Author Archives: Graeme Blair - Partner

About Graeme Blair - Partner

T +44 (0)20 7874 8835

Graeme helps guide businesses through the corporate tax world. He is particularly expert at issues that property companies and professional practices have to navigate and therefore often manages large and complex assignments, many of which have an international element.

As a client of Graeme's wrote "I am increasingly impressed that when I pick up the phone to Graeme I receive robust and appropriate advice."

Businesses should use the period to October 2019 to review contracts, update systems and understand the definition of labour for this purpose.

VAT Reverse Charge for Construction Industry coming late 2019

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 26th June 2018

Categories:

Why the VAT Reverse Charge is being introduced

In 2017 the Government floated the idea of a change to the VAT treatment of certain elements of the construction industry supply chain. They believe that criminal gangs were offering specific supplies in order to perpetrate “missing trader” or “carousel” fraud. A Government paper indicated that this was losing the Exchequer an estimated £100m a year.

The Government believes that this fraud typically occurs when sub-contractors are set up to provide workers. The sub-contractor charges their customer for the supply of people and legislation requires this cost to have VAT added to it. However the cost to the sub-contractor is the payment of wages which does not have any VAT liability. The sub-contractor collects VAT from their customer and then disappears without paying it to HMRC. As the sub-contractor might have been set up for a single site this makes it difficult for HMRC to track the perpetrators.

Consultation with the construction sector

The Government consulted the construction industry on the impact of a reverse charge mechanism to prevent this fraud. A reverse charge was suggested as it has been used to prevent other forms of missing trader/carousel fraud.

The Government estimate that there are 300,000 business at different points in the supply chain and therefore the impact of a reverse charge would be more widespread than its other applications.

When will the Reverse Charge apply?

It has now been confirmed that the reverse charge will come into effect from 1 October 2019. HMRC feel that they have listened to UK businesses requests that they are given a considerable lead time to review and amend their systems in advance of this change.

Who will be affected by the Reverse Charge?

The reverse charge mechanism will only apply to construction services and HMRC will use the existing definition of construction services from the Construction Industry Scheme (CIS). This use of a pre-existing tax definition is welcomed as it would be illogical for there to possibly be one definition of labour for CIS purposes and a different definition for VAT purposes.

The reverse charge process would vary the billing profile of a sub-contractor as they would no longer charge for construction services with VAT. Instead they would issue an invoice requiring their customer (the main contractor) to self account for the VAT that would otherwise be due. One would not normally expect this to put either the sub-contractor or the main contractor in a worse position.

Winners and Losers

However, when one looks at cashflow there may be winners and losers. Using the example of a construction service with a value of £1m then presently the sub-contractor would charge their customer £1.2m (£1m plus VAT). That sub-contractor would account for the £200k to HMRC. Depending on payment terms and commercial agreement it is possible that some sub-contractors would receive the £200k VAT before having to pay it to HMRC and others would need to finance the £200k whilst they wait for payment of their invoice. Applying a reverse charge would have a negative cash flow impact on the former whilst a positive impact on the latter.

Similarly, the main contractor could sometimes be in a position to make an input tax claim on a VAT return before having to pay the sub-contractor or vice versa. As can be seen, either party could win or lose.

A significant complication is that not all construction services will be caught by the new provisions. Only standard and reduced rated supplies will be effected, which makes sense. There can be no tax loss to missing trader fraud where the supply doesn’t have any VAT on it in the first place. Further, certain related party transactions will be excluded as will supplies to end users such as developers. The new rules only apply to contractors supplying to other contractors. This will require contractors to seek confirmation of status from their customer before engaging to ensure that the correct VAT treatment is applied.

Contractors and Sub-Contractors

Contractors will need to consider the definition of labour more carefully than they have to date. It is reasonable to assume that larger contractors use sub-contractors who are gross status payers for CIS. This means that larger contractors have not had to worry about the definition of labour.

Invoices received from sub-contractors may have components with VAT charged on some services but not others. This will lead to complexity for the contractor especially when approving payment of an invoice. The concern for the contractor is that if they are charged VAT incorrectly then they cannot recover it even if they have inadvertently paid the invoice and their supplier has accounted for that VAT to HMRC. The only mechanism to overcome this error would be to renegotiate with the sub-contractor. However if the sub-contractor is an overseas entity or is created for a single development then they may not be in continued contact with their customer.

Make sure you’re ready in time

In summary there is a considerable shift in VAT compliance from October 2019 which has an impact for both contractors and sub-contractors down to the entire construction supply chain. Businesses should use the period to October 2019 to review contracts, update systems and understand the definition of labour for this purpose.

Our property and construction team would be pleased to talk to you about how this will affect you.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Businesses should consider their strategies for a revised compliance environment and model their tax burden based on the corporation tax rules, including the impact of the corporate interest restriction.

Non-resident corporate landlords tax changes coming

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 25th June 2018

Categories:

In the past corporate non-resident landlords have experienced a beneficial tax profile for UK property profits. Rental profits are taxed a flat 20% rate of income tax, capital gains were exempt from UK tax and there were no inheritance tax consequences for the company owner.

Over time these advantages have been eroded. For example, non-resident corporate landlords are now subject to UK capital gains on gains made on residential properties. In 2017 the Government announced that non-residents would be liable to capital gains tax on disposals of commercial sites from April 2019. This brings all disposals into UK tax. The advantage that rental profits are taxed to the flat 20% rate remains.

Tax changes coming

From April 2020 there will be a transition by non-resident corporate landlords from income tax to corporation tax. Many will find this attractive as the flat rate of corporation tax will be 17%. The Government’s intention is to make this technical transition seamless and therefore capital allowances are expected to transfer between the taxes at tax written down value and any rental losses should be available to carry forward into the new environment.

Currently there is uncertainty about the compliance process. Income tax is calculated to 5 April annually whilst corporation tax is determined with reference to the company’s year-end. If the company does not have a 5 April year-end then in 2020 there is likely to be some element of time apportionment between income tax and corporation tax. The filing deadlines for these taxes differ. In addition, the dates of payment of corporation tax differ from those of income tax. Depending on the company’s profile this may accelerate or defer payment of tax on rental profits.

It seems slightly perverse that non-resident corporate landlords are subject to capital gains tax on all sales from April 2019 and subject to a shift in tax treatment from April 2020. Logic would suggest that these two changes should happen simultaneously.

Beware the potential sting in the tail

Although the move from a 20% tax regime to a 17% regime appears attractive there can be a sting in the tail for leveraged property acquisitions. For the non-resident corporate income tax does not have any restriction for interest deductions. From 2020 non-resident corporate landlords will be subject to the Corporate Interest Restriction (CIR) Regulations. These can restrict the interest deduction which a company can claim if its annual interest charge is more than £2m. In group situations the £2m is spread across the group. Larger property acquisition can easily result in interest payments in excess of £2m and therefore companies and groups may find that a move to corporation tax increases annual tax burdens. This is despite the reduced headline rate of tax.

Be prepared

Businesses should be using the period to the change to consider their strategies for a revised compliance environment and model their tax burden based on the corporation tax rules, including the impact of the corporate interest restriction.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Overseas companies owning a UK property or bidding for public contracts will need to register.

New Register to disclose beneficial ownership of foreign entities owning UK property

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 20th March 2018

Categories:

As part of the move to improve transparency of beneficial ownership for foreign entities investing in UK property, it is proposed to introduce a new Register of People with Significant Control over Overseas Companies (the PSCOC Register). A Consultation Document on this issue was published in April 2017 and on 18 January 2018, the Business Minister, Greg Clark announced that draft legislation would be published in the Summer of 2018 and introduced into Parliament before summer 2019.

Government has confirmed that a draft bill will be published for scrutiny this summer. A Bill will be introduced to Parliament in 2019 and it is intended that the register will become operational by 2021. Their response to the consultation sets out current thinking about implementation of the register.

Overseas companies owning a UK property or bidding for public contracts will need to register.

Restriction on Transactions relating to UK Property by Overseas Entities

Indeed it is proposed that overseas entities will not be able to buy or sell property in the UK unless they have provided information about the beneficial owners for the PSCOC Register.
In respect of property already owned by overseas entities, it is proposed that the restriction will be reflected by a note on the Title Register for the property, prohibiting a sale, grant of lease or mortgage unless the entity is fully compliant with requirements under the PSCOC Register.
For overseas entities which wish to acquire UK property, they will first have to apply to register their beneficial ownership with Companies House. If the application to register is successful, the entity will be allocated a registration number. This number will be required in order to register title to the property at the appropriate Land Registry. Checking that an overseas entity is compliant with the new regime can be done very easily and quickly by checking the register on the Companies House website. Failure to supply a valid registration number on the form would mean that the application is cancelled and the transfer of title will not be registered and consequently the overseas entity will not become the legal owner of the property.

End to Anonymity

The proposed register will, in all likelihood, be publicly available and will contain similar information to the Persons with Significant Control Register which is now in operation for UK companies. Any overseas entity which is a leaseholder of property, where the lease is required to be registered and the original term is for more than 21 years, will be required to maintain a PSCOC Register.

The Conditions for Registration

It is important that the PSCOC Register identifies who benefits from the legal entity and who exercises control over it and the assets that it holds.
Under the PSCOC Regime it is proposed that an individual will be a person with significant control of an overseas company (a “PSCOC”) if he meets at least one of the conditions that mirror the current PSC regime

New condition brings Trusts into the PSCOC net

A new, ‘fifth condition’ catches trusts and results in some settlors, protectors, enforcers and beneficiaries of trusts being PSCOCs.
If the trustees of a trust or the members of a firm which is not a legal person have a majority stake, the fifth condition would also need to be applied to establish if there was a PSCOC with significant influence or control over that trust or firm.
A person would hold a “majority stake” in a legal entity in any of the following circumstances:
a) The person holds a majority of the voting rights in a legal entity;
b) The person is a member of the legal entity and has the right to appoint or remove a majority of the board of its directors;
c) The person is a member of the legal entity and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights of that legal entity; or
d) The person has the right to exercise, or actually exercises, dominant influence or control over the legal entity.

Transitional Arrangements

Overseas entities which own UK property when the new rules come into force will be given one year to comply with the new requirements and apply for a registration number. This will give overseas entities sufficient time to dispose of their property interests if they choose to do this rather than disclose the required information. During this period entities will be unable to register title to new purchases of property without a registration number.

All overseas entities that own UK property will be contacted before the law comes into force, setting out the requirements and the consequences of non-compliance. A reminder will be sent three months before the end of the first twelve month period.

After the end of the one year transitional period, all overseas entities that own property in the UK, regardless of when they bought the property, will be prohibited from selling the property or creating a long lease or legal charge over it unless they have complied with the PSCOC Register requirements. As stated above, a restriction will be noted on the title Register which will be visible to prospective buyers when they carry out a title search. A transfer of the property will be void if the overseas entity is not compliant with the PSCOC Register requirements at the time the contract to acquire the property completes.
Once the overseas entity has bought property in the UK, a note will be put on the title register that will reflect the statutory prohibition on sale, grant of a lease or mortgage unless the entity is fully compliant with the register’s requirements.

Information to be provided for the Register

The Department for Business, Energy & Industrial Strategy are currently reviewing the feedback on this proposal so details of what is required are not yet confirmed. However, in addition to personal details, name, date of birth, nationality, country or state where beneficial owner usually resides, the register will likely include information about the nature of the beneficial owners’ control over the entity.
It is proposed that the information on the PSCOC Register should be updated at least once every two years and the overseas entity should have the option to update the information more often.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The Government are concerned that bringing external investors into a family business can dilute the founders down below a 5% stake in a company. The 5% threshold may therefore hold back the seeking of external funds and therefore hold back growth in a business.

Possible extension of Entrepreneurs’ Relief: Consultation wants to hear from Family Businesses

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 13th March 2018

Categories:

Philip Hammond, the Chancellor, had promised that his Spring statement would not contain tax announcements. He was true to his promise, well almost.

Amongst the usual statements about economic growth, employment prospects and borrowing needs there were congratulatory comments about the numbers of persons that have benefitted from first time buyer stamp duty reliefs and further suggestions that a litter levy may be enacted. On the theme of waste there was also a call for evidence on how the tax system could be used as an incentive to reduce reliance on certain plastics.

Of relevance to the SME sector is the announcement of a consultation on extending the availability of Entrepreneurs’ Relief. The Government are concerned that bringing external investors into a family business can dilute the founders down below a 5% stake in a company. As the 5% limit is the minimum required for Entrepreneurs’ Relief the Government feel that some businesses may not seek external funding specifically to prevent the founders falling below 5%. The 5% threshold may therefore hold back the seeking of external funds and therefore hold back growth in a business.

There is a consultation which closes in mid-May about the practicalities of allowing the founders to be treated as selling their shares and immediately reacquiring them at the point that they would otherwise be diluted down 5%. This would therefore allow the entrepreneur to “bank” the 5% rate before they are diluted below it.

The cynic may think “well that is just a way of getting money in earlier and leaving reduced tax take for a future Government”. The consultation suggests otherwise as it is making noises about the resulting gain not being payable until such later time as the shares are actually sold and the entrepreneur has cash to pay the tax.

This is certainly a novel solution for a perceived issue and the Chancellor should be applauded for facing it head on.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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It never ceases to amaze me the number of occasions that partnership loss planning is necessary, even on a successful project.

Partnership loss planning: Why it should feature even in the good years

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 18th December 2017

Categories:

Recently I had the opportunity to speak at a Partnership Tax Conference on the subject of Partnership Losses. One would normally think that partnership losses are a minority sport which are only relevant for the bad days. It never ceases to amaze me the number of occasions that partnership loss planning is necessary, even on a successful project. Typically it might be that the priority share partners have such a large guaranteed profit share that the project can return a profit but after payment of guaranteed profit some partners experience a loss.

Tax allocation across the partners

If the partnership is operating a trade in the UK then the first task is to reallocate profits and losses so that no partner can be receiving a share of loss whilst others are taxed on profit. This is a tax allocation and not related to drawings. The practical implication being that it is possible for a partner to be entitled to profit (for example due to a guaranteed profit share) but have no tax liability as they have had another partner’s loss allocated to them. Very rarely do partnership agreements consider the extent that one partner compensates the other for the tax which the former does not need to pay. Even if there was a compensation clause in the partnership agreement then the debate moves to a fair mechanism to determine the compensation. Should it, for example, be the amount of tax that the benefiting partner does not pay? If so, when should the payment be made? For example should it be at the time that the benefiting partner would have ordinarily paid tax to HMRC?

Once the loss has been reallocated then each partner is free to do with their share of loss what is appropriate for them.

New partnerships

If a partner was joining a new partnership or a new partnership was commencing then losses of the partner in the first four years of assessment could be carried back against total income of the three years prior to the loss making year. The carry back is on a first in, first out basis and so is carried back to the earliest year possible. The loss can be set against total income of the earlier year.

Terminal loss relief

Conversely losses in the last 12 months of trade, including an impact of overlap relief, can be carried back against to the previous three years. This is often called terminal loss relief and, unlike opening years loss relief, the loss can only be offset against profits of the same trade of the earlier years.

Sideways loss relief

The most common use of partnership losses is sideways loss relief which is an offset of losses against total income of the same tax year or total income of the previous tax year. The loss can also be offset against total income of both of those two years in which case the taxpayer can elect which year the loss is first used against. If the partner is in the early years or the last year of a trade then sideways loss relief can be claimed in addition to opening years and terminal loss relief.

Sideways loss relief and opening years loss relief are an offset against total income. Terminal loss relief is only against previous profits of the same trade. There is a restriction on use of losses against total income to the greater of £50,000 and 25% of total income of the profitable year. This is a general cap on certain reliefs, not just losses. In addition to the general cap there are specific caps which apply to losses. They are relevant if the partner is not active in the business or has little capital at risk in the business.

Non-active is defined in legislation. If this restriction applies then there is a cap of £25,000 use of the loss.

Restrictions

Certain partners are restricted in their use of loss to their capital contribution into the partnership. Essentially this is to cap the loss to the amount of their risk capital and this legislation is designed to reduce the scope for partners claiming losses where they have little economic downside of being a partner.

Offset against Capital Gains

As an alternative to using a trading loss against income then a partner can offset the loss against capital gains of the same tax year as the loss is recognised. Economically this relief is available to help partners who finance a loss making partnership by a sale of capital assets. With capital gains tax rates being lower than income tax rates then the partner needs to consider if it is beneficial to use an income tax loss against a capital gain.

Loss Planning

In summary loss planning is more common than most people appreciate and losses need to be considered in detail as there are many restrictions on their use. Conversely they can be used flexibly and this leads to planning opportunities.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The firm’s only defence is having preventative measures in place. It does not matter if the senior management were in the dark.

The new offence of failing to prevent tax evasion: Is your firm ready?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 6th December 2017

Categories:

The push towards global transparency gained teeth on 30 September 2017, with the new corporate criminal offence for failure to prevent tax evasion. HMRC automatically receive information on overseas accounts from over 50 countries, and once evasion has been detected they will look up the chain to see who facilitated it. If that person is associated with your company or partnership then your firm can be prosecuted.

Weak links

The link does not have to be especially strong – an associated person can be an employee, agent or contractor – although they do have to be acting for your firm. The firm’s only defence is having preventative measures in place. It does not matter if the senior management were in the dark, and so measures must be embedded in procedures and communicated to everyone associated with your firm. Simply carrying out a risk assessment and putting it in a drawer will not protect your firm.

Broad scope

The scope of the rules is breathtakingly wide. There are two offences:

1. Evading UK tax

Even if your firm has no UK presence at all, it could still be prosecuted if you assist in evading a UK tax.

2. Evading foreign tax

If your firm has a person acting on its behalf in the UK, then if they facilitate foreign tax evasion when in the UK your firm could be prosecuted. However, the evasion must be a criminal offence in both the UK and the foreign country.

Consequences

A successful prosecution could be very damaging for your business. Not only is there the prospect of an unlimited fine, but it could prevent you from winning government contracts or operating is regulated markets.

What should I do?

The first step is to identify a person or team responsible for implementing preventative measures. A risk assessment should then be carried out, evaluating business operations identifying associated persons. It may be that you consider your firm to be low risk, but it is important to document why you came to this conclusion. Procedures, for example due diligence and reporting, should be designed and implemented, and then communicated to all associated persons identified in the risk assessment. Finally, it is important to keep everything under review.

What if I identify tax evasion?

If you find out that a person associated with your firm has assisted with tax evasion, this should be reported. UK tax evasion is reported to HMRC, and overseas tax evasion to the Serious Fraud Office. This does not give immunity from prosecution – the only defence remains the procedures you have in place – but it forms part of your defence and could mitigate penalties if your firm is convicted.

Whilst the new regime only covers evasion which has taken place since 30 September 2017, this includes evasion which started before then but is still ongoing. It is therefore important to act now and get preventative measures in place. Senior management must be committed to the process, and create a positive culture in the firm.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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A practical consequence of an exit will be cessation of access to the parent-subsidiary directive and the interest and royalties directives. These directives are designed to allow for flow of funds between member states without withholding taxes. After March 2019 the terms of the tax treaty between the UK and the relevant counter party will govern the extent that withholding taxes will apply.

How might Brexit impact UK businesses?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 27th July 2017

Categories:

On 29 March 2017 the UK Government served notice for the UK to leave the European Union. This should lead to withdrawal in March 2019.

All UK businesses, irrespective of what they may do, and irrespective of their international focus, will be impacted by Brexit. Obvious examples will be the availability of staff, fluctuations of sales and purchase prices due to movements in the value of Sterling and changes in financing costs with changes in interest rates. Even wholly domestic businesses such as UK commercial landlords will experience rent variations as supply and demand shift. Such a shift will be the net effect of businesses (e.g. European holding companies) leaving the UK and businesses which traditionally import from other EU countries opening a presence here.

But what about the likely tax impacts?

The first thing to appreciate is that the EU is the only block which we are leaving. We will be remaining members of others, such as the OECD, G20 and WTO. These all lead to obligations quite separate from our membership of the EU.

The June 2017 election has resulted in a hung parliament and therefore increased uncertainty about the negotiation stance we will take for our departure. If we have a soft Brexit we may become members of the European Free Trade Association (EFTA) and be a party to the European Economic Area (EEA) Agreement. This follows the Norwegian model and gives us access to the EU single market and some free trade agreements. However it requires us to adhere to certain EU legislation and those restrictions on our self-governance may be seen as unattractive. Switzerland is a member of the EFTA but not bound by the EEA Agreement. Although this gives them access to aspects of the EU single market with a greater right to self-rule there have been suggestions that it is a complex position which may never be offered to any other country.

At the moment of departure EU legislation will be incorporated into UK law. This appears sensible as it ensures a continuity of legislation at the start. Over time the UK Government may then choose to depart from EU norms.

Free from the influence of the EU an obvious tax change may be a considerable reduction in the headline rate of corporation tax. This would be a deliberate ploy to make the UK an attractive destination for international groups, albeit outside the EU.

A practical consequence of an exit will be cessation of access to the parent-subsidiary directive and the interest and royalties directives. These directives are designed to allow for flow of funds between member states without withholding taxes. After March 2019 the terms of the tax treaty between the UK and the relevant counter party will govern the extent that withholding taxes will apply. If an existing contract involving a UK business contains a gross up clause then it may be triggered once the benefit of the directives are lost.

At a more subtle level certain UK legislation has been governed by EU state aid restrictions. Obvious examples are R&D tax credits and restrictions on the size of companies which can offer EMI share options. With those shackles removed the UK government would be free to overhaul many of its tax incentives, potentially expanding their scope.

Indirect tax

From an indirect tax perspective there is a considerable risk that the practical benefits of membership of the single market will be lost. The simplified mechanisms to permit trade by free flow of goods and reduced administration could be lost. This may result in administrative difficulties for exporters having to pay EU import duty (in addition to any UK import duties) and the UK business may need to register for VAT in many EU countries. There may also be time delays in importing goods from the EU or exporting them to the EU whilst paperwork is processed at a border.

Refunds of VAT incurred within the EU may become more difficult to obtain thereby increasing costs of doing business with EU member businesses.

VAT rates are controlled by the EU. On departure there would be more flexibility for the UK Government to change the headline VAT rate or apply a zero rating or 5% rating to items currently subject to other rates. However this might first require them to amend domestic legislation that offers protection against such variations.

In conclusion, Brexit will have an impact on us all, to varying degrees. The businessman may find it both a burden and an opportunity. The real impact may be determined in forthcoming months and years.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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EMI options are often the first choice for incentivisation but they come with conditions, administration and accounting obligations.

EMI Share Option Schemes

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 8th May 2017

Categories:

The benefits of Enterprise Management Incentive (EMI) share option schemes were highlighted in Sarf Malik’s recent blog on incentivisation in the creative sector.

Tax efficiency

EMI are considered the gold standard of share option schemes and, if the qualifying conditions are met, are often the first choice for option incentivisation. This is because of the tax efficiency associated with the options.

Conditions of EMI schemes

EMI have conditions which must be satisfied by the company whose shares are being offered and have conditions which need to be satisfied by the employee who is being granted the options.

There are company conditions attached to the size of the company and its numbers of employees. These conditions are broadly designed to ensure that the company is within the SME sector. The company must have a connection with the UK and it is only the top company of a group which can issue the options. This does not prevent options being issued to employees of a subsidiary. The company must be a trading company and cannot undertake certain prohibited trades. The restriction on acceptable trades is to ensure that there is an element of risk associated with share ownership.

The purpose of the options must be to incentivise employees and there are conditions which ensure that the employee has reasonable employment duties and cannot have a connection with the company which allows more than a 30% ownership interest in it.

Benefit of EMI

The benefit of EMI is that capital growth can be subject to capital gains at a 10% rate of tax.

Ultimately this is the fiscal incentivisation for the option holder to exercise options. Assuming that the employee pays full market value for the shares (with that value being determined at the day the options are granted) then any growth between grant and exercise of the option is not taxed until the shares are sold. That growth, together with any further growth from holding the shares after exercise of the option, is subject to capital gains tax.

Share growth would be subject to a 10% rate of tax as shares arising from EMI options attract Bussines Asset Disposal Relief. This applies even if the options are not exercised until a time immediately prior to a company sale with many EMI plans are structured as being “exit only” to provide employees the ability to participate in a share sale.

Tailored solution

The terms of EMI options must be recorded in writing and this is an opportunity to provide conditionality on their exercise. Options can be tailored for individual employees and therefore provide targets which are under the control of the employee. For example a sales director may be able to exercise options if X leads are converted into customers within a timeframe or a member of the HR team might have the ability to exercise options once the head count exceeds Y employees.
Whatever the conditions attached for options they need to be able to be satisfied within ten years of grant of the option.

The Admin

Once options are granted there are administrative requirements to notify HMRC of their existence, both after their grant and annually thereafter. From an accounting perspective EMI options are included within the cost of employee rewards and there is annual accounting to determine how much reward should be charged to company accounts. As this accounting entry does not lead to tax relief until exercise of the option there are consequential deferred tax considerations.

In summary EMI options are often the first choice for incentivisation but they come with conditions, administration and accounting obligations.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Employer obligations have always been complex, whether they are regulatory, legislative or industry requirements. Make sure you are meeting the new requirements.

New tax year changes for employers and employees

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 10th April 2017

Categories:

6 April is not only the start of the tax year but the commencement date for a number of new obligations on employers.

Apprenticeship Levy

Any employer with an annual wage bill of more than £3m must contribute 0.5% of their wage bill to a central training fund. The aim of the fund is to enable employers to access training for apprentices from registered providers. Although employers with a wage bill of less than £3m per annum are exempt from contributing to the fund, in due course they will be able to access apprenticeship training schemes. The levy has come out of the government’s belief that the UK lags behind other European countries in productivity and this may be due to a lack of skills in the workforce.
It is said that the contribution has been set at rates which ensure that large employers who provide considerable training can receive more benefit from the scheme than they contribute to it. This gives them an incentive to offer training. Small employers who do not have to contribute can find that almost all of their qualifying training will be paid for by this fund. Again this is an incentive for them to take on and train apprentices.
Although the levy is UK-wide there are separate arrangements for Scotland, Wales and Northern Ireland.
The levy will be managed via the PAYE system whilst the training credits are accessed through the government’s gov.uk website. Funds will have a finite life and this is an incentive for employers to provide continuous training.
This is not the first time that the PAYE system has been used for non-payroll matters. With the introduction of Real Time Information it is easier for HMRC to separate out the component parts of money transfers. The Construction Industry Scheme and reporting for auto-enrolment are other examples of the payroll process being used for non-payroll matters and I expect that it will be put to other uses in the future.

Gender Pay Gap Reporting

The apprenticeship levy is not the only change for larger employers this month. Any organisation that has 250 or more employees must publish and report specific figures about their gender pay gap. The report must be published on their website and the figures need to be provided to the government.
The gender pay gap is the difference between the average earnings of men and women expressed relative to the males’ earnings. The gov.uk website gives the example “men earn 15% more than women per hour”. Organisations that have fewer than 250 employees are not obliged to report this information. There is a hope that they will do so voluntarily.
The pay gap figures must be calculated using a specific reference date (called the snap shot date) which, depending on the reporting entity, will be either 31 March or 5 April. There are detailed regulations to determine how one calculates the numbers of employees and there are further regulations determine how one defines an employee.

Young apprentices

From next month there is a further change for employers as companies with fewer than 50 employees and which take on the youngest apprentices (or older apprentices with disabilities) can access specific government financing. This is a further incentive to recruit and train these employees.

Salary Sacrifice now OpRAs (Optional Remuneration Arrangements)

Employees also experience change from 6 April. The salary sacrifice legislation has been varied and this will reduce the extent that employees can exchange taxable salary for other benefits. There is a follow-on proposal that the P11d form will be redesigned to report any salary sacrifice undertaken by the employee.

Conclusion

Employer obligations have always been complex, whether they are regulatory, legislative or industry requirements. Those obligations have recently become more burdensome.

We support employers in a number of ways. Our HR support service has assisted a number of organisations in managing their systems and processes to ensure that these requirements are met. We can also help employers with payroll and tax.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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They are typically used to spread wealth throughout the family or as inheritance tax efficient vehicles.

Family wealth preservation using a Family Investment Company

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 23rd February 2017

Updated on 10th August 2023

Categories:

Traditionally a tool for family wealth preservation has been a trust. However successive governments have cut down their tax benefits. This led to a rise in debate about the benefits of using a family limited partnership instead. Although many advisers talked about these partnerships, comparatively few had clients who implemented them. Their relative lack of popularity may have been due to concerns about collective investment scheme legalisation and the professional costs of their maintenance. An alternative could be a Family Investment Company.

What is a Family Investment Company?

A Family Investment Company (FIC) is a UK resident private company whose shareholders are almost invariably entirely made up of family members. Assets are transferred into the FIC and those assets generate investment returns which can be used to provide family wealth. Alternatively, returns can be directed to be used for things such as payment of school fees.

With the UK having a corporation tax rate starting at just 19%, interest in family investment companies has risen. They are typically used to spread wealth throughout the family or as inheritance tax efficient vehicles. As they are structured around UK companies, the foundations on which they are built are well understood, easy to implement and have low annual compliance costs.

How does a Family Investment Company work?

Typically the founders transfer cash into the company in exchange for shares and loans. Non-cash assets such as property can be also transferred into the company but this may lead to stamp duty land tax or capital gains tax concerns.

The founder can then gift shares of the company to other family members as a potentially exempt transfer. There would be no inheritance tax consequences on the donor if they survive seven years following the date of the gift. Assuming that the gift occurs soon after creation of the company then there are no capital gains tax concerns for the donor.

Control

It is common for the Articles of the company to be drafted so that the donor retains control over the company and this is where the company can operate like a trust. One of the advantages of a FIC over a trust is that some people feel they have more direct control through share ownership than the less tangible control that they have over trust assets.

Tax position

If the FIC generates rental or interest income then this will be taxable at the low UK corporate rate of tax. Dividends received by the FIC could be tax free.

There is tax payable on distribution of assets out of the company. However with the first one thousand pounds of dividend being tax free and a follow on rate starting at 8.75% this may not be a concern. Even the highest rate of dividend tax is lower than the 45% rate currently applied to trusts.

A FIC should be considered a medium to long term strategy in the same way as a trust is considered a long term strategy tool.

Requirements and disclosure

As a FIC is based on a UK company there are Companies House filing requirements, including annual accounts which will be on public record. Public filings can possibly apply the reduced disclosure of abridged accounts (where permitted) or consideration maybe given to using an unlimited, and not a limited, company.

Conclusion

It may be felt a reflection of the UK government’s strategy on low corporate taxation that a UK company, for the benefit of UK individuals, may be an appropriate, low risk and tax efficient holding vehicle.

A FIC should be considered a medium to long term strategy in the same way as a trust is considered a long term strategy tool.

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The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...