The EU have signed off on ‘State Aid’ rules which mean that it should be possible to start granting EMI share options again shortly. It is believed HMRC will announce an exact date soon.
EMI is a very attractive and popular measure which allows selected employees in small trading companies to be rewarded in a tax efficient manner which is HMRC approved (and has been for 18 years, with cross party support).
Anyone wishing to get more information or advice, please call Paul Eaves on 01704 548698
HMRC have announced via their Employment related securities bulletin (No 27 – April 2018) that due to not having yet received EU State Aid approval for the EMI scheme (the previous approval expired on 6 April 2018) new EMI share options issued after 6 April 2018 will not be treated as tax-approved share option schemes and would therefore be taxed under the far less favourable non-approved regime.
HMRC do reassure taxpayers that options granted up to 5 April 2018 will continue to qualify, so there is no need to panic over existing share options.
However, if you or your clients are in the process of implementing an EMI share scheme, it would be advisable to delay granting options until the approval is granted. Of course, if this is not possible then clients should be made aware of the implications of options falling to be treated as unapproved, or consider other options such as a CSOP.
One of the big differences between approved EMI options and unapproved ones is that any tax paid on exercise is based on the value of shares at grant of the options for EMI schemes, and on the value at exercise for unapproved ones. Therefore any growth in value is sheltered under the EMI scheme.
EMI schemes also provide other valuable features including relaxations of Enterpreneurs’ relief conditions for employees.
Please get in contact with us if you have any concerns or if you require assistance with share option schemes.
One of the problems with Entrepreneurs’ relief as opposed to the old rules on Business Asset Taper Relief, was that employee shareholders could struggle to acheive the relief due to the 5% holding requirement. This position has now been relaxed where shares are acquired through an Enterprise Management Incentives scheme, meaning it should now be easier to obtain Entrepreneurs’ relief on Enterprise Management Incentives (EMI) share options.
Draft proposals under the Finance Bill 2013 will remove the requirement for a person to hold at least 5% of the ordinary share capital of a company in order to qualify for entrepreneurs’ relief on shares acquired through a qualifying EMI share option scheme.
The legislation will also be changed to allow the period in which the options are held to count towards the 12 month holding period required to qualify for entrepreneurs’ relief.
These announcements will therefore increase the already highly efficient tax treatment of EMI schemes, and potentially enhance the incentivisation of employees under such schemes. Even where the share option scheme itself is not desired, EMI schemes could potentially be used to enable employees to acquire shares that will qualify for Entrepreneurs’ relief, as there is no minimum exercise period for EMI options.
A summary of the key changes affecting businesses, individuals and estates from the Autumn Statement 2012 and the Draft Finance Bill 2013
Annual Investment Allowance
The Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 per annum to £250,000 per annum.
The increase will take effect from 1 January 2013 and will last for 2 years.
The increased relief should be of benefit to those businesses that intend to invest in capital assets/expansion during the next few years.
Businesses whose accounting periods do not end on 31 December 2012 will need to take care when apportioning the amount of the AIA available to them in accounting periods that straddle the change. This is an area that has caused confusion following numerous changes to the amount of the AIA in recent years.
Cash Basis for Small Businesses—Income Tax
A new simpler scheme is to be introduced so that ‘eligible sole traders and partnerships’ will be able to calculate their taxable profits on a cash basis if they wish.
Eligible sole traders and partnerships will include those whose receipts for the year are below the VAT registration limit (currently £77,000) or twice the VAT registration limit (currently £154,000) for recipients of the Universal Credit. Businesses must leave the scheme where their receipts exceed twice the VAT registration limit.
There are particular rules for determining the ‘receipts’ and ‘allowable payments’ of the business and any losses may only be carried forward against future profits.
The scheme is likely to be of use to smaller traders; however care will need to be taken to ensure that the intricacies of the scheme are adhered to.
Corporation Tax Rates
The main rate of corporation tax for FY 2014 has been reduced by an additional 1% from the rates previously announced.
The rates will therefore be:
Small Companies Rate 20%
Main Rate 23%
Small Companies Rate 20%
Main Rate 21%
The latest reduction means that the gap between the small company’s rate and the main rate of corporation tax is becoming ever smaller, thus reducing the potential impact of having associated/group company structures.
Individuals & Estates
The personal allowance will be increased to £9,440 in 2013/14. This will save basic-rate taxpayers up to £267, although changes to the basic rate band mean that higher-rate taxpayers are unlikely to benefit
Income Tax Rates
The additional rate of tax is set to be reduced from 50% to 45% with effect from 6 April 2013.
Pension Annual Allowance
The annual allowance for tax relieved pension savings is to be reduced to £40,000 with effect from the tax year 2014/15.
Where a taxpayer’s gross pension contributions (including employer contributions) exceed the annual allowance a tax charge will apply. The amount of the charge is calculated so as to eliminate tax relief on the excess contribution.
Inheritance Tax—Nil Rate Band
The nil rate band will be increased to £329,000 with effect from 2015/16.
Don’t forget—the unused portion of the nil rate band may be transferred to the estate of the surviving spouse.
Finance Bill 2013
The Finance Bill 2013 has been released in draft and includes legislation in respect of:
- Income tax reliefs that will be limited to the higher of £50,000 and 25% of adjusted net income. This does not apply to gift aid on charitable giving.
- Entrepreneurs Relief and Shares Acquired under EMI Share Options—subject to the trading/employment conditions being met, entrepreneur’s relief will be available where the EMI options were granted at least 1 year prior to the disposal of the shares. It is not necessary for the EMI options to have been exercised 1 year prior to the disposal nor for the employee to hold at least 5% of the share capital.
- Statutory Residence Test—the draft rules set out a legislative test to determine whether a person is UK resident in a given tax year. This should give more certainty to taxpayers, however given that the rules are more prescriptive than the current case law based guidance taxpayers should consider their position before the new rules come into force on 6 April 2013.
Please note that our offices will be closed for the Christmas period from Saturday 22 December 2012, reopening on Wednesday 2 January 2013.
Wishing you a Merry Christmas & a Happy New Year from all the team at Eaves & Co.