The life-changing power of employee ownership

avatar Posted on April 22nd, 2014 by Graeme Nuttall

Why would you want your employees, in Nick Clegg’s words, to own “a big chunk” of your company? The answer is simple – for many companies, employee ownership improves business performance, economic resilience, employee commitment and engagement.

“Employee ownership (EO) is a distinctive business model, a different perspective. And for some companies this is life-changing.”

The following interview is reproduced from HSBC Corporate World, Spring 2014 issue:

“The re-launched UK employee ownership index looks at listed companies with 3% or more employee ownership (excluding main board directors). The total return for shareholders in companies like this rose by 53% in 2013 compared to 21% for the FTSE All-Share Index. Clearly something better is happening in companies with this level of employee share ownership.  The 10% index performed even better in 2013 than the 3% version. The total return from listed companies with 10% or more employee ownership was 65% compared to the 21% for the FTSE All-Share Index.

Employee ownership (EO) is a distinctive business model, a different perspective. And for some companies this is life-changing. EO takes a conventional company, with a board of directors chosen because of their skill-set, and changes how it is traditionally owned, so that all employees have an ownership stake in the company, not just senior executives or key individuals.

That stake must be significant and meaningful. It must underpin structures that promote employee engagement in the company. Over the last two years, there’s been tremendous support from the UK government for EO. There’s now greater awareness of the concept, more resources to support EO and it’s become easier to implement. There are guidance materials and precedent documents on government websites, and we even had the first EO Day in the UK last July. But there’s still a long way to go.

We have to move away from companies introducing EO in the UK because of serendipity or because they’ve invented it from scratch. We have to get to a position where EO is as well-known a concept as establishing a charity or franchising or a management buyout. Until the last few months, most companies with EO introduced it because a manager or owner once worked for one of the UK’s flagship employee-owned companies, such as the John Lewis Partnership or Arup, or otherwise met someone from the EO sector. 

Last year the UK government changed company law. These changes help direct employee ownership, by making it easier for a company itself to buy shares from employees who leave and cancel them, or hold them in treasury.  There’s a consultation going on over abolishing the 125-year perpetuity period for employee trusts. If a charity or a pension scheme can exist forever, why not an employee trust? There is also a consultation on new tax exemptions that support the indirect (or trust) model of EO.

The government is introducing a capital gains tax exemption to encourage EO as a succession solution and an income tax exemption for bonuses. These measures could be key to maintaining the EO momentum in the UK. My hope is that the framework for obtaining these tax reliefs will be commercially acceptable, to the point of setting a new benchmark for the design of employee trusts. In other words, companies will set up employee ownership trusts of this sort because this is what is right for them commercially, as an employee ownership solution, not because they want to get the tax breaks.”

HSBC Corporate World is the bank’s publication for UK mid-market businesses, those with turnover of £25m – £800m.


Employee ownership trusts – explanation of changes following consultation

avatar Posted on March 27th, 2014 by Graeme Nuttall

On EO Day 2013 HM Treasury announced that “Following the findings of the Nuttall Review and in order to support this sector, the Government has decided to introduce two tax reliefs to encourage, promote and support indirect employee ownership”. The Finance Bill (see clause 283 and schedule 33) published on 27 March 2014 contains helpful changes in response to the consultation on the original drafts of these reliefs. An earlier article on the new CGT and income tax exemptions for employee ownership trusts explained that some important amendments and clarifications were needed.  The following is an explanation from HM Revenue & Customs of the changes made, as sent to those involved in the consultation (hyper-links have been added):

“…The government has today published the Finance Bill 2014. It contains legislation introducing tax reliefs for indirectly employee owned companies, a draft of which was published for technical consultation on 10 December 2013. We have made changes to the legislation reflecting views we received and I wanted to write to you to set out how those changes affect the legislation.

We received 22 responses to the technical consultation ranging from small businesses that are employee owned or considering becoming employee owned, through to big businesses with a degree of employee ownership, as well as professional advisors and representative bodies.

The general theme of the responses was that although the tax reliefs are welcome, respondents thought that some of the conditions around the reliefs and the employee ownership trust (EOT) in particular were too restrictive and would result in companies having to set up another trust or trusts to ensure that, while they were able to claim the tax reliefs, they could retain a degree of flexibility in dealing with their remaining shares.

What has changed?

Structure of the Employee Ownership Trust (EOT)

1. We recognise that many trusts that were set up for employee ownership before the publication of our draft clauses will have been set up as employee benefit trusts (EBTs). While compliant with the existing legislation that gives an IHT exemption, such trusts may have been incapable of meeting the stricter EOT conditions without amendment to their trust deeds.

2. It is not our intention to require that companies whose trusts have been operating quite genuinely for the benefit of all of their employees and which already held a significant shareholding on 10 December 2013 should have to incur costs in amending their trust deeds (or, in some cases, setting up an entirely new trust) in order to meet the all-employee benefit requirement and hence qualify as an EOT.

3. The amended legislation therefore introduces an alternative way for certain pre-existing trusts to qualify for the tax reliefs: the “behaviour requirement”. The behaviour requirement looks at the actions of the trustees to see if they would meet the intentions of the EOT legislation over a specified period of time. If the actions of the trust meet the criteria then the trust is deemed to meet the all-employee benefit requirement, and may be treated as an EOT subject to the other relevant requirements.

4. A number of respondents have told us that, even with the behaviour requirement, their structures will not qualify for the tax reliefs and suggested the criteria be made less restrictive. In particular, several companies are partly owned by trusts which operate at least in part for the benefit of charitable organisations rather than their employees. The set-up is such that the structure will not qualify as an EOT e.g. because a single trust will never hold more than 50% of the company shares with the necessary voting rights (so the controlling interest requirement is not met). While we are sympathetic to the businesses that are affected, and recognise that these structures were set up prior to the EOT legislation and have been operating in a way similar to employee trust owned companies, we have decided not to accommodate these structures. To do so would add a great deal of complexity to the legislation.

5. Respondents told us that the legislation was not flexible enough to accommodate hybrid models of direct and indirect ownership because the EOT will not be able to be used for warehousing shares that the company intends to use for plans that award shares directly to employees. For example they suggest if an EOT holds 71% of the company’s shares, then the trust should be permitted to use say 20% of those shares for direct share ownership plans, as long as a more than 50% of the shares remain in the trust.

6. We propose to facilitate the role of the EOT in the conduct of share schemes operated by the company. In order to do this, we have amended the legislation so that shares to which the new CGT relief applied when they were acquired by the trustees will be pooled separately from other shares of the same class, and when they make a disposal the trustees will be able to specify from which pool the disposal occurs. We have not provided a specific tax relief for shares warehoused in the EOT that are transferred into share schemes; in order to meet the all employee benefit requirement the trust will have to dispose of the shares to the share scheme at market value. However, the pooling arrangements will prevent the trustees’ gains on the disposal of shares to a share scheme being inflated by the deemed acquisition cost of shares to which the CGT relief applied.

7. We were also told that the deeds of most trusts created for the purpose of employee ownership require the trustees to waive their right to receive dividends in relation to the company shares they hold. This is because it is more tax-efficient for the trust to be funded as necessary by gifts or loans from the company rather than pay tax on dividend income. Such a waiver was prohibited under the draft legislation because it prevented the trustee from being entitled to profits available for distribution. We have amended the legislation to ensure that the requirement to waive dividends will not disqualify the trust from being an EOT. And we have gone further by ensuring that where there is no compulsory dividend waiver, but the trustees voluntarily waive a dividend, this will also not be a disqualifying event.

8. Trustees may use their shares in the company which they control as security for a loan. We are content that such security arrangements should not constitute arrangements whereby the trustees may cease to have a controlling interest in the company. We have amended the legislation to ensure that the mere existence of such arrangements will not result in the trustees failing to meet the controlling interest requirement. However, if the trustees actually lose control of the shares e.g. because they default on the loan under such an agreement then they will cease to meet the controlling interest requirement.

9. To prevent potential unfairness and difficulties on cessation of the business or disposal by the trustees of all their shares, we have amended the legislation so that in these circumstances the eligible employees to whom distributions may be made by the trustees must include employees who ceased employment in the preceding 24 months.

10. A further issue that has been raised by respondents as causing concern is that where a controlling interest in a company is held by an EOT (with a corporate trustee) the company may not be able to operate a Share Incentive Plan (SIP) or other tax advantaged share scheme. SIPs are widely used by companies as they represent a tax-advantaged way to remunerate employees with shares; they facilitate direct employee share ownership rather than the indirect employee ownership that the EOT represents.

11. The draft legislation has been amended to confirm that a company owned indirectly by its employees through an EOT (with a corporate trustee) can also operate one of the tax advantaged share schemes. We have amended the legislation relating to the tax-advantaged share schemes (SIP, SAYE, CSOP and EMI) to allow a company controlled by a corporate trustee of an EOT to operate such schemes, subject to the other relevant conditions being met. As the EMI scheme is a notified State Aid, the change will only take effect once any necessary clearance is obtained from the EU Commission.

12. Concerns have been raised about the fact that the EOT is not permitted to transfer any settled property into another trust. This restriction is intended to prevent the trust getting round the EOT conditions by creating new trusts on different, less stringent, terms and transferring property to them. However, we accept that without amendment this might unduly restrict the transfer of trust assets to a new EOT where that is desirable or necessary for bona fide commercial reasons including those related to the expiry of the 125 perpetuity period under UK trust law. The Department of Business Innovation and Skills is currently consulting on the perpetuity rules and one of their proposals is to abolish them so that trusts would be able to continue indefinitely. We cannot be sure of the outcome of that consultation and have decided to amend our legislation to accommodate transfers from one EOT to another.

13. We have also clarified that the EOT conditions will be met where the EOT gives the trustees power to amend the terms of the trust such that the assets are held on trusts which continue to meet the conditions in the future.

14. We have decided to make a further change in relation to office-holders. The change will require trustees to make payments to office-holders as eligible employees to the extent that the trust deeds permit them to do so. Where such payments are made they must be made to all persons (including office-holders) on the same terms. We recognise that many existing trusts specifically exclude office-holders from being beneficiaries and so this change will be permissive – that is to say it will only apply if the trust deeds enable the trusts to make such payments. Where no such provision exists, the equality requirement will not be breached if office-holders are excluded.

Capital gains tax (CGT) relief

15. Stakeholders have provided us with feedback that the limited participation requirement, which seeks to deny CGT relief in some cases where the ratio of participators to employees who benefit from the EOT is greater than 2/5, is too restrictive. Stakeholders were concerned that actions which were outside the control of the trustees (for example, an employee resigning), could in some circumstances result in a CGT charge on the trustees. We have therefore amended the legislation to ensure that the EOT is allowed a ‘grace period’. If the participation fraction test is failed for six months or less, and for reasons beyond the control of the trustees, then the trust can continue to be treated as an EOT and no CGT charge will arise.

16. There was concern that some provisions of the equality requirement appeared to work against one another. For instance, a distribution of settled property by trustees based on employees’ salaries might be permitted by one part of the legislation, but could have results which suggest another part of the legislation would prohibit it. We have amended the legislation to remove any contradiction.

Exemption from income tax on bonus payment

17. We have amended the legislation to provide flexibility when an employee dies or is asked to leave their employment. There will be circumstances when the company wants to pay a bonus to a former employee and circumstances when they don’t want to do so. We think it is right to give employers some discretion and have amended the legislation so that either making or not making a bonus payment to somebody who was an employee in the last 12 months doesn’t disqualify the bonus payments made to the rest of their employees from the income tax exemption. Some stakeholders have suggested extending this to employees who have left in the last 24 months, but we consider that a 12 months period should capture all or most of the former employees a company might wish to reward.

18. We have considered the treatment when an employee is subject to disciplinary proceedings. There will be occasions when a person remains in employment having had a finding of gross misconduct made against them. We do not want our legislation to require that bonus payments are made to the employee in those circumstances. Where the finding of gross misconduct has been made within the previous 12 months of the award being determined, or the employee is subject to disciplinary proceedings for gross misconduct at that time and is not subsequently cleared, the participation requirement will not be infringed by their being excluded from the award. However, if the outcome of the disciplinary proceedings is that the employee is cleared, the employer must pay the bonus on the same terms as other employees within a reasonable timeframe.

19. Similarly, stakeholders have suggested that there are occasions when they will want to exclude an employee from benefiting from a bonus payment. This might be the case for an employee who has been made bankrupt. We do not think it would be right for government legislation to support not making funds available for creditors of a bankrupt employee and have not therefore amended the legislation to permit this.

20. We think there may be a risk from small companies being set up in an EOT structure to benefit from the income tax exemption, where the only employees are also the office holders (directors). We have introduced a further requirement that the proportion of directors and office holders to other employees must be less than a certain fraction in order for the exemption to be claimed. If we take an example of a qualifying company where there are two directors and six employees, one of whom is connected to a director, the ratio of directors and connected persons to unconnected employees is less than 2/5 so the employer is able to pay tax-exempt bonuses.

21. However, we acknowledge that in small companies the loss of one employee could have a significant impact. To ensure that these restrictions don’t have too harsh an affect we would allow companies a grace period to remedy inadvertent breach of this new requirement.

22. Stakeholders have requested greater flexibility for employers to differentiate between individual employees or between particular units of the organisation. While we are happy to accommodate arrangements which don’t pay an equal sum to all employees, we don’t think that performance related pay (whether that be the performance of the individual or of a specific part of the business) particularly fits with the policy rationale, which is to allow companies to reward their employees in their role as owners of the business. We therefore do not intend to accommodate this.

Inheritance tax relief

23. We have made only minor consequential changes to the inheritance tax parts of the legislation, but the legislation has been substantially restructured to make it easier to understand.”

Explanatory notes on Schedule 33 to the Finance Bill as published on 27 March 2014 are available. Full background materials on these tax exemptions are listed (with hyper-links) in the article “Nuttall Review of Employee Ownership – quick guide to source materials


UK Budget: tax break for North Sea fields & venture capital relief curtailed for certain renewables

avatar Posted on March 26th, 2014 by Andrew Prowse

In the UK’s annual budget speech on 19 March 2014, the Chancellor announced that the government will consult on the introduction of a new North Sea tax allowance. Its aim would be to encourage billions of pounds of extra investment in the UK’s maturing oil & gas industry. The proposed incentive relates to the development of ultra-high pressure, high temperature fields (u-HPHT) that typically demand higher spending to exploit because of the technical difficulties of bringing hydrocarbons to shore.

The Ultra-High Pressure, High-Temperature Cluster Allowance would exempt a portion of a company’s profits from the Supplementary Charge (which is currently 32%).  The amount of profit exempt will equal at least 62.5% of a company’s qualifying capital on u-HPHT projects. It is expected HM Treasury will launch a consultation in relation to the Ultra-High Pressure, High-Temperature Cluster Allowance over the summer of 2014, and that the allowance will be included in Finance Bill 2015.  This allowance will be similar in structure to the onshore allowance announced in the Autumn Statement (and reconfirmed in this year’s Budget) that we reported previously here.

Maersk Oil and BG Group have announced that the new u-HPHT allowance will help enable the development of two new projects, which will lead to investment of £6 billion across new fields.  They estimate that these two big projects will create more than 700 new jobs and close to 8,000 more jobs will be supported along the supply chain. These jobs will be spread across the country, with about half likely to be in Scotland.

The Chancellor also said the government would take forward all the recommendations of Sir Ian Wood’s recent report and that the government would review the tax regime for the entire oil & gas sector to make sure it is fit for purpose having regard to the maturing nature of the asset.

Aside from his measures affecting the oil and gas industries, the Chancellor also announced that investment in companies benefiting from Renewables Obligation Certificates and/or the Renewable Heat Incentive scheme with effect from Royal Assent of Finance Bill 2014 will not be eligible for EIS (enterprise investment scheme) or SEIS (seed enterprise investment scheme) relief, or for VCT (venture capital trust) relief.  The renewables sector, particularly solar and wind projects, has in recent times benefited from substantial venture capital investment and this change, which is understandable in terms of the policy of the reliefs (which are aimed at investing in risk opportunities, rather than those backed by government subsidies producing a reliable income stream), may have a marked effect on access to and the nature of funding in this area.

Click here for a link to the UK Budget Speech


Casino on a ship is a fixed establishment for VAT purposes

avatar Posted on March 24th, 2014 by Nick Beecham

We have advised Astral Marine Services Limited (“Astral”) on its successful appeal to the First Tier Tribunal.

Astral is a UK company and is granted a licence by ship operators to site its casino business on-board the ships in return for a share of revenue.  The casino business is carried on by Astral’s self-employed croupiers.  HM Revenue & Customs ruled that the licence has an entirely UK  place of supply under the general B2B rule on the basis that Astral should be treated as belonging in the UK.  Astral appealed arguing that its casinos constitute fixed establishments to which the licence is supplied and therefore outside the scope of VAT to the extent that the ship is situated outside UK territorial waters, in particular on the high seas.

In seeking to deny the VAT treatment sought by Astral, HM Revenue & Customs raised a number of arguments that the casinos were not a fixed establishment to which the licence should be treated as granted:

a)         The domestic VAT legislation (Section 9(3)(b) VATA) refers to the position where the recipient of a supply has a business establishment or some other fixed establishment in “more than one country” – the recipient is then treated as belonging in the establishment which is most directly concerned with the supply.  HMRC argued that Section 9(3)(b) did not include the case where the fixed establishment was located on the high seas and so not in another “country”.  The FTT, however, decided that Section 9, should be read in accordance with Article 44 Directive 2006/112/EC which refers to “place” rather than “country” and so would include a place outside the EU.

b)         HM Revenue & Customs argued that a casino on-board a moving ship is not a fixed establishment, relying partly on the Oxford English Dictionary definition of “fixed”.  However, the FTT accepted that the ECJ cases of Berholz and Faaborg-Gelting clearly indicated that it was possible for there to be a fixed establishment on-board a ship if it has the permanent presence of the human and technical resources for the provision of services.  (These two cases were decided when the legislation in question was Article 9 of the EC 6th Directive which was worded so that for a supplier with a business establishment and fixed establishment in two different places, there was an effective choice between regarding the place of supply as made from the business establishment or the fixed establishment.  On that basis, the ECJ’s decisions were that recourse was only made to the fixed establishment if using the business establishment led to an irrational result.  However, in contrast Article 44 Directive 2006/112/EC, determining the place of supply by reference to the place where the recipient belongs rather than the supplier, mandates the place of supply to be the place of the fixed establishment where the supply is to the fixed establishment.)

c)         HM Revenue & Customs argued that recourse to the fixed establishment was only possible where the recipient had one fixed establishment, not more than one.  However, the FTT accepted Astral’s argument that this would lead to absurdity – it would mean that a theoretical rival to Astral operating on-board only one ship would have a different VAT treatment to Astral for no apparent reason.  Although Section 9 VATA does refer to “fixed establishment” in the singular, this was easily resolved as including the plural by virtue of the Interpretation Act 1978.

d)         HM Revenue & Customs argued that human resources can only be employees so that the croupiers, being self-employed, were not human resources of Astral.  However, in the ECJ case of DFDS, a UK subsidiary had been held to be a fixed establishment of its parent yet clearly the UK subsidiary was not an employee of its parent.  The FTT also accepted the broader approach proposed by the Advocate General in the ECJ case of RAL of interpreting the concept of human resources.

So then, the FTT decided that Astral’s casinos amounted to fixed establishment on-board the ships and that the place of supply of the licences depended upon the extent to which the ships are situated outside UK territorial waters.

This case, then, is important in giving helpful guidance on the place of supply rule for a recipient established in an EU member state, such as the UK, with one or more fixed establishment in different countries or places and where the human resources are not necessarily employees.  It is also useful in confirming that a fixed establishment may exist on-board a ship, as well as clarifying the change in law which occurred when Article 9 of the EC 6th Directive was replaced by Article 44 Directive 2006/112/EC.


FFW’s Tax Partners Contribute to PLC’s Leading Experts Budget Commentary

avatar Posted on March 21st, 2014 by Andrew Prowse

Once again, FFW’s tax partners contributed to PLC’s Budget 2014 leading experts’ tax commentary.  Our comments are set out in full below:


O tempora o mores!

In 2005, HMRC announced (in somewhat Panglossian fashion) that tax avoidance would be ended by 2008. Budget 2014 implicitly confirms that this aim has yet to be achieved, and, indeed, probably never will be. Some nine years on, tackling avoidance remains a key theme for the Government; and yet further measures with the objective of curbing “tax avoidance” have been announced. It is to be noted that the introduction of the GAAR under Finance Act 2013 has yet to preclude the, at least, annual publication of screeds of targeted anti-avoidance legislation. A further weapon in HMRC’s ever-burgeoning arsenal of measures available to be used against what it perceives to be egregious tax avoidance committed by a minority of taxpayers is to be introduced in Finance Act 2014: accelerated payment notices. These will require the tax said to arise in relation to avoidance structures to be paid before it is determined by the First-tier Tribunal whether or not there is a tax liability. The explicit basis of this policy is to preclude the taxpayer obtaining a cash flow advantage from entering into a tax avoidance structure, in respect of which it may take several years before its being considered by the First-tier Tribunal. As a corollary, the implicit basis is that it is the Treasury that should have the cash flow advantage: “this will … secure tax revenues for the provision of public services.” Chipping away at the somewhat glacial pace that tax disputes often have to progress at is, accordingly, unlikely to be a focus of the Government. It is expected by the government that accelerated payment notices relating to existing avoidance cases currently under dispute (which concern £7.2 billion of tax) will be issued to c.33,000 individual taxpayers and c.10,000 corporates primarily over the course of 2014/15 and 2015/16. There are two bases on which an accelerated payment notice will be able to be issued. The first is in relation to arrangements that have been notified under the DOTAS rules or have been the subject of a GAAR counteraction (a “DOTAS APN”). The second is where the “claimed tax effect [of the avoidance structure] has been defeated in other litigation” (a “CTE APN”).

A CTE APN may be issued only if there has been a relevant final judicial ruling. A final judicial ruling is a decision of the Supreme Court or an un-appealed decision of any other court or tribunal. This is even though, first, a decision of the First-tier Tribunal is not binding precedent and, secondly, that a taxpayer has chosen not to continue with an appeal is not conclusive of that appeal not being meritorious per se. Given the anticipated numbers of APNs to be issued as against the comparatively much small number of Supreme Court decisions in relation to tax avoidance matters that have been released, it may well be that HMRC will be encouraged to adopt a wide interpretation of the precondition for a CTE APN: “the principles laid down … would, if applied to the applied arrangements, deny the asserted advantage”. The risk is that arrangements that might have, at best, only a superficial similarity to the principles laid down in a decided case will be considered sufficient. Indeed, in many instances, it is motive, rather than, say, the contractual terms, that has been determinative.

There is no route to appeal against the issue of APNs to the First-tier Tribunal. Recipients of an APN will have to either appeal the penalty or issue judicial review proceedings to challenge the APN. The government expects that “a range of different legal challenges, including judicial review proceedings, an increase in closure notice applications … and disputed enforcement activity” will ensue.

Each of the measures has a degree of retrospectivity – “judicial rulings” includes decisions released before the enactment of Finance Act 2014. It is intended that CTE APNs can be issued consequent on pre-Finance Act 2014 decisions, but may not be issued later than two years after enactment of Finance Act 2014 or one year from the day the return was submitted or appeal made. It may be that DOTAS APNs will be able to be issued in relation to arrangements that have been notified prior to the enactment of Finance Act 2014.

That the fons et origo of the DOTAS rules was to provide HMRC with information about tax structures in advance of their receipt of tax returns seems to have been forgotten in the tax avoidance maelstrom. An arrangement being notified under the DOTAS rules was not an egregiousness signifier. Previously, it had not been uncommon for advisers to recommend that a notification should be made in circumstances where there was uncertainty as to the application of the rules. That may not be the optimal approach post Finance Act 2014. The numbers of DOTAS notifications has been falling year on year (from 587 in 2004/05 to 77 in 2012); that fall may be accelerated consequent on the introduction of DOTAS APNs.


It was commended to the House as a Budget for “the makers, the doers, and the savers”, although perhaps the savers did best this time around as recompense for having involuntarily put up with desperately low interest rates on their savings for years (or to get their votes…). Pensioner bonds, to redress the imbalance of the effect of interest rates for savers versus borrowers, and intended to pay an above market interest return are likely to prove popular. However, much more fundamental are the changes to the structure of pensions, intended to offer greater flexibility to investors. A huge change will be the removal of the requirement to buy an annuity, expected to take effect from April 2015. The billions wiped off the share value of UK insurance industry a few minutes after the Chancellor made the announcement, and before he had finished his speech, indicated the significance of this proposal. For those still some way off retirement, the benefits of the new regime are likely to be moved further off, as a result of consultation for the normal minimum retirement age to be moved from 55 to 57 from 2028. It will be interesting to see whether in the future the Chancellor will play around with tax relief on pension contributions as the price for greater flexibility on drawdown. In the meantime, in addition to making pension contributions, savers will be able to invest more, more flexibly, in nicer ISAs.

For businesses (the makers and the doers), it was generally a quieter affair. For the owner-managed sector, it was a case as steady as she goes. Despite some rumours, the reduction in the main rate of corporation tax to 20% from April 2015 was not brought forward a year, the main rate from April this year being fixed at 21%. However, there was good news in the form of the doubling of the annual investment allowance to £500,000 from 1 April 2014 to 31 December 2015. Given that the AIA will plummet back to £25,000 from 2016, the Chancellor clearly hopes his measure will spark a rush of investment (more making and doing, and less saving). He is probably right.

Those who invest in the makers and doers will be pleased to see that the Seed Enterprise Investment Scheme (SEIS) and the associated capital gains tax reinvestment relief will be made permanent (it was originally only a temporary measure). For EIS and SEIS, the government announced that it will consult on the need to accommodate the use of convertible loans. This is encouraging. At present, shares issued on the conversion of convertible loans do not without additional structuring qualify for EIS or SEIS status, whereas, conceptually, the investor is on conversion taking risk in the company in a way commercially comparable to straightforward EIS-eligible investors.

In addition, the government is concerned about the use of what it calls contrived structures to allow EIS investment in low-risk activities benefitting from income protection through government subsidies. We can expect venture capital tax relief for these structures to be stopped. EIS and SEIS are aimed at giving investors a tax break to encourage investment in riskier enterprises and so it is no surprise that the government is targeting structures where the risk may not warrant the relief. It will be interesting to see the detail of what the government has in mind and how it will take effect.

Whilst it was ‘steady as she goes’ for most, those involved in perceived tax avoidance faced choppier waters. There were the usual specific measures and tweaks to DOTAS. Advance payment notices will enable the government to get its hands on disputed tax up-front in a move that (like the new follower penalties) seems a little incongruous with the Chancellor’s support in his speech of the Magna Carta. One wonders whether the cash-flow advantage from APNs will make the speed of progress of tax cases even more like sailing into the wind than now and, to overdo the metaphor, whether HMRC will seek to pick off the weaker ships first so that it can issue APNs to the whole fleet.


This is, hopefully, the dawning of a new era. Budget 2014 confirmed the previously announced important new tax exemptions for employee ownership trusts (“EOTs”) will be enacted in the Finance Bill 2014. These exemptions have wide-ranging potential to create a fairer choice between direct and indirect employee ownership business models:

  • There will be no need to compromise the principle of employee trust ownership to provide tax free bonuses to staff. Instead of the complexities of having to establish a share incentive plan (“SIP”), a company controlled by an EOT will be able, instead, to pay income tax free cash bonuses, on same terms, to all employees. The same individual limit as now applies for SIP free share awards, £3,600 per tax year, applies to these bonus payments. The income tax exemption provides a tax effective reward to employees for working in a company that adopts the trust or indirect model of employee ownership.
  • The new capital gains tax (“CGT”) exemption will provide an alternative solution for owners with a succession problem: a sale to an EOT. Why sell to, say, a few managers in a management buy-out and pay 10% CGT (after entrepreneur’s relief) when there is a complete CGT exemption for an all-employee buy-out?
  • The many owners currently planning to introduce indirect employee ownership will have an additional way to help finance that move; through the tax savings in the new income tax and CGT exemptions.

But the employee ownership sector has to wait until 27 March 2014, for the publication of the Finance Bill to see what changes have been made during the consultation process. The original specification of an EOT needed changes to it. There were encouraging signs, from HM Revenue & Customs and HM Treasury, during the consultation process that some additional flexibility would be added to make the EOT a more viable option. Let’s see what gets announced on 27 March 2014.

Budget 2014 confirmed that the government will also consult on the Office of Tax Simplification (“OTS”) proposal to introduce an employee shareholding vehicle. As previously acknowledged by the OTS, the need to facilitate sales by employees of relatively modest quantities of shares that they have acquired via a share plan, and the need, identified in the Nuttall Review of Employee Ownership, to hold a large static shareholding “should be considered together, in order to have a consistent approach to a common theme, and to avoid complexity and contradiction in any resulting legislation



FFW’s Budget Blogs Summary

avatar Posted on March 20th, 2014 by Andrew Prowse

Yesterday, the Tax & Structuring Team was blogging about the key measures in Budget 2014.  Here are links to the posts:

Budget 2014: Your Pension – you can spend it all at once

Accelerated Payment Notices

New CGT and income tax exemptions for employee ownership trusts

SEIS will not cease and EIS may have a few tweaks

Equity incentives – Two new consultations announced

Confirmation of increases in SIP and SAYE plan limits

Personal allowance and income tax thresholds

IHT –  liabilities and foreign currency bank accounts

Budget 2014; what’s new for non-residents?

Residential property in a corporate envelope – new tax thresholds

Budget 2014 – Funds Taxation


Tomorrow, PLC will be publishing opinion pieces from leading expert tax practitioners.  Our tax partners have contributed to the piece and we will post our comments in full tomorrow.




Budget 2014: Your Pension – you can spend it all at once – David Gallagher – Partner Field Fisher Waterhouse LLP

avatar Posted on March 20th, 2014 by Andrew Prowse

The pensions changes in the Budget have been a major talking point. Here David Gallagher, our Head of Pensions, shares his thoughts.

The Chancellor has announced radical changes to pensions. The most radical one only applies to defined contribution schemes, which are often called “money purchase” schemes.

The main change is that from 2015 individuals will have the choice to take some or all of their pension fund as cash at any age from 55 onwards. They will pay tax on this but only at their marginal rate at the point of income. Carefully structured, drawing from one fund could be combined with deferring another pension and state pension to produce significant tax savings.

This removes one of the structural rules of UK pensions and over the next year the Government will examine all the knock-on effects and decide which ones it can tolerate. It has already flagged up that it will ban most public sector workers from transferring their final salary pensions to a DC scheme to take the pension as cash. They are not sure whether they will need to do this for private sector schemes.

It also reverses the position taken by public authorities that transferring members to schemes which allow them to cash out their benefits are abusing the current system – the new system is based on legitimising that practice, which up until now has been known as “trust-busting”.

There are a lot of major questions to be answered over the next year. The most technical is how this interacts with the changing rules on what is a “money purchase” benefit and what is a “money purchase” scheme. The less technical issues include: Will a transfer ban produce a rush to beat it? Will final salary schemes let their members convert to money purchase without transferring out? Will all the complex rules on foreign transfers – which are focussed on maintaining the UK’s ban on taking a pension fund as cash – be abolished?

The budget also introduced some immediate (from next Thursday) flexibility which mainly takes existing easements and increases their impact by changing monetary limits. So the current rules that anyone can take their pension pot as cash if it is worth less than £2000 and they have only 2 such funds becomes £10,000 and 3 such funds. The £18,000 lump sum threshold for lump sums in a scheme which is winding up becomes £30,000.

Another new rule will be a requirement on pension providers and money purchase schemes to give every member free face to face advice at retirement. For money purchase pension schemes this will be a major cost and, if there is no duty on an employer to contribute, it cannot be provided for free.  For the government the point to note here is that the advice is likely to focus on the increased scope to reduce income tax in retirement which they have created.


Funds Taxation/Budget 2014

avatar Posted on March 19th, 2014 by Nicholas Noble

There are the following Budget Day 2014 announcements affecting funds taxation:-

  • SDRT on transactions in collective investment schemes will cease from 30 March 2014.  There will continue to be SDRT on non-pro rata in specie redemptions.
  • The subscription limit for both stocks and shares and cash ISAs (to be called “NISAs”) is being increased to £15,000 from 1 July 2014.  The subscription limit for Junior ISAs will be increased to £4,000 also from 1 July 2014.
  • A loophole permitting VCTs to return share capital to investors within three years will be closed from 6 April 2014.
  • The 15% SDLT rate, the ATED charge and the capital gains tax will over a period be applied to residential property with a value in excess of £500,000.

The abolition of SDRT for collective investment scheme has of course been flagged for some time.  A number of other changes relating to funds taxation will continue in parallel, for example:

  • The widening of the definition of investment transactions from 6 April 2014.
  • UK management of offshore funds.
  • Allowing UK domiciled bond funds to pay interest gross when marketed to non-UK residents.
  • Changes to the tax rules for unauthorised unit trusts and their investors.



Two new consultations announced

avatar Posted on March 19th, 2014 by Mark Gearing

The Chancellor has confirmed consultations with respect to two of the more radical recommendations from the review by the Office of Tax Simplification of unapproved share schemes.

The recommendations were:

1. Introduction of the concept of a “marketable security”, whereby employment related securities will only be taxable if they are marketable securities (in other words they can be sold for money or money’s value for a price equal to the unrestricted market value of the security).

2. Introduction of a new safe harbour “employee shareholding vehicle”, similar to an employee benefit trust. This would enjoy specific tax breaks, and be more straightforward to implement than EBTs.

If the results of the consultations into these two recommendations lead to their implementation (in one form or another), then they could potentially prove to be extremely useful in simplifying the implementation and administration of employee share ownership in private companies.


Budget 2014; what’s new for non-residents?

avatar Posted on March 19th, 2014 by Penny Wotton

Personal allowance

The Government has announced that it intends to consult on whether to restrict the UK personal allowance so that it is available only to UK residents, and to non-UK residents who have strong economic connections to the UK. This is the approach already taken by many other countries, including most of the EU.

At present a non-UK resident can claim a personal allowance if they are a commonwealth or EEA citizen (and in some other cases) regardless of their connection with the UK.


UK residential property

The Government has confirmed the proposal announced in the Autumn Statement 2013 that CGT will be charged on gains arising from April 2015 to non-UK residents disposing of UK residential property.  A consultation will be held before legislation is introduced in Finance Bill 2015.

This marks the continuation of the Government’s move to impose CGT on UK residential property owned by non-residents.  Historically non-UK residents were beyond the scope of a direct charge to CGT, even on the disposal of property and other assets located in the UK.  From 6 April 2013 CGT was imposed on disposals of high value UK residential properties by “non-natural persons” (i.e. certain companies partnerships on collective investment schemes), including non-UK residents in those categories.  For properties already held on 6 April 2013 this charge applies only to gains accrued on or after 6 April 2013.