Author: Stephen Burwood

Stephen is recognised in the Tax and Accountancy world as an expert in Transactional Tax.
Stephen offers advice on Corporate reorganisations, sales and disposals ,EIS / SEIS, Share Schemes and Property Portfolios including SDLT.
He is commercially aware and always offers advice in a commercial and pragmantic way.

Categories
Property

Trading and property allowances

These £1,000 annual allowances were introduced by F(no 2)A 2017, and backdated to apply from 6 April 2017. However, the detailed guidance on exactly how each allowance works has only just been published in HMRC’s Business Income Manual (BIM) and the Property Income Manual (PIM).

The trading allowance and miscellaneous income allowance (TMIA), and the Property Income Allowance (PIA) operate in a similar fashion, but on different categories of income received by individuals. The PIA can’t apply to rental income which qualifies for rent a room relief. Also neither allowance can be set against income from a connected party, such as a close company in which the taxpayer is a participator or an associate of a participator, or a partnership in which he is a partner or connected with a partner.

Where the qualifying income, before deduction of expenses, is no more than £1000 per year, he will automatically be given full relief, and the trading or property income is treated as nil. The taxpayer also is relieved from having to report that income to HMRC.

If the taxpayer doesn’t want the allowance to be set against his qualifying income, he must make an election for it not to apply. This may be the desired outcome where the taxpayer has made a loss, after deduction of expenses, which he wishes to set against his other income (for a trade), or carry the loss forward or back.

If the taxpayer’s gross qualifying income is more than £1,000 he can opt in to be given partial relief and not deduct any expenses, or not elect for the allowance not to apply at all and then deduct all allowable expenses as normal.

These elections are made as part of the taxpayer’s SA return, so you need to watch out for the opting out and opting in elections when completing the 2017/18 returns.

Trading income allowance guidance

Property income allowance guidance

Categories
Share scheme arrangements

EMI Schemes under threat

The enterprise management incentive (EMI) scheme is the most popular share option scheme, as it is designed for companies that have gross assets of no more than £30 million.

On 4 April 2018 HMRC announced that the EU State Aid approval for the EMI scheme was due to run out on 6 April, as it hadn’t been renewed in time. This means that any EMI share options issued from 7 April 2018 onwards won’t qualify for tax relief.

It is not clear whether the tax relief for any existing EMI share options continues to apply where those options have not been exercised. HMRC has said that it will continue to apply its current guidance and practice regarding existing EMI options, so it will consider those options to be approved share options for now.

The UK Government is trying to negotiate the reinstatement of State Aid approval for the EMI scheme, but no one knows whether this approval will be backdated to 7 April 2018. Tax relief for the EMI scheme may only apply from the date the approval is reinstated or from a date to be specified in the future. It is possible that the State Aid approval may not be renewed for the EMI scheme before the UK leaves the EU on 29 March 2019.

The implications for employers are not pretty. Any share options granted which do not qualify for tax relief are a benefit in kind subject to PAYE and NIC. The company would normally be able to claim a deduction for corporation tax purposes of the cost of granting the options, but this deduction doesn’t apply if the options are part of an unapproved share scheme.

Shares acquired through an EMI scheme also carry an entitlement to entrepreneurs’ relief on disposal, where the qualifying option was granted at least one year before the disposal of the shares. The employee is not required to hold 5% or more of the ordinary share capital for such EMI-derived shares.

We can help with any questions you may have concerning the EMI scheme, the implications of issuing unapproved options and other opportunities such as the CSOP scheme.

Categories
Transactions

Winding up a company – The Targeted Anti-Avoidance Rule

HMRC introduced a Targeted Anti-Avoidance Rule in Finance Act 2016 to counter the practice of winding up a company for tax avoidance purposes, specifically attempting to convert dividends into a capital payment.

HMRC have now published guidance (see here ) to indicate the circumstances in which the anti-avoidance rule would be invoked leading to the extracted profits being subject to income tax rather than the hope for capital gains tax.

HMRC give an example of such a practice

Mr J is a dance instructor who runs his business through his own company. At the end of each year, instead of paying himself a dividend (which would be liable to Income Tax), Mr J winds up his company and receives the profits as a distribution in a winding up, liable to Capital Gains Tax. He then immediately creates a new company and continues his dance instruction business.

This practice is often known as ‘phoenixism’ (because the new company rises from the ashes of the old).

The example given is straight forward but it comes as no surprise that the guidance covers more sophisticated methods of attempting to extract profits from the company at capital gains tax rates where the owners intend to carry on the business albeit in a new guise.

HMRC say in their guidance

Ultimately, the legislation is asking whether the individual that has received the distribution is continuing what amounts to the same business, having extracted the accumulated profits in a capital form. This is inevitably a question of judgment to be made on the basis of facts in individual cases.  The following issues are likely to be relevant:

  • Is there a tax advantage, and if so, is its size consistent with a decision to wind-up a company to obtain it?
  • To what extent does the trade or activity carried on after the winding-up resemble the trade or activity carried on by the wound-up company?
  • What is the involvement in that trade or activity by the individual who received the distribution? To what extent have their working practices changed?
  • Are there any special circumstances? For example, is the individual merely supplying short-term consultancy to the new owners of the trade?
  • How much influence did the person that received the tax advantage have over the arrangements? Is it a reasonable inference that arrangements were entered into to secure this advantage?
  • Is there a pattern, for instance have previous companies with similar activities been wound-up?
  • What other factors might be present to lead to a decision to wind-up? Are these commercial and independent of tax benefits?
  • Are there any events apparently linked with the winding-up that might reasonably be taken into account? For example, was the only trade sold to a third party, leaving just the proceeds of the sale?

Clearly a business can come to the end of its useful life, for example, as a result of:

1. The shareholders reaching retirement
2. Loss of business

The shareholders may then consider winding the company up and distributing any assets, including cash, to themselves.  Generally that would result in a capital gains tax liability arising where the value of the assets received exceeds the base cost of the shares.  The rate of tax payable, after taking into account the annual exemption,  will depend on whether or not entrepreneurs’ relief is available.

In those circumstances where there is no continuing business activity it is unlikely that HMRC would invoke the anti-avoidance rule.

As always when contemplating change in business circumstances professional advice should be sought.

Categories
Share scheme arrangements

EMI and CSOP schemes gain in popularity

HMRC have published a report setting out the statistics in respect of the 4 shares schemes that have advantages to employers and employees.  In their summary they say:

Employee share schemes are used by companies to grant options to buy shares or award shares directly to their employees. HMRC offers four share schemes that have tax-advantages to both employers and their employees. Company Share Option Plan (CSOP) and Enterprise Management Incentives (EMI) are for certain employees chosen at the discretion of the employer. Save As You Earn (SAYE) and Share Incentive Plan (SIP) are for all employees.

The value of EMI and CSOP share options granted increased by 23% and 20% respectively between 2013-14 and 2015-16. SIP share values have reduced by 6%. The value of tax relievable gains on EMI and CSOP share options exercised have increased by 23%, this is mainly driven by the large increase in EMI gains in 2015-16.

Click here To see the full report

Categories
Share scheme arrangements

Share Scheme – Reports to HMRC

Employee share schemes have their own reporting regime called ERS online.

The first year for which annual reports had to be submitted using ERS online was 2014/15.

To file the ERS report the employer, or tax agent, must submit a spreadsheet in a particular format. Templates are provided for the four tax advantaged share schemes (CSOP, SIP, EMI and SAYE), other arrangements or schemes under which employees have acquired shares must be reported using the “other employment related securities schemes” template.

The HMRC templates are in open document (ODS) format, so the employer has to download the right software to use them. HMRC say that the CVS format is acceptable if employer wishes to construct their own spreadsheets, but CVS spreadsheets often fail to submit. There have been problems with these spreadsheet templates since 2015, and this year the whole ERS online system has been down for some weeks.

As the statutory deadline for submitting the annual share scheme reports for 2016/17 is 6 July 2017, some employers are starting to panic. Late on 23 June HMRC released the June 2017 issue of the Employment-related Securities Bulletin, which revealed the ERS reporting deadline has been extended by concession to 24 August 2017. Penalties will apply if the share scheme reports are not received by this extended deadline.

HMRC emphasis that an annual report is due for every share scheme registered with ERS, even if there are no events in the year, in which case a nil report is required. Where the share scheme was closed in the year an annual report must still be submitted for that tax year.