HMRC has today, 14th October 2022, published its long-awaited revised guidance on the use of discretion in EMI share options. This is the product of much “toing-and-froing” between HMRC and the Share Plan Lawyers, but does not alter either HMRC’s long-established practice or, insofar as it may be relevant, the position in law. The new guidance can be accessed here: https://www.gov.uk/hmrc-internal-manuals/employee-tax-advantaged-share-scheme-user-manual/etassum54300
Budget announcements on 23rd September 2022
Company Share Option Plan (CSOP) – From April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to employees, double the current £30,000 limit. The ‘worth having’ restriction on share classes within CSOP [presumably a reference to para 20, Sch 4, ITEPA 2003 – requirements as to other shareholdings] will be eased, better aligning the scheme rules with the rules in the Enterprise Management Incentive scheme and widening access to CSOP for growth companies.
This suggests that the class of shares to be put under CSOP options need not be either “employee-control” shares, or “open market shares”, allowing qualifying companies to grant CSOP options over a special class of restricted employees’ shares.
(There is no appetite then for enhancing the EMI share option regime.)
Repealing off-payroll working reforms – The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023. From this date, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.
Reform of EMI share options? No….but perhaps a reform of CSOPs.
The Spring Statement, published today (23rd March 2022) includes the following passage, extracted from para 4.60:
“At Budget 2020, the government launched a review of the Enterprise Management Incentive (EMI) scheme, to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and to examine whether more companies should be able to access the scheme. The government has concluded that the current EMI scheme remains effective and appropriately targeted. However, the scope of the review will be expanded to consider if the other discretionary tax-advantaged share scheme, the Company Share Option Plan, should be reformed to support companies as they grow beyond the scope of EMI.”
So…are we to assume that there will be no change to the current EMI regime (in place in substantially the same form since 2000), but that attention will now focus instead upon the CSOP regime? Or is this simply an excuse for the Treasury not having had sufficient resource to give the responses received, to the Call for Evidence, the attention they justified?
(Click here for my response to the earlier review of EMI share options referred to above.)
Claritax Books has just published the first edition of my latest book, Employee-Ownership Trusts. So far as I am aware, this is the only published work that focusses on the tax treatment of EOTs and associated transactions, as well as their structuring and financing.
Corporate trading businesses which are owned by trustees on behalf of employees can enjoy greater levels of employee engagement, offering the potential for higher productivity and more even distribution of the resulting financial rewards.
To achieve these goals, the owners of a company can sell their shares to an employee-ownership trust (EOT) for the benefit of the employees. When correctly carried out, this affords CGT relief for the vendors on the sale to the trust and allows the company to pay tax-free bonuses to all its employees.
Interest in employee ownership in general, and in the EOT model in particular, has grown rapidly in recent years. The conditions for gaining the tax benefits are complex, however, so this timely volume offers an accurate and comprehensive guide to the relevant rules.
For more information, please visit http://claritaxbooks.com
The government announced in the 2020 Budget that it would review the EMI share option scheme to ensure it provides support for ‘high-growth’ companies to recruit and retain talented employees and examine if a wider range of companies should qualify to grant EMI share options. To this end a “Call for Evidence” was published by HM Treasury in March 2021 (see: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/965555/Enterprise_Management_Incentives_Call_for_Evidence_2021.pdf ).
Click here to download David Pett’s response to that Call for Evidence. It sets out a number of suggested changes which could be made to the EMI Code to make it easier for qualifying companies to make best use of the tax-advantaged grant of EMI share options and to remove existing “traps for the unwary”.
The response will be of interest to anyone advising a company or its shareholders on the adoption of an EMI scheme or the grant of EMI share options.
I have written to the Sunday Times in response to their article published on 21 March:
The article “It’s not just the rich that avoid tax: it’s teachers and nurses too” (March 21) is a fine example of lazy journalism, the content having been gleaned from an HMRC corporate report (https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk ) and relayed without challenge. The idea that all lower-income workers involved in arrangements of the type described should be treated as deliberate “tax avoiders” is absurd, given that (a) it has often been a condition of securing paid work that they do so; (b) it has been falsely represented to them by supposedly reputable organisations that the arrangements have been approved by counsel and by HMRC; and (c) it is unreasonable for HMRC to assume that such individuals have a sufficient understanding of the complexities of our tax laws to appreciate that they are being lured into tax avoidance. This is all the more disturbing, given allegations that HMRC has itself engaged workers paid through such arrangements.
As the HMRC report recognises, the promotion of tax avoidance is not, on its own, a criminal offence. Until it is, it is difficult to see how the government will succeed in preventing ordinary people falling victim to the organisations profiting from the misunderstanding of workers intent on securing remunerative work. Your journalist should perhaps be asking government why, according to recently published consultation documents, it still does not propose to criminalise the involvement of individual officers, directors and company owners in such promotion. To establish guilt, it could be provided that a judge or jury is asked to determine if an arrangement has been “promoted”, once the Upper Tier Tax Tribunal or the High Court has determined, on application by the prosecuting authority, that the arrangement is or involves “abusive tax avoidance”.
BBC Radio 4’s “Money Box” programme has investigated unscrupulous ‘umbrella companies’ targeting those retired nurses and other NHS staff returning to work to assist in the response to the Covid-19 pandemic, as well as new hires for the ‘track and trace’ system. I was asked to respond to questions from the presenter, Paul Lewis, about the tax consequences, for the individual workers, of the actions being taken by such umbrella companies.
Given the impermanent nature of employments of this kind, these individuals will normally be required to secure their engagement through an agency. For an agency worker, the agency or its intermediary is normally responsible for payment of the remuneration earned after first deducting tax and NICs under PAYE.
So-called umbrella companies, interposed between the agency and the individual, can play a useful role in those cases in which an individual may expect to enter into multiple successive engagements and wants to offload responsibility for the paperwork and tax compliance associated with such multiple engagements. However, some umbrella companies are promoting their services on the basis of being able to secure that the individual receives a higher amount of net earnings by structuring payments to the individual as if part only is a payment of remuneration, subject to PAYE, the balance being paid as either an “investment payment” (i.e. the umbrella company supposedly making an investment in the individual) or an “advance on a future bonus” and (so it is claimed) therefore being free of tax.
As the programme made clear, this is a form of abusive tax avoidance. Agency workers are deemed to be employees of the agency (s44 ITEPA 2003) and are liable to tax and NICs under PAYE on the whole of the remuneration they earn including “every form of payment, profit or benefit” (s47). It is not sufficient, to avoid tax, simply to describe payments of remuneration as something else. To do so poses serious financial risk for both the individual worker and the agency involved. If the intermediate umbrella company fails to deduct and account for tax and employee’s NICs when making such payments, HMRC will look to recover the tax, with penalties and interest, initially from the agency (as the intermediary payee is invariably offshore) or, if it remains unpaid within 30 days of a Reg 80 determination being made on the agency, from the individual on the basis that it is a payment of ‘disguised remuneration’ (the umbrella company being a ‘relevant third person’).
It was said, by the so-called brokers marketing the services of such umbrella companies, that the arrangements made had been confirmed by counsel to be legal. If that is correct, such opinions are simply wrong or (as has been found to be the case in the past) do not in fact state what they are purported to assert.
It goes without saying that individuals and agencies should avoid entering into such arrangements. When what is offered seems too good to be true, it probably is. In this case, it most certainly is.
The programme later suggested that the actions of such umbrella companies were analogous to the arrangements formerly widely used to structure remuneration in the form of loans from a trust which were not expected to be repaid. The government eventually responded to those arrangements with the 2019 ‘Loan Charge’ which has enraged campaigners as it has had a serious financial effect upon those workers who were either lured into or obliged to enter into such arrangements. However, the present actions of certain umbrella companies, in purportedly describing remuneration paid to a worker as something it is not, is very different. This is simply ‘calling black, white’. If done with the intention of cheating the Revenue, this could have serious consequences for those involved.
Perhaps the real issue here is whether HMRC has sufficient powers and resources to penalise, where appropriate, those who devise and promote or market such abusive tax avoidance arrangements, particularly if they are operating outside the UK.
HMRC does have powers to impose sanctions and civil penalties, both (i) for failure to disclose tax avoidance schemes under the DoTAS regime and, under legislation made in 2014 and 2017, (ii) if persons persist in the promotion of schemes after earlier schemes have been defeated, or they have enabled tax avoidance by devising, marketing or facilitating a tax avoidance arrangement. Under the ‘penalties for enablers’ rules, anyone who designs, markets, or otherwise enables tax avoidance may incur a penalty equal to the fees it has generated from the arrangement.
The problem is that, if the promoter is an offshore company, it can easily be liquidated and the individuals behind it can, all too easily, escape such sanctions.
If HMRC can identify the individuals concerned and adduce sufficient evidence of wrongdoing, they might seek to bring criminal charges for, say, conspiracy to cheat the public revenue. However, the threshold needed to secure a conviction is high, and this can prove challenging. If the individuals concerned are in countries with which the UK does not have agreements for reciprocal enforcement of criminal sanctions, such efforts may be fruitless. HMRC announced earlier this year that criminal charges had been brought against a number of individuals in the UK, although it was unclear as to what forms of evasion these arrests related. The alleged offences included “conspiracy to cheat the public revenue”, “conspiracy to evade income tax and NICs”, “fraud by abuse of position” and “conspiracy to transfer, disguise or convert criminal property”.
The question is: does HMRC have the necessary resources to root out promoters where offences have been committed?
 First broadcast on Saturday 6th June at 12:04 p.m and currently available on the BBC Sounds app.
The government has announced that the changes to IR35 due to come into effect in relation to work done on or after 6th April 2020 will, as part of the response to Covid-19, be put back until 6th April 2021. The announcement is to be found here: https://www.gov.uk/government/news/off-payroll-working-rules-reforms-postponed-until-2021
As a member of the working party that put together the EMI scheme which was originally legislated for in Sched 24, FA 2000, I very much welcome the government’s announcement, as part of the Budget today (11th March 2020), that it intends to “review the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme.”
Coupled with the consultation on changes to the tax treatment of ‘hedge funds’, there may now be an opportunity to persuade the government of the need to extend eligibility to employees of companies under the control of private equity. Hopefully the existing statutory limits and other eligibility requirements will be examined with a view to broadening the scope of what has proved to be a remarkably popular and successful scheme allowing companies to attract and retain the best talent at the early, high-risk, stage of their development.
That said, the announcement of an immediate restriction, to £1 million, of the lifetime allowance for Entrepreneurs’ Relief will come as a disappointment to those holding EMI share options over valuable shares in the most successful qualifying companies.
The government has today published a House of Commons Library Briefing Paper (No. 4369) on the topic of “Retrospective Taxation” which describes, inter alia, the practices which successive Parliaments have adopted in relation to the enactment of tax legislation having retrospective effect.
The paper may be found here: https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN04369
The paper makes reference to the decision of the High Court in the case of Cartref & Others v HMRC  WEHC 3382 (Admin), which was the subject of an earlier post. The High Court ruled that the Loan Charge is compatible with human rights.