2013 Budget: key developments relevant to share schemes

Practical Law UK Legal Update 2-525-3086 (Approx. 10 pages)

2013 Budget: key developments relevant to share schemes

by PLC Share Schemes & Incentives

Corporation tax relief for employee share acquisitions

The government has published draft legislation, which applies from 20 March 2013, to clarify the scope of corporation tax deductions in respect of employee share acquisitions under Part 12 of the Corporation Tax Act 2009 (CTA 2009). The draft legislation replaces section 1038 of the CTA 2009 with a revised section 1038, and adds a new section 1038A. The new provisions are designed to put beyond doubt that where a corporation tax deduction is available under Part 12 of the CTA 2009, no other deduction is available in connection with the provision of the shares or the option, or any matter connected with the shares or the option. The new provisions also disallow any corporation tax deduction in respect of share options where shares are not ultimately acquired pursuant to the option.

The measures are intended to prevent companies attempting to claim deductions for accounting expenses for share-based payments in addition to a deduction under Part 12, or in connection with an option on occasions where shares are not acquired pursuant to a share option (and therefore no deduction is available in connection with the acquisition of the shares).

For more information, see Legal update, 2013 Budget: corporation tax relief for employee share acquisitions.

Tax treatment of employee shareholder shares

The 2013 Budget included further details about the proposed new "employee shareholder" employment status:

The tax provisions relating to employee shareholder shares will take effect on 1 September 2013, along with the separate legislation introducing the new employment status.
The draft legislation to provide a capital gains tax exemption for disposals of employee shareholder shares has been revised to exclude an income tax charge on a buyback of CGT-exempt employee shareholder shares, and to strengthen the "material interest" restriction.
Income tax and National Insurance contributions (NICs) legislation will be amended to deem, for tax and NICs purposes, that an employee shareholder pays £2,000 for employee shareholder shares. This will make the first £2,000 worth (only) of employee shareholder shares free from income tax and NICs.

For more information, see Legal update, 2013 Budget: tax treatment of employee shareholder shares.

EMI options and entrepreneurs' relief

As announced in the 2012 Budget, capital gains tax entrepreneurs' relief will be available on disposals of shares acquired on exercise of EMI options (EMI option shares) from 6 April 2013, regardless of whether the option holder holds 5% of the shares in the company (as is usually required). The holding period of an EMI option will count towards the one year holding period required for shares to qualify for entrepreneurs' relief, as specified in a draft clause for the Finance Bill 2013 published in December 2012 (see Legal update, Draft Finance Bill 2013: enterprise management incentives (EMI) options and entrepreneurs' relief).

The draft legislation has been revised so that the relief will also be available on the same basis for shares that replace EMI option shares on a company reorganisation, and for certain shares following an exchange of EMI option shares for shares in another company. Legislation to amend entrepreneurs' relief as it applies to EMI option shares will be included in the Finance Bill 2013, which is expected to be published on 28 March 2013.

See Overview, paragraph 1.9.

OTS review of tax-advantaged share schemes

As announced in December 2012, Finance Bill 2013 will include legislation to simplify tax-advantaged share schemes, following the OTS' review of tax-advantaged share schemes. The draft legislation has been revised following consultation to:

Protect the position of existing SAYE option scheme participants who reach a specified age.
Widen the range of circumstances in which tax free exercise of SAYE and company share option plans (CSOP) options will be available on the cash takeover of a company.
Ensure that share incentive plan (SIP) partnership shares may not be subject to forfeiture provisions.
Allow companies the flexibility to limit the amount of cash dividends that can be reinvested in SIP dividend shares.

For more information on the OTS review of tax-advantaged share schemes and the proposed changes, see Legal update, Draft Finance Bill 2013: Tax-advantaged share scheme simplification.

See Overview, paragraph 1.10.

OTS review of unapproved share schemes

The government will consult on some of the recommendations made in the Office of Tax Simplification's (OTS) review of non tax-advantaged share schemes. Legislation will be introduced in future Finance Bills. For more information on the OTS review of unapproved share schemes, see Legal update, OTS final report on unapproved share schemes.

See Overview, paragraph 2.4.

Self-certification for approved share schemes

The 2013 Budget confirmed that the government will proceed with a proposal to replace the current system of HMRC approvals for CSOPs, SAYE option schemes and SIPs with a self certification regime. It will publish further details shortly. Legislation to implement the self-certification regime will be included in Finance Bill 2014.

See Overview, paragraph 2.3.

Measures to encourage employee ownership

The government will provide £40 - 50 million annually from tax year 2014-15 to encourage uptake of employee ownership structures for businesses. This will fund:

Responses to recommendations in the Nuttall review of employee ownership (see Legal update, Nuttall review of employee ownership: government response) and to proposals from other employee ownership advocates.
A new capital gains tax relief on the sale of a controlling interest in a business to an employee ownership structure. This relief is related to the development of an "off the shelf" employee-owned company model by the Department for Business, Innovation and Skills and the Implementation Group on Employee Ownership. The intention is to introduce legislation for the relief in Finance Bill 2014.

The government will also consider further incentives in this area, including measures targeted at indirect employee ownership models.

See HM Treasury Budget 2013, paragraph 1.134.

Close company loans to participators rules tightened

The Chancellor announced draft legislation to close three loopholes reportedly being used by close companies to avoid the tax charge on loans to participators imposed by section 455 of the Corporation Tax Act 2010. The amendments will be published in Finance Bill 2013 on 28 March 2013, and will apply to all loans made on or after 20 March 2013.

The government will carry out a review of the close company loans to participators rules later in 2013.

For more information, see Legal update, 2013 Budget: close company loans to participators rules tightened.

Other relevant developments

Increased exemption threshold for employment-related beneficial and notional loans

The exemption threshold for the aggregate value of employment-related beneficial and notional loans will be increased from £5,000 to £10,000 with effect from 6 April 2014. Legislation will be included in Finance Bill 2014. Income tax (under self-assessment) and class 1A NICs liabilities arise annually on the benefit of interest below HMRC's official rate on:

Employment-related loans, under sections 175 - 180 of ITEPA 2003.
Notional loans in respect of employment-related securities acquired for less than market value, under sections 446Q - 446W of ITEPA 2003.

In both cases, there is currently an exemption for taxable loan values in aggregate not more than £5,000. For more information, see Practice note, Loans to employees and directors: tax issues: Benefit in kind tax charge on beneficial loans and Notional loans: acquisition of securities for less than market value (including nil paid or partly paid shares).

See TIIN, Exemption threshold for employment-related loans and Overview, paragraph 2.9.

Reduction in pensions annual and lifetime allowances and family pension plan restriction confirmed

The government confirmed the 2012 Autumn Statement announcement that the lifetime allowance will be reduced from £1.5 to £1.25 million and the annual allowance from £50,000 to £40,000 from 6 April 2014. Draft legislation for these measures, together with the proposed "fixed protection 2014" transitional relief, was published on 11 December 2012 (see Practice note, Finance Bill 2013: pensions provisions: Reductions in the annual and lifetime allowances and Transitional relief: fixed protection 2014).

In addition, it was confirmed that the previously announced anti-avoidance measure to curtail the use of so-called family pension plans that are sometimes offered as part of employees' flexible benefits arrangements will be implemented to take effect from 6 April 2013 (see Practice note, Finance Bill 2013: pensions provisions: Restricting relief for family pension plans).

It was also announced that the government plans to consult on amendments to the tax rules relating to investment-regulated pensions schemes (in most cases self-invested personal pensions (SIPPs) or schemes that were formerly small self-administered schemes). The apparent aim is to encourage the conversion of unused space in commercial properties to residential property. At the moment, investment-regulated schemes are effectively barred from investing in residential property under the "taxable property" provisions enacted in the Finance Act 2004.

For a summary of all the 2013 Budget pensions-related measures, see Legal update, 2013 Budget: pensions implications.

See TIIN: Reducing the pensions tax annual and lifetime allowances, Overview, paragraphs 1.12 to 1.14 and HM Treasury Budget 2013, paragraph 2.18.

Statutory residence test

As expected, the Finance Bill 2013 will include legislation introducing a statutory residence test for individuals, placing HMRC's concessionary split-year treatment on a statutory footing, and amending and extending anti-avoidance rules that tax temporary non-residents. These measures will take effect from 6 April 2013.

Following consultation on its second draft of the legislation (published on 11 December 2012), the government has made amendments to the concepts of full-time work and international transportation workers, as well as to the new rules on split-year treatment, although we will need to wait for publication of Finance Bill 2013 on 28 March 2013 to see the details.

For more information on these measures, see Private client tax legislation tracker 2012-13: Statutory residence test and Practice note, Statutory residence test for individuals.

See Overview, paragraph 1.3.

General anti-abuse rule

The government has confirmed that the Finance Bill 2013 will include legislation introducing a general anti-abuse rule (GAAR). The GAAR will counteract tax advantages arising from abusive avoidance schemes subject to certain procedural requirements. Specifically, counteraction must first be notified by a designated HMRC officer and, unless having considered any representations made by the taxpayer a designated HMRC officer decides that counteraction ought not to apply, the arrangements must be referred to an Advisory Panel for its opinion. Counteraction will be on a just and reasonable basis.

The GAAR will apply to income tax, NICs, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the annual residential property tax (ARPT) due to be enacted with effect from 1 April 2013. The legislation will apply to abusive tax arrangements undertaken on or after the date of Royal Assent to the Finance Bill 2013. Separate legislation will be introduced later in 2013 to apply the GAAR to NICs.

The government first announced that it would consider introducing a legislative general anti-avoidance rule in the June 2010 Budget. This led to a study group and a series of consultations. Draft Finance Bill 2013 clauses were published in December 2012 (see Legal update, General anti-abuse rule (GAAR): response document, draft Finance Bill 2013 provisions and draft guidance).

See Overview, paragraph 1.59 and TIIN: General anti-abuse rule.

Personal income tax allowance reaches £10,000 in 2014-15

As anticipated, the Chancellor announced that the coalition government's plan to increase the personal allowance to £10,000 over the parliament was to be accelerated. The personal allowance for those born after 5 April 1948 will increase (by £560) to £10,000 in 2014-15. At the same time, the basic rate limit will be reduced to £31, 865, giving a higher rate threshold of £41,865. This figure reflects the increase of 1% in the higher rate threshold (tax-free amount plus basic rate band) that was announced in the 2012 Autumn Statement (see Legal update, 2012 Autumn Statement: business tax implications: Personal allowance increase to £9,440 from April 2013). For 2015-16, the personal allowance will increase in line with the Consumer Prices Index, while the higher rate threshold will increase by 1% to £42,285.

The 2013 Budget also confirms the rise in the personal income tax threshold from £8,105 to £9,440 with effect from 6 April 2012, with the basis rate threshold being reduced to £32,010 (giving a higher rate threshold of £41,450). TIIN: Income tax personal allowance for those born after 5 April 1948 and basic rate limit for 2014-15.

Corporation tax main rate reduced to 20% from 2015

The Chancellor announced in the 2013 Budget that the main rate of corporation tax (CT) for non-ring fenced profits will be reduced to 21% for the financial year commencing 1 April 2014 and to 20% for the financial year commencing 1 April 2015. The 21% rate for 2014-15 was announced in the 2012 Autumn Statement (see Legal update, 2012 Autumn Statement: business tax implications: Corporation tax rate further reduced). Both rate changes will be implemented by the Finance Bill 2013.

The main rate applies to companies and groups whose annual profits exceed £1.5 million. Finance Bill 2013 will keep the small profits rate of CT (which applies to companies and groups whose annual profits do not exceed £300,000) at 20% for the financial year commencing 1 April 2013. Legislation in Finance Bill 2014 will, as a result of the reduction of the main rate of CT to 20%, unify the small profits rate and the main rate of CT to create a new unified CT main rate from 1 April 2015. (Presumably the small profits rate will remain at 20% for 2014-15, although this has yet to be confirmed.)

See TIIN, Corporation tax: main rate and small profits rate and Overview, paragraphs 1.21, 2.19 and Annex B12.

Collecting tax debts through PAYE (coding out)

The 2013 Budget included an announcement that the government will consult on improving the system for collecting tax debts through PAYE (known as coding out). Changes will be made to the rules through secondary legislation, including increasing the amounts that can be collected in this way. In 2011, the government held a consultation on coding out and issued a response document to the consultation (see Legal update, Collecting small debts through PAYE: response document and next steps).

See Overview, paragraph 2.46 and HM Treasury Budget 2013, paragraph 1.215.

PLC's comprehensive budget coverage

PLC has published a comprehensive analysis of the key business tax announcements in the 2013 Budget. To view this update, which includes links to other relevant materials, see Legal update, 2013 Budget: key business tax announcements.

2013 Budget: key developments relevant to share schemes | Practical Law