2016 Budget: key share schemes announcements

Practical Law UK Legal Update 2-624-9866 (Approx. 7 pages)

2016 Budget: key share schemes announcements

by Practical Law Share Schemes & Incentives

Disguised remuneration

The government indicated in the 2015 Autumn Statement and Spending Review that it intended to take action against users of disguised remuneration schemes who have not paid their "fair share" of tax.

The 2016 Budget includes a number of measures intended to deal with the continued use of disguised remuneration and similar avoidance schemes.

Some measures will be introduced in Finance Bill 2016, while some measures will be introduced in future Finance Bills, following consultation.

For information about the current disguised remuneration ant-avoidance legislation, set out in Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), see Practice note, Disguised remuneration tax legislation (Part 7A of ITEPA 2003): issues for share plans and other employee benefits.

Measures to be included in Finance Bill 2016

Legislation to be included in Finance Bill 2016 will make a number of changes to Part 7A of ITEPA 2003, and to Schedule 2 to Finance Act 2011 (FA 2011).

The main change to FA 2011 concerns a relief from a Part 7A charge where an agreement has been reached with HMRC. Users of disguised remuneration arrangements can agree with HMRC that the value of a pre-April 2011 relevant step should be treated as earnings from employment. Under paragraph 59 of Schedule 2 to FA 2011, where a settlement is reached with HMRC in respect of a pre-April 2011 relevant step, the value of the relevant step, together with the value of any investment growth, is deductible when computing the Part 7A tax charge on a future relevant step. HMRC operated an EBT settlement opportunity, pursuant to which it was possible to settle on relatively favourable terms and take advantage of the provisions of paragraph 59 where the conditions were met.

Finance Bill 2016 includes provisions to restrict the availability of this relief on investment returns to situations where an agreement was reached before 1 December 2016, or tax has been otherwise determined and paid before 1 December 2016. As HMRC withdrew its employee benefit trust (EBT) settlement opportunity from 31 March 2015 (subject to a deadline for agreements to be finalised by 31 July 2015), it is not clear how many taxpayers may be currently negotiating agreements with HMRC that could benefit from the relief in paragraph 59 (see Legal update, HMRC to withdraw EBT settlement opportunity).

The technical note includes a number of examples to illustrate the effect of this amendment.

Paragraph 59 will also be amended to ensure that payment on account or an accelerated payment does not amount to tax being paid for the purposes of satisfying the conditions of paragraph 59.

Other changes to Part 7A of ITEPA 2003 that will be included in Finance Bill 2016 are:

An amendment to section 554Z8 of ITEPA 2003 (which provides relief from a Part 7A charge to the extent that an employee gives consideration), to remove the relief where there is a tax avoidance motive. This applies from 16 March 2016.
A provision that apportions the value of a relevant step if a relevant step counts as employment income of more than one person. The apportionment is on a just and reasonable basis.

(See HM Treasury: 2016 Budget, paragraphs 1.216-1.217 and 2.49, HMRC: Tackling disguised remuneration, HMRC: Tackling disguised remuneration avoidance schemes: technical note, HMRC: Employment income provided through third parties: draft legislation and HMRC: Employment income provided through third parties: draft explanatory note.)

Measures to be included in future Finance Bills

HMRC published a technical note as part of the 2016 Budget documents which sets out a number of proposed measures designed to tackle the use of disguised remuneration arrangements which will be included in future Finance Bills.

The measures are intended to address the continued use of disguised remuneration arrangements, as well as their historic use.

In the technical note, HMRC notes that although the introduction of Part 7A of ITEPA 2003 in Finance Act 2011 has been effective in tackling the promotion of the schemes that existed at the time, new schemes that are intended to circumvent Part 7A continue to be promoted.

In order to address the continued use of disguised remuneration schemes, as well as their historic use, in addition to the legislation to be included in Finance Bill 2016, future measures will include the following:

Provisions to prevent attempts to circumvent Part 7A of ITEPA 2003 by using a series of contrived steps, or by arguing that Part 7A does not apply because the individual is not only an employee (for example, where the individual is also a director and/or shareholder). In some circumstances, both the loans to participators rules and the disguised remuneration rules may apply.
The PAYE regulations will be amended to extend the circumstances in which liability can be transferred to the individual when it cannot be collected from the employer.
Any outstanding loans entered into before the proposed changes to Part 7A of ITEPA 2003 come into force (including loans made before Part 7A was introduced) will be subject to income tax and NICs if not repaid by 5 April 2019. The charge will apply if the loan would be taxable under Part 7A of ITEPA 2003, had it been made after Part 7A is amended (regardless of when the loan was actually made).
Measures to deal with certain avoidance schemes that do not currently fall within the scope of Part 7A but are intended to avoid tax and NICs, including those that do not use a third party.

Legislation will include measures to ensure that amounts are not subject to double taxation.

The technical note includes a number of examples to illustrate how the various amendments are intended to work, and HMRC will issue a technical consultation on the changes over the summer.

(See HM Treasury: 2016 Budget, paragraphs 1.216-1.217 and 2.49, HMRC: Overview, paragraph 1.12, HMRC: Tackling disguised remuneration, HMRC: Tackling disguised remuneration avoidance schemes: technical note, HMRC: Employment income provided through third parties: draft legislation and HMRC: Employment income provided through third parties: draft explanatory note.)

Enterprise management incentives (EMI) options: repeal of Part 4 of Schedule 7D TCGA 1992

The government proposes to simplify the enterprise management incentives (EMI) code by repealing Part 4 (paragraphs 14 and 16) of Schedule 7D of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). Although the tax information and impact note (TIIN) does not refer to entrepreneurs' relief (ER) specifically, it appears that the effect of this amendment is to extend ER to rights issue shares acquired in relation to shares acquired through EMI options.

Current EMI rules for rights issue shares

ER applies to "relevant EMI shares". These are, broadly speaking, shares acquired on the exercise of a qualifying EMI option.

Shares can also be relevant EMI shares if they are acquired through a reorganisation of share capital to which section 127 of TCGA 1992 applies (section 169I(7F)(a), TCGA 1992). If the shares in the original holding were relevant EMI shares then the shares in the new holding will also be relevant EMI shares but only in two circumstances.

One of these circumstances is where there is a reorganisation or reduction of the share capital of the company, and section 126 of TCGA 1992 applies to that reorganisation or reduction (section 169I(7F)(c)(i), TCGA 1992). Section 126 generally applies to rights issues, so normally shares acquired through a rights issue are pooled with the shares to which they relate. However, paragraph 16 of Schedule 7D of the TCGA 1992 disapplies section 126 where there is a rights issue on qualifying shares. Qualifying shares are shares acquired through an EMI option, either where there is no disqualifying event, or the option is exercised within 40 days after a disqualifying event (paragraph 14, Schedule 7D). As a result, where there is a rights issue on relevant EMI shares, the original shares continue to qualify for ER, but the shares acquired through the rights issue will not.

There is a further complication because of the 40 day rule that applied when EMI options were first introduced. This rule provided that options exercised within 40 days after a disqualifying event would retain their tax advantages.

Finance Act 2013 extended the 40 day period to 90 days. However, due to what seems to have been a drafting oversight, the reference to 40 days in paragraph 14 of Schedule 7D was not amended to 90 days.

The effect of this is that, if an EMI option is exercised more than 40 but less than 90 days after a disqualifying event, the option will still qualify for EMI relief, but the resulting shares will not be qualifying shares as defined in paragraph 14. This in turn means that paragraph 16 does not disapply section 126 in relation to the rights issue shares. Therefore, shares acquired through a rights issue on relevant EMI shares will themselves qualify for ER if the EMI option was exercised more than 40 but less than 90 days after a disqualifying event, but not in any other circumstances.

Proposed amendments to Schedule 7D

On 9 December 2015, HMRC published a proposal to increase the 40 day period in paragraph 14 of Schedule 7D of TCGA 1992 to 90 days with effect from Royal Assent to Finance Act 2016 (see Legal update, Draft Finance Bill 2016 legislation: share schemes and incentives measures). This would have meant that shares acquired through a rights issue on EMI shares would never qualify for ER.

However, as a result of a representation received on the draft legislation, the government has now decided to repeal Part 4 of Schedule 7D to TCGA 1992 (paragraphs 14 and 16) entirely. The effect of this will be that shares acquired through a rights issue on relevant EMI shares will themselves be relevant EMI shares (assuming all the other conditions are met). This will have effect for rights issues and disqualifying events occurring on or after 6 April 2016.

(See TIIN: Employee share schemes: simplification.)

Employee shareholders: lifetime limit on CGT relief of £100,000

Finance Bill 2016 will include legislation to impose a lifetime cap on the capital gains tax (CGT) relief available for employee shareholder shares. The change applies to shares issued as consideration for entering into an employee shareholder agreement after midnight on 16 March 2016. When they are disposed of, gains up to the lifetime limit will be exempt from CGT. Gains above the lifetime limit will be chargeable to CGT in the normal way. Specific rules will apply to spouse and civil partner transfers to fix the transferee's base cost. The measure is expected to save up to £35 million in the tax year 2020-2021.

Employees must be given a seven day period following the receipt of legal advice before an employee shareholder agreement is implemented, so it is unlikely that many arrangements not already completed could have been finalised before the end of 16 March.

For more information on employee shareholder status, see Practice note, Employee shareholders.

(See HM Treasury: 2016 Budget, paragraphs 1.126 and 2.193, HMRC: Overview, paragraph 1.52 and TIIN: Capital Gains Tax: lifetime limit on Employee Shareholder Status exemption.)

Technical changes to share schemes announced in 2015 Autumn Statement and Spending Review

The 2016 Budget confirms that, aside from the change to the proposal regarding EMI options and Part 4 of Schedule 7D to TCGA 1992, all other proposed changes to share schemes legislation that were announced in the 2015 Autumn Statement and Spending Review will proceed unchanged. These include:

Clarification of the tax treatment of restricted stock units (RSUs) held by internationally mobile employees.
Introduction of reasonable excuse provisions for late filing of notifications under Schedules 2, 3 and 4 of ITEPA 2003.
Partial re-introduction of disqualifying events provisions for share incentive plans (SIPs).
Amendments to the EMI legislation to allow for a takeover by an employee-ownership trust.

For more information on these developments, see Legal updates, 2015 Autumn Statement and Spending Review: key share schemes and incentives announcements and Draft Finance Bill 2016 legislation: share schemes and incentives measures.

(See HM Treasury: 2016 Budget, paragraph 2.48 and HMRC: Overview, paragraph 1.10.)

Other developments relevant to share schemes

The Chancellor announced a number of other measures that will be of interest to share schemes practitioners, including:

A reduction in the rates of CGT from 6 April 2016. The higher rate will be reduced to 20% (from 28%) and the basic rate will be reduced to 10% (from 18%).
From April 2018, a tightening of the rules relating to the £30,000 tax exemption for qualifying payments under Chapter 3 of Part 6 of ITEPA 2003 (termination payments), as the existing provisions are "complex and the exemptions incentivise employers to manipulate the rules". The exemption will be narrowed in scope, and the NICs position for payments above the exempt amount will be aligned with the income tax rules.
From 6 April 2016, an increase in the tax rate for loans to participators, from 25% to 32.5%, to mirror the higher rate of dividend taxation.
The possible restriction of the range of benefits that can be offered under salary sacrifice arrangements (although pensions, childcare and the cycle-to-work scheme should not be affected).

For more information about the key business tax announcements, see Legal update, 2016 Budget: key business tax announcements. For information about the key private client announcements, see Legal update, 2016 Budget: key private client tax announcements.

2016 Budget: key share schemes announcements | Practical Law