd v HMRC TC07172

How to deregister a share scheme 

Entrepreneurs’ relief changes

FA 2019, Schedule 16 has introduced four changes to entrepreneurs’ relief (ER). The new conditions for an individual’s shareholding in their personal company to qualify for ER took effect from 28 October 2018. The three other changes to ER take effect for disposals made after 5 April 2019.

Qualification period

For disposals after 5 April 2019 all the qualifying conditions for ER must be in place for at least 24 months to the date of disposal, or to the date the business ceases to trade.

Look through incorporation

Where a business incorporates the qualification clock for the ER conditions is set back to zero on the issue of the shares, or on date the on which the company starts trading, whichever is the later. Where the shareholders receive an offer for the company shortly after incorporation, they will be denied ER as they won’t have built up full qualification period of share ownership.

For disposals after 5 April 2019 the qualification period for ER can look through the incorporation and include the period during which the unincorporated business was owned by the current shareholders. This look-through only applies if the shares were acquired wholly or partly in exchange for the transfer of the business as a going concern, and all the assets of the business, other than cash, must have been transferred to the company. These are the conditions under which incorporation relief applies.

If it is planned to incorporate the business, make sure that incorporation relief does apply as an insurance policy against a quick sale of the company.

Dilution of shareholding

Where equity investment is raised from outside investors, it can dilute the holdings of existing shareholders to below 5% of ordinary share capital, stripping away their rights to ER.

For new share issues made from 6 April 2019, the existing shareholders can preserve their ER by making two elections . The first election creates a deemed sale and reacquisition of their shares, crystallising the gain on which ER can be claimed, and the second election defers the CGT due until their shares are sold. These elections must be made by the first anniversary of 31 January following the tax year in which the additional shares are issued.

What tax is paid on winding up a company?

In 2016 a targeted anti-avoidance rule (TAAR) was introduced to prevent individuals from winding-up their close company, taking out the retained cash at capital gains tax rates and then continuing the same business in another vehicle.

In HMRC Spotlight 47 HMRC declare that schemes designed to step around this TAAR, which involve selling the company to a third party rather than winding it up, don’t work, so the TAAR would apply with the result that the withdrawn cash would be subject to tax at income tax rates.

HMRC’s view is misleading to say the least.

The TAAR only applies if a company is wound-up, it can not apply if the company is sold to a third party. If a business owner decides to sell their cash-rich company to a third party in order to release the funds, and within two years (the period defined in the TAAR), starts a similar trade or activity, the income tax charge imposed by the TAAR cannot apply. It is disingenuous for HMRC to imply that it could.

What’s more HMRC say that the general anti-abuse rule (GAAR) would apply in these circumstances if the TAAR doesn’t apply. This is also nonsense, as it was not the intention of Parliament for the TAAR to apply on the sale of a company to a third party.

Clearly if there is a non commercial arrangement with a third party undertaken with the primary aim of sidestepping the TAAR then it is to be expected that the transaction will come under scrutiny.  

HMRC is trying to frighten people away from using tax avoidance schemes, which is a good thing, but it needs to use this power in a responsible way. 

You can read Spotlight 47 here

CGT Rollover Relief

A little knowledge is a dangerous thing, especially in tax. The circumstances of a transaction need to fit precisely within the parameters of the relief, or tax will be payable as is demonstrated by the cases of CF Day v HMRC and KW Day v HMRC

Mr and Mrs Day sold a plot of land for £200,000, and reinvested the proceeds in a cottage which they planned to let out as holiday accommodation. Mr Day did not take professional advice, but instead did some online research, which he didn’t print off or bookmark, so he couldn’t refer back to it.

From his research, Day believed that CGT rollover relief would be due, as he was selling a business asset (land he farmed) and buying another business asset (a Furnished Holiday Lettings property). In fact business asset rollover relief (TCGA 1992, s 152) was not available to Mr Day as the cottage was subsequently let on 6-month tenancies and not as short term furnished holiday accommodation, so it didn’t qualify as a business asset.

Mrs Day was the joint owner of the land, but she didn’t farm the land, as the farming business was carried on by Mr Day alone as a sole-trader. Thus, for Mrs Day, neither the asset disposed of (farm land), nor the asset acquired (the cottage), qualified as business assets.

Having reached their erroneous conclusions about CGT rollover relief, the couple thought that no tax would be payable on the sale of the land, so they didn’t report the transaction on their tax returns. HMRC investigated and raised assessments for the CGT due, plus penalties for careless errors on the tax returns, and interest due on late paid tax.

Amazingly, HMRC accepted Mr Day’s claim for entrepreneurs’ relief on his share of the gain, which cut his CGT liability by half. Unfortunately, Mrs Day was not eligible to claim entrepreneurs’ relief as she was not farming the land.

‘Living’ in a property for PRR purposes

Private residence relief provides relief from capital gains tax arising on the disposal of a property which has been the taxpayer’s only or main residence.

In the recent tribunal decision of Hezi Yechiel TC06829, consideration was given as to whether, for the purposes of the legislation, Mr Yechiel occupied the property in question, 6 Beaufort Drive, as his only or main residence.

In determining whether the property was occupied as a main residence, the Tribunal considered the ordinary English meaning of ‘reside’ which is ‘to dwell permanently or for a considerable period of time, to have one’s usual or settled abode, to live in a particular place’.

In determining whether a property qualifies as a `residence’, the nature, quality, length and circumstance of the occupation are taken into account. Weight is also given to the taxpayer’s intention – in this case to have a ‘bolt hole’ to escape the stress of his divorce and for it to be a long-term home.

The tribunal considered what Mr Yechiel did in the house. It had a working kitchen and bedroom and (the Tribunal presumed) a bathroom. While Mr Yechiel slept there, he did not cook there or do his washing there; when he ate there, it was mainly take-way food. He brought only a bed and a side table for the property. During the period Mr Yechiel spent a significant amount of time at his parents’ house, eating there and doing his laundry there.

The Tribunal dismissed Mr Yechiel’s appeal. They found his occupation lacked sufficient quality of occupation, concluding ‘that to have a quality of residence, the occupation of the house should constitute not only sleeping, but also periods of ‘living’, being cooking, eating a meal sitting down, and generally spending some periods of leisure there.

It is important that clients appreciate the quality of occupation as well as the quantity when seeking to claim private residence relief.

Tribunal decision Hezi Yechiel TC06829

Pension Tax Trap

Individuals may have made pension contributions in the year but they may also have accessed some of their pension savings in the year or in an earlier tax year.

The MPAA does not apply if the benefits are taken as:

Where an Individual has flexibly accessed their pension benefits from a defined contribution pension scheme or SASS, their pension contributions should be restricted from that date onwards (the trigger date). This restriction is imposed by the money purchase annual allowance (MPAA), which was initially set at £10,000, but reduced to £4,000 on 6 April 2017.

The MPAA does not apply if the benefits are taken as:

  • a small pots lump sum;
  • a pension commencement lump sum and no income is taken; or
  • the income comes from a capped draw-down arrangement.

Where the MPAA does apply, any contributions paid into a money purchase (defined contribution) scheme after the trigger date are measured against the MPAA. Where those contributions exceed the MPAA, a tax charge will be due.

As 2017/18 is the first year for which the lower MPAA of £4000 applies, more Individuals are likely to be caught by this tax charge. HMRC has recently set up an online tool to help clarify whether the MPAA tax charge applies, but the accompanying explanation is not easy to follow.

So specialist advice may be required to clarify whether an individual has to pay a pensions tax charge in respect of contributions paid in 2017/18 or earlier.

Guidance for IFAs on the MPAA

HMRC guidance on the MPAA

Venture capital schemes

New compliance statements for EIS, SEIS and SITR

If you use, or are considering using, one of the venture capital schemes to raise money for your small company or social enterprise (schemes: SEIS, EIS or SITR) you need to be aware that the compliance statement, formerly known as form SEIS1 or EIS1, has changed.

The new compliance statement must be completed online and every question must be answered except those marked optional. However, the form can’t be saved while you complete it, and you can’t view all questions until you come to them. Once the compliance statement is completed it must be printed and posted, or emailed to HMRC.

We have included a link below to the 2014 PDF version of the EIS1 form to give you an idea of the questions which are asked, but this is only for reference. You should not use this PDF EIS1 form as HMRC has a new procedure for approving company applications under the VC schemes. Each successful application is given a unique reference number, which must be included on the compliance certificates the company gives to its investors.

Links to the new compliance statements are included within the HMRC guidance for the particular scheme.

PDF of 2014 version of EIS1

Guidance for EIS applications

Guidance for SEIS applications 

Guidance for SITR applications

Disguised Remuneration – Update

Loan Charge – Government Review

Groups who have been campaigning for the 2019 Loan Charge to be scrapped won a small victory last week. They secured an amendment to the Finance Bill which forces the government to review the loan charge legislation by 30 March 2019.

This does not remove or alter the loan charge, which comes into effect to on 5 April 2019, as the law was passed in 2017, with supplementary charges added in 2018. However, the requirement for a review, particularly of the apparently retrospective nature of the charge, has been welcomed by the professional bodies and contractor groups.

HMRC has estimated that around 50,000 people may have used loan schemes managed by offshore ‘umbrella’ companies. However, only around 25,500 individuals have come forward to agree a repayment schedule of the tax due.

The remaining taxpayers in that group will be subject to the loan charge from 5 April 2019 if they have not agreed a settlement with HMRC by that date. Those taxpayers do not have to pay all the tax due by 5 April 2019, but they must have an agreement in place to pay.

Where the taxpayer’s current annual income less than £50,000 and they are no longer using loan scheme or any tax avoidance arrangement, HMRC will offer a five-year instalment arrangement to pay the outstanding tax, on a ‘no questions asked’ basis. If the taxpayer needs longer than five years to pay, HMRC will consider the case on an individual basis.

Where HMRC accept an instalment arrangement, they will charge ‘forward interest’ – which is the normal interest rate plus 1%, with effect from 6 April 2019. The estimated forward interest, based on the progressively reducing balance after each instalment, will be included in the settlement amount.

It is imperative that the taxpayer makes the promised payments under the settlement in full and on time. If they default on the instalment arrangement made, the debt will be passed to HMRC’s Debt Management team, who are more rottweiler than pussycat – possibly not like this though!

HMRC originally set a deadline of 30 September 2018 for people to agree a settlement for loan charge liabilities, but they will still work with agents and taxpayers to come to an agreement even at this late stage.

Overview of the Loan Schemes and loan charge

Loan Charge FAQs

Entrepreneurs Relief – Personal Company definition

The government has now tabled an amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. See the proposed amendment here: 

The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the tests based on profits available for distribution and assets on a winding up.

The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons, and does not rely on the definitions in the Corporation Tax Act 2010.

Let properties – Interest Relief Restriction

The proportion of finance and interest charges which can be deducted from residential property income is gradually being reduced to nil as follows:

Tax Year in which interest is paidProportion of finance charges
deductible
2017/201875%
2018/201950%
2019/202025%
2020/21 and laterNil

The landlord will have a tax credit (20% x blocked interest) that reduces his income tax bill. This 20% rate applies irrespective the landlord’s actual marginal tax rate.

Some landlords will get a nasty shock when they see their tax bill for 2017/18 is much higher than what they paid on a similar level of profit for 2016/17.  Their tax bill for 2018/19 may be even higher.

There are four ways out of this bind, but they all require careful thought around the knock-on tax implications;

  • Sell some residential property and reduce the level of debt for the remaining property business.
  • Let the property in such a fashion so it qualifies as furnished holiday lets for tax purposes.
  • Sell all residential property and reinvest in commercial property.
  • Transfer the let properties to a company controlled by the landlord.

Some landlords have no debt in their property businesses, and they are not affected by the interest and finance restrictions.

However, individual landlords (of all types of property), should draw up their accounts for 2017/18 using the cash basis for landlords (different to the cash basis for trading businesses).

Where the total receipts of the property business exceed £150,000 for the tax year, the cash basis should not be used, and GAAP accounting can be used instead. Any individual landlord can elect to use GAAP accounting rather than the cash basis, by ticking a box on the 2017/18 tax return.

We can help you advise your clients on restructuring, but time is running out for residential property businesses which are supported by large mortgages.