May 2018 Tax News - Albert Goodman

TAX NEWSLETTER

CHARTERED ACCOUNTANTS, TAX CONSULTANTS & FINANCIAL PLANNERS

CHARTERED ACCOUNTANTS, TAX CONSULTANTS & FINANCIAL PLANNERS

Contents Upcoming tax deadlines In the news The benefits of employees Party time! Diesel U-turn Employee sacrifices Auto enrolment – employer duties Employer-supported childcare Future proofing your business Ending an employee relationship Profiling AG tax staff Sharing success Options – is EMI always best? Tax-free sale GDPR Welsh Land Transaction Tax MTD & VAT

TAX NEWSLETTER MAY 2018

www.albertgoodman.co.uk

WELCOME

Welcome to this month’s E News. There is no doubt that attracting and retaining a capable and engaged workforce is key to ensuring you achieve your business objectives. This month the team have covered some of the benefits you can provide employees, paying particular attention to the most tax efficient. We are also grateful to Dawn Gallie of Battens solicitors, for her legal insight into the importance of tracking employee development. It has been nearly six years since the government published the Nuttall review, in which Graeme Nuttall outlined the benefits and his key recommendations to government in promoting employee ownership structures. There is no doubt that employee ownership can also be a useful tool to securing key management, ensuring the wider employee base has a vested interest or indeed to facilitate your succession plan. The team have covered the most popular HMRC approved and unapproved share schemes, outlining key factors to consider before introducing such a scheme. As usual, if you would like to discuss any of the articles in more detail, please do get in touch.

Upcoming tax deadlines May 7th Electronic filing and payment of VAT liability for quarter ended 31 March 2018. 14th Large companies under the quarterly instalment payments regime may need to make a further corporation tax payment. th 19 PAYE, NIC, CIS and student loan liabilities for month ended 5 May 2018 are due (22nd if paying electronically). File CIS returns online for the month to 5 May 2018. 31st Employees must have received their form P60 for 2017/18. Payment deadline for inheritance tax due on November 2017 transfers in or out of a trust.

June 1st Companies (outside of QIPs) with August year ends are liable to pay their 2017 corporation tax liability. Deadline for employers to give employees a statement detailing the benefits that have had tax collected through the payroll during 2017/18. 14th Large companies under the quarterly instalment payments regime may need to make a further corporation tax payment. 19th PAYE, NIC, CIS and student loan liabilities for month ended 5 June 2018 are due (22nd if paying electronically). File CIS returns online for the month to 5 June 2018. 30th Payment deadline for inheritance tax due on December 2017 transfers in or out of a trust.

July 5th Final day to agree 2017/18 PSA arrangements with HMRC. 6th Submission deadline for P11Ds to HMRC (employees should have also received a copy by this date). Share scheme annual return reporting deadline.

Tracey Watts Tax Partner

In the news • On the 4

April the government announced that whilst renewed state aid approval of the UK’s EMI share option scheme had been sought from the EU Commission, no response had become forthcoming and the approval lapsed on 6th April 2018. The Government advised that companies may wish to delay the granting of new EMI options until state aid approval has been granted, as the tax benefits cannot be guaranteed. th

• With the above in mind, concern builds that other state aid

approved tax reliefs could be subject to delays, including the recent changes to the EIS legislation in respect of knowledgeintensive companies.

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Party time! Staff parties and events are a great way to reward your workforce following a successful year. There are however, a few pitfalls to bear in mind in order to avoid any unexpected tax or national insurance liabilities. To be completely exempt from tax and national insurance, the function must meet all of the following conditions: The cost must not exceed £150 per head; It must be open to all employees; and It should relate to an annual event, e.g. a Christmas party or summer BBQ (one-off events, such as a party to celebrate an anniversary, are not exempt).

• • •

Cost per head To calculate the average cost per head of an event, the total cost is divided by the total number of attendees (employees and non-employees). If your employees are able to bring guests and the cost per head exceeds £150, the benefit assessed on the employee will include the cost for themselves and any members of their family/ household who attend. When determining the cost of the event, you will need to take into account not only the cost of the venue but also any VAT paid, accommodation costs and the cost of travel arrangements to and from the event.

The benefits of employees

Multiple events or locations

Since we are currently in the midst of the P11D reporting season, it is the perfect time of year to review the benefits you provide your employees. Benefits can be a great way to incentivise and boost employee morale, particularly if the benefit does not attract an associated tax charge! Examples of tax-free benefits that can be provided include:

• • • • • •

Work-related training; Car parking at or near the workplace; Mobile Phones; Meals provided in a staff canteen; Annual events costing up to £150 per person (inc VAT); see Hannah Terry’s article “Party time!”; Non-cash gifts costing no more than £50.

This list is not exhaustive and as usual there may be further conditions to be met in order to qualify for the tax exemption. Alternatively, you may wish to provide taxable benefits, whilst covering the associated tax liability on behalf of your employees. In order to do this, a PAYE settlement agreement can be agreed with HMRC. Knowing your staff members and how to motivate them will be critical to implementing an effective benefits plan. Should you wish to discuss how to structure your employee benefit offering in more detail, please do get in touch. Holly Gough


If you operate your business over several locations or have various departments, events can be held separately and will be exempt so long as all of your employees are invited to attend at least one of them. The £150 limit is not an allowance to be set against the total cost; therefore, if the cost of a single event exceeds £150, the full amount will be chargeable. In contrast, if the combined cost of multiple events does not exceed £150 per head, they will all be exempt. If the aggregate cost of several annual events does exceed £150, you can choose the most beneficial event(s) to exempt. For example: Your business holds two events in the year for your employees; the first costing £1,200 (including VAT) for 12 employees and the second £800 for 10 employees. The total average cost per head is £180 so both events cannot be exempt. Either event could qualify for exemption on its own; however, it is most beneficial to exempt the first as the cost per head is greater. Therefore, employees who attend: Both events, will only be chargeable on the benefit for the second event (£80) Only the first event, will have no chargeable benefit Only the second event, will have a chargeable benefit of £80 For any events which do not meet the above criteria but the cost is less than £50 per head, the events could still be exempt from tax and national insurance through the trivial benefit exemption. If you want to hold events which are not covered by the exemptions outlined, but do not want your employees to suffer any tax, a PAYE settlement agreement could be the preferred choice, settling the tax on your employees’ behalf. Hannah Terry For more information, please get in contact with the tax team.

• • •

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As you can see from the table, the real shift comes from 6 April 2020 when the BIK percentage for an EV drops to just 2%! Using the example of the Nissan Leaf, this means that the tax cost to an employee of having such a company car is just £121 for a basic rate taxpayer, rising to £272 for an additional rate taxpayer. Comparing this to the tax cost of between £2,291 (basic rate) and £5,156 (additional rate) for the BMW 320d. If you run your own company, providing yourself with a Nissan Leaf (other electric cars are available) could be as close to “free motoring” as you can get!

The benefits to your business Purchasing an EV or PHEV (rather than a diesel) is not just advantageous for the employee using the car, but also for the business owner too. Irrespective of whether you are a sole trader, in partnership or run a limited company, all EVs and the majority of PHEVs have CO2 emissions of less than 50g/ km, which means that your business can claim 100% tax relief in the year of purchase, reducing taxable profits immediately following the cash outlay.

Diesel U-turn

Diesels and other combustion engine cars are only likely to attract relief of 18% (CO2 between 75g/km and 130g/km) or 8% for cars with CO2 emissions above 130g/km.

You may have noticed that the government has changed its mind towards diesel recently. This comes after years of diesel cars being actively promoted due to their low CO2 emissions, overlooking the fact that diesel cars emit particulates and other emissions such as NOx, in greater quantities than any petrol car would. Historically, if you were provided with a company car, it is likely that you would have selected a diesel version for that very reason (lower CO2 emissions), amongst others such as superior “real world” fuel economy. What is the government promoting now, I hear you ask?! Well, to meet society’s demand for clean air in cities, they are now very keen to promote vehicles which have the potential for zero emissions, such as electric vehicles (EV) and Plug in Hybrid Electric Vehicles (PHEV). To help encourage the take up of EVs and PHEVs, the government have introduced some very low benefit-in-kind (BIK) rates for these types of vehicles, which are beneficial to employees with company cars. Here is a comparison of the costs of an EV, PHEV and diesel company car with similar P11D values (list prices);

Tax relief for charging the vehicle If the tax reliefs mentioned above are not enough to persuade you into an EV or PHEV, then perhaps the following advantages (where the car is provided to an employee as a company car) will help you;

• Company cars charged at work can do so without a taxable benefit arising on the employee. • Employers can pay for a home charging point to be

installed at the employee’s home, without a taxable benefit arising on the employee. Employers can pay for a charge card of £100 per year to allow employees unlimited access to local authority vehicle charging points, without a taxable benefit arising.

•

If you would like to discuss any of the above prior to selecting your next company car, please do get in touch.

Alex Covey

Nissan Leaf Hatchback 2.Zero ProPilot & Cold Pack auto 5d

Mitsubishi Outlander PHEV 3h 2.0 4WD auto 5d

BMW 3-series Saloon 320d M Sport 4d

Fuel type

Electric

Plug in Hybrid EV (petrol)

Diesel

P11D Value

£30,284

£34,750

£33,705

CO2 emissions

0g/km

41g/km

127g/km

Tax year

18/19

19/20

20/21

18/19

19/20

20/21

18/19

19/20

20/21

BIK %

13%

16%

2%

13%

16%

12%

30%

33%

34%

BIK (£)

3,936

4,845

605

4,517

5,560

4,170

10,111

11,122

11,459

Tax 20% (£)

787

969

121

903

1,112

834

2,022

2,224

2,291

Tax 40% (£)

1,574

1,938

242

1,806

2,224

1,668

4,044

4,448

4,583

Tax 45% (£)

1,771

2,180

272

2,032

2,502

1,876

4,549

5,004

5,156

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Employee sacrifices An ‘Optional Remuneration Arrangement’ (OpRA), more commonly known as ‘salary sacrifice’ is an arrangement between an employee and their employer to be provided with a benefit in kind, rather than the salary equivalent. A benefit is provided under such an arrangement in either of the following circumstances:

•

An employee gives up the right, or the future right, to receive earnings in return for a benefit. This arrangement is more commonly known as ‘salary sacrifice’; An employee agrees to be provided with a benefit, rather than an amount of earnings. This type of arrangement normally arises when an employer is in discussion with a potential employee in respect of their remuneration package.

•

The chancellor announced in the Autumn Statement 2016, that he intended to crack down on Optional Remuneration Arrangements, as he felt that the current system for tax relief was being abused.

Tax Consequences Before April 2017, optional remuneration arrangements could be entered into and employers and employees enjoyed the benefit of tax and national insurance savings made by replacing salary with benefits in kind. Employers would save national insurance on the salary sacrificed and the employee would obtain a tax and national insurance saving. Under the new rules, if a benefit is provided under an optional remuneration agreement, the tax and national insurance savings are now restricted even where salary is replaced with a tax-free benefit (had it been provided outside of an OpRA). By way of example, an employee sacrificing part of their salary for the provision of car parking no longer attracts relief, other than for the employee’s NIC. The benefit in kind value will now be the higher of:

• •

The taxable value; or The cash foregone.

Exclusions The new rules do not apply to the following benefits:

• • • •

When does this apply? The new rules came into effect from 6 April 2017 for any new arrangements and current arrangements where a change, renewal or modification has been made since then. For arrangements in place before that date, which continue to apply without change, the new rules apply from April 2018 with the exception of providing cars emitting CO2 emissions of more than 75g/km, school fees and living accommodation, which will be caught from 6 April 2021.

Example 1: Michael and Boris have applied to Theresa for a job. She has interviewed both of them and offered them the following remuneration packages: Michael – A salary of £70,000 along with a company car with a benefit value of £10,000 Boris – Either a salary of £80,000 or a salary of £70,000 with a company car benefit worth £8,000. If they both decide to accept the remuneration package of a £70,000 salary and a car, only Boris will be caught in an optional remuneration arrangement. This is because he was given a choice over his remuneration package and Michael was not. Boris’ P11D form will show a car benefit of £10,000, not £8,000, as the cash foregone amount is higher than the car benefit value. Michael’s P11D will also show a benefit value of £10,000.

Example 2: Phillip has worked for Take a Chance Limited for a number of years and is on a salary of £45,000. He has now been offered a high emission company car worth a taxable benefit value of £4,000 in exchange for taking a £5,000 pay cut. Phillip will be taxed on the benefit value of the salary amount given up of £5,000, rather than on the lower benefit value of £4,000. If you are unsure whether you will be affected by the new rules or would like to discuss this further, please do get in touch.

Payments into a registered pension scheme or employer provided pension advice; Childcare vouchers, workplace nurseries and directly contracted employer provided childcare; Bicycles and cyclist safety equipment; Ultra-low emission company cars (emissions of no more than 75g/km). Holly Gough


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Auto enrolment – employer duties A new policy paper prepared jointly by legal firm Eversheds Sutherland and pension provider Royal London warned that there is a risk that employers aren’t doing enough and that the legal minimum may well prove to be too low. It was suggested in three areas, that employers satisfying only the minimum obligation are vulnerable to serious future potential consequences. a) Governance – the importance of scheme governance; having a regular scheme monitoring and review process in place is a key care duty for every employer; b) The correct application of tax relief – which type of tax efficiency is the most beneficial to the employer’s workforce? c) Providing information to employees – absolutely key when an individual is able to access their pension funds; employers should help employees to make appropriate decisions about their options. This paper suggested that successful litigation looks likely in finding against employers who have done just the minimum. The courts potentially deeming the employer to have failed in their duty to ensure that their pension arrangement delivers good employee outcomes. How many employers would fail the ‘duty of care’ test?

be reviewing their automatic enrolment arrangements on a regular basis to ensure that it remains fit for purpose’. As a reminder, in line with Government policy, minimum contributions for both employer and employee increased from April 2018 and will again in April 2019. The tables below show the changes of all three earnings definitions which may be used to calculate the contributions.

Total pay definition Effective date

Employer Employee Total contribution contribution contribution

April 2018

2%

3%

5%

April 2019

3%

4%

7%

Basic pay definition Effective date

Employer contribution

Employee contribution

Total contribution

April 2018

3%

3%

6%

April 2019

4%

5%

9%

Banded qualifying earnings definition

Employers in North America have paid damages to the tune of $350 million to disadvantaged employees for their failures in monitoring and reviewing their pension arrangement.

Effective date

Employer contribution

Employee contribution

Total contribution

April 2018

2%

3%

5%

Commenting, Sir Steve Webb, former pensions minister:

April 2019

3%

5%

8%

‘It is very tempting for employers thinking that once they have chosen a pension scheme and enrolled the right workers they can largely forget about automatic enrolment. This paper is a wake-up call, especially for larger employers, which suggests that this might be a high-risk strategy. Many larger employers do already take pensions seriously and go well beyond their statutory minimum duties. But all employers should Andrew Hopper

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Employer-supported childcare Many employers help employees with childcare costs, often by providing childcare vouchers by way of salary sacrifice. Following the roll out of Tax-Free Childcare (TFC), the new government scheme to help working parents, existing Employer-Supported Childcare (ESC) schemes were expected to close to new joiners from April 2018. However following the Chancellor’s Spring Statement, Education Secretary Damian Hinds, made a concession to delay scrapping the scheme by six-months.

The Childcare Choices website which provides useful guidance to parents on the childcare options available to them including ESC, TFC and other free entitlements has been updated to show that childcare vouchers will be available to new joiners until the end of September 2018. Under the rules employees already using ESC can choose whether to remain in existing schemes or switch to TFC, but parents cannot be in both TFC and ESC at the same time. Internet link: GOV.UK Childcare Choices

Future proofing your business In business, staff are often your most valuable asset. You want to ensure you keep good dedicated productive staff and incentivise them sufficiently so they remain with your business. Replacing valuable staff can be costly; not only in terms of agency fees, but in terms of the impact the transition and/or gap can leave in your business. In the current uncertain climate, it is not always possible to offer pay rises but you can offer something of value – some examples of which Albert Goodman have included in this newsletter. In addition, offering training and development within the organisation can gain loyalty. Flexible working arrangements can also ensure that staff that need or want a suitable work/life balance remain within the business, with working arrangements that suit both parties. But what do you do if your efforts to support incentivise and reward staff are not reciprocated? How do you deal with members of staff who either do not pull their weight or fall short in performance? First, at the start of employment make good use of your probationary periods and review the employee’s performance. If they are not going all out to impress you and work hard in the early stages, they are unlikely to be doing so 18 months – 2 years in. Secondly, make meaningful use of appraisals – ensure they are not a simple tick box exercise. Set out what is expected from your staff and ensure your managers are trained to manage situations where staff fall short of the level required. This keeps staff on track and also enables the business to use the appraisals in order to deal with performance issues formally. Where formal action is required, it is vitally important for employers to follow a proper capability or disciplinary process. Failing to follow a reasonable process is likely to lead to successful claims in the Employment Tribunal, even in circumstances where disciplinary action or even dismissal is potentially justified. Employees who are not pulling their weight or who are disruptive or negative in the workplace can have a detrimental effect on other, otherwise good workers. If an employee is seen to be “getting away with” a lazy attitude or substandard work, this can lead other employees to rethink the effort they make when others are not being kept in check.


Briefly, a disciplinary process involves giving the employee advance notice of a formal meeting, setting out the issues, the possible sanctions and confirmation of the right to be accompanied by either a TU representative or colleague. The employee should then be given full opportunity to put forward their reasons, responses or points in mitigation before any decision is made as to sanction. If a warning is issued, the employee must be a given a right of appeal to be heard by somebody not involved in the initial investigatory or disciplinary process. It is always better for employers to undertake capability or disciplinary reviews as soon as possible. This will either set the employee on the right track leading to an improved performance in attitude or alternatively, will enable the business to go to the next level of action, or ultimately dismiss fairly with notice. In light of the abolition of Employment Tribunal fees in July 2017, employers should obtain early legal advice to ensure that the correct process is being followed and decisions on sanction are reasonable. Claims to the Employment Tribunal have increased by 100% since the abolition of fees. Employees no longer have anything to lose in submitting claims to the Tribunal and the costs of defending claims can be significant. The current cap on compensation that can be awarded in unfair dismissal claims is £83,602, with compensation for discrimination being unlimited. Average awards range from approximately £8,500 to £1.7m. It is fair to say that there is a significant amount going on in the UK and EU at present, with uncertainty as to how this will affect the business community going forward. Therefore it is important to look at ways to protect your business and prepare for what’s to come; including getting all your contracts, policies and procedures in place, obtaining advice and support from the start and following due process. This will give your business the best chance to allow it to run smoothly and if not to avoid claims, Dawn Gallie then at least be able to successfully Head of Employment defend them. Battens Solicitors [email protected] 01935 846233

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Ending an employee relationship

Undoubtedly employers dread the thought of ending an employee’s contract but it is a common misconception that the first £30,000 of any termination package is payable taxfree. Most recently, the Government saw this as a potential area of abuse and, following a consultation, legislated new rules which apply to termination payments made from 6 April 2018.

PILON Under the old rules, a contractual Payment in Lieu of Notice (PILON) would be subject to income tax and primary Class 1 NIC for the employee, as well as secondary Class 1 NIC for the employer. However, non-contractual PILONs would benefit from the £30,000 exemption which would reduce the tax for the employee and eliminate the NIC charge for both the employer and the employee. From 6 April 2018, all PILONs are both taxable and subject to Class 1 NICs. The employer is required to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if they leave part way through the notice period. This will include all holiday pay entitlement, bonuses or benefits in kind provided for the same period. The result will be treated as earnings subject to tax and Class 1 NICs, with no entitlement to the £30,000 exemption. All non-contractual termination payments or redundancy payments will continue to be regarded as termination payments which can benefit from the £30,000 exemption. Any excess is taxed at the employee’s marginal rate. However, whilst such excess payments are currently NIC free for the employer and the employee, the employer will have to pay Class 1A NIC (13.8%) on the excess from April 2019.

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FSR The final change relates to Foreign Service Relief (FSR), which applies when an employee who has worked abroad for some, or all, of their contract receives a non-contractual termination payment. Depending on the amount of time spent overseas, this can either partially or fully exempt the termination payment. From April 2018 FSR will only apply where the employee is not resident in the UK during the tax year when the termination payment is received. FSR will still be available if the employee is employed as a seafarer or is receiving a payment following a change to their employment duties or earnings, rather than on the termination of their employment. The tax treatment of termination payments can be complex and the new calculation will need to be considered in detail when considering how much of a payment should be subject to income tax and NIC. However, the new legislation does mean that the tax treatment is no longer dependant on how the employment contract is drafted or how the payment is structured. Whilst we hope that you do not have to make such a payment, if you are uncertain as to whether a termination payment will be taxable, please do get in touch.

Tara Hayes


Profiling AG tax staff To introduce you to our eclectic mix of tax team members, we will interrogate members of the AG team each month.

This month it is the turn of Holly Gough, who loves all things benefits based! 1. Holly why are employee benefits such a useful tool in an employer’s armoury to attract the talent they require? Benefits are a commercially effective way to reward your current staff and to incentivise new staff, especially if the benefits provided are also tax-free. 2. What is the name of your favourite author? There are lots of authors whose books I like to read but if I had to choose one I would say J K Rowling. I am a huge Harry Potter fan and I also love her Cormoran Strike detective series.

Next up is private client specialist Hannah Terry. 1. Hannah you are both ACA and CTA qualified. Anymore tax qualifications on your wish list?! Not a chance! Although I said that after completing my chartered accountancy exams and started CTA a year later, so I am clearly a glutton for punishment! I am currently enjoying a well-earned break from exams, however, every day’s a school day in the office so who knows where my career might lead next. 2. I hear that you are the office’s (American) pancake making queen, what’s your favourite topping? I am a big fan of Nutella with blueberries and strawberries.

3. How did you become aware of tax as a career choice? To be honest, until my interview I had no idea that tax was even a career option. In school you only ever hear about becoming an accountant. I was interviewed for a trainee role at AG in either accounts or tax and was chosen for tax!

3. Do you have a top tax tip for individuals to consider for the 2018/19 tax year? With the tax-free dividend allowance reducing to £2,000 from 6 April 2018, anyone with excess dividends should consider making use of their £20,000 ISA allowance.

4. Well, we’re glad they did! Any holidays planned for this year Holly? I am off to Disneyland Paris for a week with my partner in July. A nice break after the P11D deadline, it will be much needed I think!

4. Being the mum of Lucy and Skye (Jack Russell’s), you must know some great walks around Somerset? Do you have any top walking locations? I love the beaches at Berrow and Brean, or going up into the Quantocks. The 360 degree views from Cothelstone Hill are amazing.

5. What do you love about working as part of the AG tax team and what would be your benefit of choice if offered?! I love the people who I work with. The tax team is a great team to be a part of as everyone gets on really well, there’s a lot of banter and we work well as a team. I also love how varied my job is, every day is different which keeps my job interesting. In terms of benefits, a staff canteen would be great. I am rubbish at making my lunch everyday so having lunch provided would be a real bonus. This is a tax free benefit as well so win-win! Well that gets my vote Holly!


5. The Making Tax Digital (MTD) obligations are coming in next April for VAT purposes initially. How should VAT registered private clients prepare for this event? Making the transition to MTD compliant record keeping should be done sooner rather than later to allow for time to get used to it before it becomes compulsory.

Although it will be possible to continue using spreadsheets, we recommend using Cloud Accounting packages such as Xero or Quickbooks, which can also benefit your business by streamlining the record keeping process and providing real-time information. For anyone nearing the VAT registration threshold, it would also be worth taking this opportunity to review current record keeping processes and discuss the options with our specialist Cloud team.

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Sharing success When considering what you have in your arsenal to attract and retain a skilled workforce a share offering can, on occasion, be the most effective solution. The share offering can fall into two distinct categories, those which are approved by HMRC and those which are not, the latter generally not attracting tax reliefs whilst benefiting from the greatest flexibility. Before providing employees with shares, the following points should be given consideration. 1. Who should be involved? 2. How will the award be determined e.g. by length of service, position or salary? 3. Do you want to link the company objectives to the acquisition of shares or indeed revisit company objectives in light of the share issue? 4. Should a new share class be issued in order to place restrictions on the rights of the new shareholder e.g. voting rights on certain company matters? 5. Will financial assistance be provided e.g. will you lend the employee money to acquire the shares? 6. What are the tax and implementation costs to both employer and employee?

7. What would you like to happen to the shares when an employee leaves the company e.g. how will the acquisition of their shares be financed and who can buy them? 8. Are all current shareholders in agreement? 9. Are there any trade association restrictions on share transactions? 10. Liaise with the bank; it is always worth keeping them informed. Once you have decided to progress with an employee share scheme or share issue, make sure legal advice is sought and that you speak with our financial planning team regarding shareholder protection insurance in particular. Communication is absolutely critical to a successful implementation of a share scheme/issue. This applies equally to those who have been identified as being part of the offering and those that have not. Individuals can react differently to a share offer, for some it can throw them, believing that it is part of a transition they do not wish to be party to. Knowing your staff is vital! Should you wish to discuss any of the above in more detail, please do contact the AG tax team.

Elaine Grose

Options – is EMI always best? It is quite common to be asked ‘How do I set up an EMI scheme?’ this usually comes about from clients who have decided that it would be beneficial to the business to include certain employees in its ownership, and then a huge leap is taken to the conclusion that an EMI scheme is what they need. There is no doubt that the EMI code is in fact quite well written, being both generous and flexible. However, as with most things in life, what is perfect for one person might not fit as well on you.

How do share options work? A share option agreement is a legal contract between the company and the employee, either as a stand-alone contract or by reference to a set of scheme rules. The contract literally gives the employee the option to acquire the stipulated number of shares at the required (exercise) price, possibly conditional upon certain events happening. Examples of so-called ‘vesting conditions’ include: the expiry of a qualification period, hitting performance targets or a sale of the company.

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In the meantime, and for so long as the optionholders have not exercised, they do not own those shares. This means that they have no votes and no rights to dividends. They also have nothing that needs to be bought back should they leave. At the same time, they have not committed anything to the company and can simply walk away even if the company value has fallen. Once the options are exercised, the opposite is true.

So why don’t I just give them some shares? You could indeed just skip over the step of issuing options and instead just give some shares direct. There are two main reasons why in practice an option scheme could be better:

• •

Options allow you to set vesting conditions. The employees might not be able to afford to pay market value for the shares.


Show me an example The sole shareholder of Company A decides to incentivise two key staff to grow the value of the company, ready for its sale in three to five years’ time. A baseline valuation of £1m is agreed (roughly equal to today’s open market value) and each optionholder gets to have 10% of the sale proceeds in excess of £1m but only if the company is sold in the next 5 years. An option works well here. Unless and until the sale of the company happens the current owner keeps her 100% share ownership intact, only losing it at the point of sale. The optionholders do not need to put any of their own cash up to finance the purchase of the shares.

What are the tax benefits of EMI options? With all share option schemes, the grant of the option does not give rise to any tax liabilities. There is a tax point when the options are exercised and it gives rise to a liability to income tax, which in some cases falls under PAYE and National Insurance. For unapproved schemes the taxable amount is the difference between the market value on the date of exercise and the price paid for the shares. For EMI schemes the taxable amount is the difference between market value on the date of grant and the price paid for the shares. Most EMI schemes set their exercise price at the value preagreed with HMRC at the date of grant, with the result that there is no tax to pay on exercise. When the shares are sold, fingers crossed, there is a capital gain. This gives EMI schemes two big advantages over unapproved options:

• •

The shares can qualify for the 10% rate of CGT under entrepreneurs’ relief without the optionholder needing to have held the usual 5% of the shares and votes for the last year.

When could a simple gift of shares be suitable? Not all companies meet the qualification criteria to be able to issue EMI options. The major factors that might prevent qualification for EMIs are

•

What other schemes can be used? Type of scheme What is it?

When is it used?

Share Incentive Plans

An all-employee scheme

Mostly used by quoted companies

Company Share Option Plans

A selective scheme For companies that with some similari- exceed the £30m ties to EMI gross assets test for EMI

Partly-paid shares

The employee is required to pay full market value for the shares, but only puts up say 1% of the total initially

For valuable companies that do not qualify for EMI (eg property investment companies) or where we would need the option to be exercised quickly

Growth shares, including joint ownership plans

The employees get shares whose value only accrues above a set price

The low market value of those shares today makes it easier to get them to the employees now with limited tax cost

Sale or gift of shares

The employee acquires the shares direct for an agreed discount

Companies whose current value is low and where we want them to be actual shareholders rather than just optionholders

Phantom share schemes

Not a share scheme at all, just a cash bonus scheme designed to pay out broadly the same as if the staff had been shareholders

A simple scheme giving actual benefits each year, where tax-efficiency is not crucial

Basically all of the profit on sale is liable to capital gains tax, rather than income tax (at up to 45%), plus possibly two lots of NICs.

We should also mention the corporation tax relief that the company attracts when the share options are exercised. The company can take a deduction against its taxable profits amounting to the difference between market value on exercise less the amount paid (or assessed on) by the employee.

• • •

Some companies have no particular plans to sell, but they still want to have employees invested in the business, possibly with half an eye on some longer-term succession. So they need to become shareholders in short order, so why bother with an EMI scheme? The only tax benefit of immediately getting shares to an employee via EMI is the ability to qualify for entrepreneurs’ relief despite not meeting the 5% tests.

the independence requirement; the working hours requirement; the gross assets limit for the company or group of £30m, and the restrictive qualification with regard to trading which eliminates, among others, certain businesses in the financial sector, property developers and certain ‘property-rich’ businesses, and accountants.

There are so many different ways to get shares to employees that it is not possible to list them all. The design of any good scheme will start with a thorough discussion of the company’s aims and objectives. The tax benefits of EMI mean that it is used maybe nine times out of every ten when it can be used. Still it would be brave (or reckless) to go for an EMI scheme without first exploring the alternatives. Nick Scull


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Tax-free sale The employee shareholder status ending after a relatively short life seemed a disappointing step-back in the drive for wider employee ownership. However, the Government have kept in place an exit option to shareholders who are looking to place the ownership of the company into employee hands. The tax rules introduced for this type of trust permit:

• • •

The deferral (and potential complete exemption) of capital gains generated on the transfer of qualifying shares to the trustees; An inheritance tax exemption where value is transferred to the trustees; Up to £3,600 income tax exemption in relation to certain employee bonus payments.

This is only available to trading companies and the transfer must assist in creating a controlling interest for the trustees. Whilst appreciating the appeal of selling a tax-free interest in your company, you should not underestimate the practicalities and cost of running an employeeownership trust. That said, it could well be part of the answer to your succession question!

Welsh Land Transaction Tax Elaine Grose

GDPR New data protection rules from General Data Protection Regulation (GDPR) will replace the Data Protection Act in the UK from 25 May 2018. GDPR is designed to safeguard personal data of citizens from EU member states, with particular emphasis on transparency and accountability. It applies to all businesses in the EU and non-compliance will lead to substantial fines. The new GDPR is a regulation which is intended to strengthen and unify data protection for all individuals within the European Union (EU). The regulation will become a law without exception in the UK from 25 May 2018. The government has confirmed that the UK’s decision to leave the EU will not affect the commencement of the GDPR. The government has also confirmed that the UK will replace the 1988 Data Protection Act (DPA) with legislation that mirrors GDPR, post-Brexit. This means that any business, big or small, will be required to comply with GDPR - which deals with secure collection, storage and usage of clients’ personal data. Failure to comply with the regulation can result in heavy fines of up to €20 million or 4% of the businesses’ annual turnover (whichever is higher amount). Internet link: ICO guide to GDPR

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From 1 April 2018, Land Transaction Tax (LTT) will replace Stamp Duty Land Tax (SDLT). LTT will be collected by the Welsh Revenue Authority (WRA). HMRC has published guidance on the introduction of the new tax and the way in which property transactions straddling 1 April 2018 and cross border transactions will be dealt with.

Property Taxes across the UK From 22 November 2017, there is an exemption for first-time buyers from SDLT on the first £300,000 when buying a home, where the total price of the property is not more than £500,000. 5% is payable on purchases between £300,000 and £500,000. However, with devolved taxes, buying a property in Scotland and Wales can bring different tax consequences. In Scotland, Land and Buildings Transaction Tax (LBTT) applies instead of SDLT. Therefore an LBTT relief for first-time buyers of properties up to £175,000 has been proposed in the Scottish Draft Budget 2018/19. This is subject to a government consultation before the relief launches in 2018/19. Welsh first-time buyers benefit from first-time buyers SDLT relief until 31 March 2018. Land Transaction Tax (LTT) replaces SDLT in Wales from 1 April 2018. The starting rate for LTT will be £180,000, benefiting not just first-time buyers but other home buyers in Wales. A higher rate, of 3% over standard rates for additional residential properties, applies to purchases throughout the UK whether SDLT, LBTT or LTT applies. A new land-transaction-tax-calculator is available. HMRC has issued guidance on the changes in Wales and the transitional rules for property transactions. Internet links: GOV.UK news GOV.SCOT LBTT first time buyer relief


Making Tax Digital & VAT

The regulations to bring into force Making Tax Digital for VAT (MTDfV) are now law, and digital VAT returns will be required from 1 April 2019.

other than VAT before April 2020, although businesses below the VAT threshold which have voluntarily registered for VAT can opt to join the scheme.

MTDfV is the first phase of HMRC’s landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. Regulations have now been issued which set out the requirements for MTDfV.

As with electronic VAT filing at present, there will be some exemptions from MTD for VAT. However, the exemption categories are tightly-drawn and unlikely to be applicable to most VAT registered businesses.

Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

Keeping digital records will not mean businesses are mandated to use digital invoices and receipts but the actual recording of supplies made and received must be digital. It is likely that third party commercial software will be required. Software will not be available from HMRC. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements.

The new rules have effect from 1 April 2019, where a taxpayer has a ‘prescribed accounting period’ which begins on that date, and otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019. HMRC is piloting MTDfV during 2018, ahead of its introduction in April 2019. Keeping digital records and making quarterly updates will not be mandatory for taxes


Internet link: GOV.UK statutory instrument

Andy Branson

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CHARTERED ACCOUNTANTS, www.albertgoodman.co.uk TAX CONSULTANTS & FINANCIAL PLANNERS