EMI Share Option schemes in times of COVID-19

When Coronavirus turned the entire world upside down, nearly every business owner focused on protection of their business, its income, and its employees. In many cases protecting the economic wellbeing of the business resulted in pay cuts, furloughing staff, and cutting performance incentives such as bonuses.

Although the pandemic is far from over, it is important to consider the need to retain key value-generating employees that are critical to the survival and future success of a company. Granting EMI share options could be used to offset the downside of furlough  or a salary reduction without the need for an immediate cash injection, allowing an employee to feel part of the company’s future irrespective of the short term challenges.  

The Enterprise Management Incentives Scheme (EMI) is an approved employee share scheme that is available to most trading businesses. The main requirements are:

  • The business is independent with a permanent establishment in the United Kingdom, has gross assets of less than £30 million and less than 250 full time equivalent employees
  • The trade is not one of the excluded activities like dealing in land, banking, property development, farming, operating, and managing hotels, nursing homes or residential care homes

One of the main qualifying requirements of the scheme is that the employee works no fewer than 25 hours a week at the business or, if less, at least 75% of their working time. However, for options granted prior to 20 March 2020, employees will now remain qualified if they were placed on furlough, unpaid leave or were required to work reduced hours as a result of Covid-19.

The EMI scheme allows the employers to grant tax efficient share options to key employees. The main tax advantage is that any uplift in share value is not subject to income tax but is instead chargeable to capital gains tax, which can be as low as 10%.

Share options can be designed to suit the needs of the business. For example, the exercise of options can depend on meeting certain performance conditions and there can be exit only options which can only be exercised on a sale of the company.

In summary EMI schemes offer flexibility and for key employees, a great alternative to a bonus or a pay rise. Additionally, given the economic climate, it may be possible to agree lower share valuations with HMRC.

Contact us

If you would like to discuss how an EMI scheme could benefit your business please get in touch with our tax team.

Capital Gains Tax Review – Forward to the past

The Office of Tax Simplification (OTS) recently released the first report of the Capital Gains Tax (CGT) review.

The Chancellor asked the OTS to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. The report details areas in which CGT is counter-intuitive and creates odd incentives. The report draws on a range of economic perspectives with almost 100 written responses and analysis of taxpayer data. There will be a second report early next year which will explore key technical and administrative issues.

The report suggests changes to the CGT regime that would bring it back to be similar to the regime in the 1990s.

Rates and boundaries

It is believed the disparity in rates between CGT and Income Tax (IT) can distort business and family decision making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.

Possible amendments suggested by the OTS are:

  • Align IT and CGT rates. Income tax rates in the UK (not Scotland) are 20%, 40% and 45% with CGT rates being 10%, 18%, 20% and 28% depending on the asset sold and the individuals income levels i.e. if an individual disposes of listed shares in an investment portfolio and pays higher rates of IT, they will pay CGT at a rate of 20% on the gain made on sale. The change could mean the individual will pay CGT at 40% instead of 20%
  • Ensure CGT can be calculated without the need for knowing taxable income
  • Possible relief for inflationary gains, meaning an indexation allowance would apply
  • Making owner managed business owners rewards for employment duties more consistent

Annual exempt amount

The OTS have said that the relatively high level of the Annual Exempt Amount can distort investment decisions. In the tax year 2017-18, around 50,000 people reported net gains just below the threshold. If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing the level.

Possible amendments suggested are:

  • Reducing the Annual Exempt Amount to an admin de minimis
  • Looking at the chattels rules and amending the limits
  • Formalising the administration of real time gain reporting and aligning it with the Personal Tax Account
  • Introducing a requirement for fund managers to report capital gains direct to taxpayers and HMRC directly, to make compliance easier

Interaction with lifetime gifts and Inheritance Tax (IHT)

CGT incentivises owners to transfer business and personal assets to others on death rather than during their lifetime. This may not be best for business, the individuals or families involved, or to the wider economy.

The OTS’s second IHT report recommended that where a relief or exemption from IHT applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the asset at the original base cost. This would not affect taxpayers who retain assets, but would affect those who sell recently inherited assets.

The suggested amendments are:

  • As mentioned above, an option to remove the uplift value on an assets received on death to instead ensure the recipient takes on the original base costs of the asset. Currently, the base cost acquired is the probate value.
  • Widening the gift hold over conditions to make the relief apply to more assets. Currently, gift hold over is only allowable on qualifying business assets and shares.
  • Rebasing asset values to a more recent year. Currently, if an asset was acquired after March 1982 the base cost is the initial value at acquisition. If the asset was acquired prior to March 1982 the value is rebased to the March 1982 value, meaning only the uplift in value since that date was chargeable to CGT. An option would be to rebase asset values to a date more recent than March 1982, to say ten years ago.

Business reliefs

There is a policy judgement for government to make about the extent to which CGT reliefs should be used to seek to stimulate business investment and risk taking.

Possible changes could be:

  • Changing Business Asset Disposal Relief (formerly Entrepreneurs Relief) to focus more on business owners retiring, possibly introducing a holding requirement period of longer than the current 24 months. A suggestion of ten years is made.
  • Abolish Investors Relief (relief for selling unlisted shares in a trading company that you are not connected to).

Our view

The initial report suggests a reform of the CGT regime to similar to how it was in the 1990s, when CGT rates were aligned to IT rates and indexation relief was available. The suggestions are very much that, suggestions, and we don’t expect every area to be affected, but this will become clearer when the second report is released early next year.

Some proposed changes imply that the administrative burden may be less, but some taxpayers would also suffer less CGT for example if gift relief is widened to non business gifts.

A small change of simply reducing the Annual Exempt Amount could mean hundreds of thousands of additional tax returns being filed each year, which may not result in a lot of tax but may have an administrative burden on HMRC

It would be sensible to assume business owners will be targeted to make business relief conditions tighter e.g. being based more on retirement, and the IT and CGT rates to be aligned.

The 2020 pandemic has had a huge impact on the economy and finances and we all know the government will seek to recoup as much additional taxes as they feasibly can, whilst considering the impact on business and entrepreneurial risk taking.

What should you do?

As ever, nothing is certain, but if you are considering selling an asset, gifting a business asset, making a gift to a trust or carrying out IHT planning in the near future, it may be worth completing transactions sooner rather than later.

We would hope that changes to the regime will be clear, with advance notice, to give taxpayers and our clients time to consider how it impacts them and to make decisions in advance, but this is not clear at the moment.

Contact us

If you would like to discuss the report with us, or have any concerns regarding your current capital assets, please get in touch with our tax team.

This update originally appeared on the website of our colleagues MHA Tait Walker.

VAT – Change to the treatment of early termination payments

HMRC recently issued a Revenue and Customs Brief (RCB) setting out changes to the VAT treatment of early termination payments. The guidance was given in the context of European Court decisions relating to the early termination of contracts for the provision of telecommunications services.  The RCB makes it clear that HMRC have changed their policy for all early termination payments.

  • This will be the case whether the payment is characterised as ‘compensation’ or ‘liquidated damages’.
  • The payment will be subject to VAT whether the payment was envisaged in the contract first signed for the provision of goods or services.
  • HMRC maintain that a payment made to a lessor for breach of contract will be subject to VAT.

A payment made in compensation for breach of contract will only be subject to VAT if the contract is terminated early as a result of the breach.

What does this mean for me?

Are you the supplier?

If you provide goods or services with payments due periodically over the life of a contract, you need to revisit existing agreements with your customers. If those contracts contain terms for early termination, liquidated damages or breach, those payments should be characterised as excluding VAT. This will protect the payment due on the basis that it excludes, rather than includes VAT. Similarly, any negotiated settlement not within the terms of your original agreement should exclude VAT.

This treatment will also apply to landlord and tenant relationships if you receive payment to break a lease early. However, it will not impact dilapidation payments, as these are not paid as a consequence of early termination.

Are you the customer?

If you are the customer, tenant, or lessee, you should ensure you understand the reason for making the payment. These changes only cover early termination, which is particularly relevant for payments due for breach of contract. If the contract is not terminated early as a result of the breach, the payment is not subject to VAT.

If VAT is due, make sure your supplier provides you with a valid VAT invoice, so that you can recover VAT on your next VAT return.

What about the historical position?

HMRC have stated that they expect businesses to review the position taken over the last four years and adjust the position if payments have been received and VAT has not been paid to HMRC. They have stated a ruling from HMRC is not sufficient defence against the need to pay VAT on amounts previously received by the business. This is an unwelcome, but not unprecedented position taken by HMRC.

If this is an issue for you as a supplier, please speak to us as there may well be a defence available on the grounds of the legitimate expectation of following clear and unambiguous guidance from HMRC.

If you would like to discuss this further please get in touch with indirect tax partner Jonathan Main on 01772 821 021 or jonathan.main@mooreandsmalley.co.uk

Brexit Update for the Motor Sector

As Brexit talk deadlines extend, the position of the UK Motor sector remains a cause for concern. At OEM level the prospect of a 10% tariff on cars moving in and out of the UK from the EU now seems increasingly inevitable. As well as these Motor specific topics, we are talking to clients about the following Brexit related issues.

We know that manufacturers have differing approaches to the issue with Ford having taken the most radical step in the market with plans to make their dealers the ‘importer of record’. Ford are seeking to minimise the disruption and added bureaucracy this will entail, but there is an inevitable impact on cash flow. Dealers will no longer benefit from the cash flow advantage of reclaiming VAT from HMRC on stock purchases before paying that VAT to Ford. Other manufacturers will no doubt monitor the practical impact of this approach and we may see it spread more widely in the sector.

In the meantime, most dealers will continue to buy from UK distribution arms and will notice no change other than an inevitable upward pressure on price due to the impact of tariffs. This may create some market shifts as the tariff change will only affect imports of cars manufactured in the EU – the market price of those cars will therefore rise relative to cars imported from further afield. For example, cars imported from South Korea benefit from a zero tariff and this is expected to continue post-Brexit.

Some dealers buy stock directly from manufacturers or distributors in Europe and they will need to understand the impact of the UK’s exit from the EU Single Market and Customs Union on the cost and practicalities of importing prestige sports cars, mainly from Italy.

Dealers who export cars must anticipate the end of the New Means of Transport Scheme (NMT) which allows EU nationals to buy cars VAT-free in the UK where the vehicle is ultimately destined for an EU address. The Personal Export Scheme (PES) will replace it, but the conditions are tighter and dealers need to ensure they are familiar with them.

As well as these Motor specific topics, we are talking to clients about the following Brexit related issues.

Customs Warehousing

This will be really important in a No-Deal situation. Our info sheet is here and clients in a manufacturing setting will be particularly affected. We can provide detailed project based advice.

Commercial terms

All businesses with intra-EU trade will need to have revised paperwork to deal with the changes, we can advise on what they need. In particular businesses who have commercial terms to deliver to their customer will need to review their contracts to see what implications this has. We can also introduce Customs agents to undertake accurate declarations.

EU VAT registrations

A side effect of importing into the EU will be the requirement to be registered for VAT and potentially appoint a fiscal representative. Without it a business will not be able to claim back their import VAT or trade within the EU. We can handle all aspects of these obligations.

Get in contact to find out how we can help your dealership with its planning for Brexit.

Contact us

If you have any questions in regards to the above content, please contact Jonathan Main on 01772 821 021 orjonathan.main@mooreandsmalley.co.uk.

Off-Payroll Working from April 2021

The Off-Payroll working legislation is designed to counteract the tax and national insurance advantages for workers inserting a company between themselves and their end client. This personal service company – (PSC) contracts with end clients in order to provide the worker’s services. The PSC would then pay dividends, as opposed to salaries, resulting in National Insurance (NIC) savings.

This type of transaction is already subject to legislation to try and counteract it, known as IR35 which was introduced in April 2000.  Where IR35 rules applied, then the worker would be required to operate payroll on payments deemed to be paid by the personal service company.

In 2017, MP Mel Stride was quoted “The cost of non-compliance with IR35 in the private sector is projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.”.  A government consultation paper stated ““HMRC estimates that around a third of people working through their own company should fall within the rules and be taxed as employees. However, currently, only 10% of this group actually determine they should be taxed in this way.”  It is because of this perceived lack of compliance in operating the rules, that the government decided to introduce the off payroll working rules.

The rules work by switching the requirement to determine whether the off payroll working rules apply from the worker’s PSC to the end client.  With this, the potential liability for underpaid income tax and NI also switches from the PSC to the end client.

The rules were originally due to begin on 6 April 2020, however at the last minute the government announced a one year delay to the rules as a consequence of the Covid-19 pandemic.  The rules are therefore due to commence from 6 April 2021.

The rules will only apply to medium/large businesses. Small companies are exempt from the new rules. A small company is one which can satisfy two of the following three conditions:

  • Turnover for the year not more £10.2m
  • Total assets on the balance sheet not more than £5.1m
  • Average number of employees in the year not more than 50

Where the company is part of a group or there are companies under the same control, these companies must be taken into account. Unincorporated businesses are treated as small if their turnover is less than £10.2 million.

Businesses should be taking action now to ensure there is sufficient time to review their contractor’s positions and fully engage with them.  Early and regular communications with contractors explaining the upcoming changes and the process, will reduce the risk of status decision challenges.

Please get in touch with our tax team if you require advice on Off-Payroll working

Tax free gifts for employees

It is that time of year again, Christmas is around the corner. However, this year is a little different as many of us  will be working from home on Christmas jumper day and it is unlikely that we be catching up with colleagues at the annual Christmas party.

To stay in the Christmas sprit employers may want to send gifts to their employees instead, however if that gift gives rise to a personal tax charge it may be unwelcome. As HMRC see gifts to employees as benefits it will be necessary to consider if the trivial benefit rules for employers and employees apply, so certain gifts are exempt from income tax and national insurance.

The key conditions

The current form of the trivial benefit rules imply that no tax is payable if all of the following points apply.

  • The gift has cost the employer  £50 or less, including VAT, per employee.
  • The gift is not cash or a cash voucher (retail gift vouchers should be allowable).
  • The gift is not a reward for the employees work, past or present.
  • The gift is not part of the work contract or other arrangement.

Tax is due on all gifts that do not meet these conditions. As this is an all or nothing exemption, gifts with a value in excess of £50 will be fully taxable in line with the benefit in kind rules.

Where the  benefits are classed as ‘trivial’, HMRC do not require any notification of these gifts  being made.

Where various gifts are bought in bulk and provided to employees, working out the exact cost per individual gift may be impractical. When this happens the average cost of the gift can be used, and it must come under the £50 limit to remain ‘trivial’.

The special treatment of directors

Directors of close companies i.e. companies owned and controlled by five or fewer shareholders, have an annual cap placed on the value of ‘trivial’ gifts they receive in one tax year. The current form of the rules has a cap of £300. General employees are not subject to this rule.

What to watch out for

There is no general rule which places a limit on the number of ‘trivial’ gifts an employee can receive in one tax year, provided all the rules are met per gift. HMRC do however have rules in place which prevent employers from trying to divide a larger gift into several smaller gifts.

An example of this provided by HMRC shows how providing an employee with a gift card costing £10, would initially fall within the ‘trivial’ benefit rules. If the employer were then to top up the same card on 7 further occasions at a cost of £10 per time the total cost to the employer would be £80. Even though the card is topped up at separate occasions, the provision of the card forms a single benefit, and the total cost would be fully taxable in line with the benefit in kind rules. Retail vouchers from different stores should not fall under this treatment as they do not constitute one single benefit, so the limit per voucher would remain at £50.

Contact us

If you are unsure about how the rules may apply to gifts you are giving to your employees, please get in touch with Uzair Qasim, Healthcare Tax Assistant Manager, or alternatively contact us here.

North West construction sector: stamina and persistence required to maintain Covid recovery

The construction sector can overcome the economic challenges of coronavirus but it is likely to be a long road to full recovery.

That’s according to a survey of 100 construction companies across the UK, compiled in association with Lancashire-based accountants and business advisers MHA Moore and Smalley.

The MHA Construction Sector Report 2020 found that while 71 per cent of companies who have used the Government’s furlough scheme planned to bring back all furloughed staff, 32 per cent of companies surveyed had been forced to make redundancies.

And while 44 per cent of those surveyed said coronavirus was having minimal impact on their business, 49 per cent claimed the impact was substantial, with 30 per cent believing it would be more than a year before business returned to pre-pandemic levels.

Joe Sullivan, partner at MHA Moore and Smalley’s Preston office said:

“The fact that the majority of firms using the furlough scheme plan to bring back all furloughed staff is a positive sign. However, the sector’s future is currently very uncertain.

“Government projects are now the most likely source of revival. Housebuilding, although buoyed by strong demand, is likely to suffer from a rise in unemployment. Commercial building is unlikely to thrive, with many companies questioning whether they need as much office space as before.”

He said with the stark contrast between companies who had felt minimal impact from coronavirus and those claiming the impact had been substantial, any future government relief must be properly targeted.

Joe added:

“Not everyone needs help and there is no blanket solution for the companies that do need assistance. In particular, the government needs to be mindful that big infrastructure projects tend to benefit larger companies the most, and even disadvantage small ones by sucking in materials and labour.”

The biggest concern, shared by 61 per cent of respondents, was economic uncertainty. Supply chain disruption also ranked high on the list of worries, mentioned by 45 per cent of respondents.

The vast majority of respondents have used of some form of Government support. 81 per cent have used the furlough scheme and 68 per cent have used the VAT deferral scheme.

However, take up of other schemes was much lower, with only 13 per cent making use of the Coronavirus Business Interruption Loan Scheme (CBILS) and 12 per cent taking advantage of the Bounce Back loan scheme.

The MHA Construction Sector Report 2020 can be viewed here.

Is time running out for proactive tax planning? Webinar recording

It is no secret that Rishi Sunak will be looking for ways to raise taxes and has already called for a review of Capital Gains Tax (CGT) while the Public Accounts Committee have called on the Government to account for “tax giveaways”.

Our latest webinar Jonathan Main, indirect tax partner, discussed topical VAT issues focusing primarily on the implications of Brexit. Whilst our specialist tax advisers looked at ways of ‘banking’ some of the tax reliefs that are currently available before any Budget measures take effect. The focus was on Capital Gains Tax and Inheritance Tax in relation to owner managed businesses.

To view the video, please click below:

What effect will the postponed Budget have on farmers?

Surveying the state of the agricultural industry at Michaelmas 2020, there is something of the feel of the Edwardian era – a last period of sunshine, shooting parties and prosperity before the country was plunged into a war economy, turmoil and recession. Certainly not everything in the industry is now perfect, but we are seeing wheat futures approaching £190/tonne, beef and lamb prices up 15-20% and red diesel down by nearly a third over the last twelve months. After difficult weather last year, the autumn cultivations are well ahead and some welcome rain in the last week should see crops off to a good start.

Moving from the meteorological to the political, the announcement that the autumn Budget has been cancelled takes a little away from the threat of capital tax reforms, and the extension of the income tax deferral period will be a significant help for those whose cashflow might have been stretched in January. Indeed, the whole Covid-19 aid package will have benefitted an industry which, for many, has seen little direct impact of the disease so far but has brought benefits in the shape of bounce back loans, self-employed income support grants, business rate rebates and tax deferrals.

The rural economic bulletin published in September, shows that for most, rural life really isn’t too bad these days. By comparison with the urban environment, average house prices are £27,000 higher, unemployment is 0.7% lower and whilst the number of redundancies has risen over the last year, the increase in percentage terms is less than half that of urban areas. Even the incidence of Covid-19 cases has been lower with 415 cases per 100,000 being recorded in predominantly rural areas compared to 729 in predominantly urban environments.

It almost goes without saying that at this point, the probability is that life is likely to take a downturn. Some factors are at this stage unknown: the state of the Brexit trade negotiations (and impact on prices) will become apparent in the next few weeks, the extent of the second wave of Covid does not look encouraging and the autumn and winter weather is, as usual, anybody’s guess.

Other problems are easier to predict. We know that BPS, which makes up a significant part of farm incomes, will be phased out from next year. We know that the deferred tax liabilities will come home to roost in January 2022 and those who have taken out bounceback loans as cheap finance will need to repay them next summer. We can be pretty much sure that at some stage taxes will need to rise and although there is a feeling that pain will need to be shared across all income levels, and that the repair to the national finances will be a long term process, capital taxes (and particularly capital gains tax) may well be one of the areas where significant money can be raised without too much immediate outcry. Certainly, the possibility of the tax burden on agriculture being reduced seems remote in the extreme.

So, whilst the latest fiscal announcements are generally good news, these should be seen as a breathing space to enable the implementation of a farm survival strategy rather than an indication that everything will be fine in the future. The parable of the seven fat cattle being devoured by seven thin cattle is one that has stood the test of time.

Keith Porter, Head of Agriculture at MHA Moore and Smalley advises;

 “Whilst many businesses are in a strong position, now would be a good point in time to prepare for the worst, do the cashflow forecasts and business plans  –  and try to ensure there is still a viable farm business by the end of the decade.”

Find out more  

To discuss this and how we can help your agriculture and rural business, please get in touch.

This update originally appeared on the website of our colleagues at MHA MacIntyre Hudson