Mind the Gap – EMI Share Options from 6 April 2018

Mind-the-GapHMRC 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.

Tax, Morality, and a Load of Balls!

I am a Tax Practitioner.  As a Chartered Accountant and former Inspector of Taxes, I have always been taught [and sought] to act ethically.

Unfortunately, I fear HMRC is at grave risk of becoming dysfunctional.  Too many cuts in expertise, perhaps?  Too many silly projects, instead of performing good service.  Generally a political problem, rather than the good Civil Servants trying to keep the ship afloat?  Questions!

From my experience, I understand that certain people have tried to disclose undeclared income to HMRC, but have then been ignored.  Understandably, this makes them a little reticent in sending a reminder!

I have just had a telephone call from a pensioner [not a client] who is [from information provided] not due to pay tax, but is having tax deducted at source from her widow’s pension.  A decent HMRC would provide her with a real person to talk matters through.  However, such local Help Desks have been abolished.  This seems to be on the grounds that you can get such assistance “online”.  There are [many] people who have never been online, and do not own computers.

Please do not suggest a telephone ‘Help Line’ is remotely equivalent – even if you have the patience to wait the extraordinary length of time for the telephone to be answered.

You may speculate where such saving in Government costs may fall, in terms of rich and poor.  In this particular case it is likely to fall upon the pensioner who cannot understand how to get her [deserved] repayment.

In our great democracy such matters may affect your vote?

Surely, a sensible and coherent Tax Policy should be a great vote winner?

With such an opportunity, then, you may speculate as to why Ed Balls decided to attack giving cash to humble workers, rather than focussing on the more complex area of multinational business [where the money is]?

Using straightforward cash?  We all realise, [surely] electronic monetary transfers would be far better than cash?  Electronic transfers would involve Banks that would impose charges on the small business concerned.  If the business was in overdraft, the Banks may take away control of day to day funds and then, at their whim may close the branch in the [it does not matter because it is out in the sticks] small town where the humble worker may reside?  Transfers to banks that may be computer hacked for millions?  Run “Trust Me I am a Banker” past your marketing department as a slogan?

The Westminster People know the Bankers, so obviously they understand how trustworthy they are.

The argument seems to be give your money to the big banks and supermarkets, because they are obviously less corrupt than the nice woman who cleans your windows and has done since she inherited the business from her father, when she decided to look after him after his stroke?

Tax is a social good.  It should be paid according to the law.  Please do not bring morality into it, because if we thought that way no one would wish to pay it, because in the diverse economy of modern society there will surely be something everyone could claim a moral objection to funding.

If paying tax is a moral duty, then presumably any radicalised Muslims have a good argument for tax exemption, because they would object to bombing the Islamic State?

As to Evil Tax Planning, I would suggest that anyone who is not planning on [at least] smoking 20 cigarettes and also drinking a bottle of wine this evening is guilty of planning to avoid, VAT, tobacco and alcohol duty.  I trust you will wake up appropriately ashamed of yourselves!

Taxpayers Hunted and Lynched

The Blog this week could be described as dark tales from the Brothers Grimm entitled “What happens to those who ignore HM Revenue and Customs…”

Do not be too scared!  Whilst the Brothers Grimm tales tend to have awful endings – as do the stories of the poor souls in the cases described in the Blog – they are the ones who have ignored the warnings and neglected dealing with HMRC with due and proper respect.  For years many seem to get away with it.  However, the final conclusion seems inevitable to Observers.  Neglect means ignoring that invariably the Mills of God (and HMRC) may grind slowly, but they grind exceedingly fine.  It is prudent to take professional advice before the sack of corn representing your life is thrown down the hopper into the grinding wheel.

Looking at likely outcomes those who take advice from their properly qualified professional advisors generally come out far better.  Prior neglect will cost – often significantly – but making disclosure and then negotiating a fair deal makes personal and economic sense.  Just compare getting matters settled to being sent to jail or having your assets seized under the Proceeds of Crime Act, let alone the miserable anticipation of waiting for it to happen.

3 recently reported cases exemplify the lesson.  Stephen Douce only declared a low household income, where in fact he was earning far more.  The under-declarations resulted in a loss to HMRC of VAT, income tax, NIC and tax credits.  He was sent to jail.

Mr Lynch was discovered to have failed to declare a particular source of income.  The Courts held that the degree of suspicion was sufficient for there to be ‘discovery’ under S29 TMA 1970 and for procedures to be taken under the Proceeds of Crime Act, reflecting gains obtained illicitly over the preceding 20 year period.  Unexplained deposits and credit card payments from unexplained sources amounted to sufficient evidence of undeclared income.  The tax assessments stood.

The Hunt case shows financial irregularities can have other long term consequences.  Again, taking proper advice regarding prompt disclosure may well have helped Mr Hunt, a Financial Advisor, avoid having his new business tainted because he was deemed not to be a ‘fit and proper person’ under FSMA regulations.  He lost in court, even though he argued his original criminal conviction ought to be ‘spent’ because it took place in 1993 so was over 20 years ago.

The advice to clients is take proper advice and then act promptly.  Ignore HM Revenue and Customs at your peril!  The alternative consequences are likely to be costly and last most of a lifetime.

If you need further advice call us; 01704 548698 or 0113 2443502.

Liechtenstein Disclosure Facility (LDF): Further Update from HMRC

HMRC have written to tax advisors who have taken part in the Liechtenstein disclosure facility (LDF), informing them on common errors that lead to “unnecessary delays” in the system.

From 1 April 2013, HMRC have said they will be taking a more robust stance on whether LDF certificates are issued in such circumstances.  Incomplete disclosures may be taken as a sign of lack of co-operation, leading to the withdrawal of the beneficial terms under the facility.

According to HMRC, the most frequently omitted items are:

  • A narrative explanation detailing the background to the previously undisclosed items;
  • Computations showing how the taxable figures in the disclosure have been arrived at;
  • A fully completed certificate of full disclosure;
  • The statement of assets and liabilities at the end of the final year covered by the disclosure;
  • Completed letter of offer; and
  • Full payment of the tax, interest and penalties due in the offer.

It is therefore essential to take suitable advice from experienced advisors, in order to ensure the terms of the LDF can be met.  Eaves and Co have successfully completed a number of disclosures under the LDF and would be happy to assist.

 

Julian Martin v HMRC – TC 02460 – Income Tax where Employee Obliged to Refund Earnings

In the recent case of Julian Martin v HMRC (TC 02460),  the appellant agreed to enter into an employment contract under which he received a signing bonus of £250,000 in 2005/06 the terms of which required him to work for the company for a period of 5 years.

The signing bonus was subject to income tax and NIC’s through PAYE and the net amount received was £147,500.

Mr Martin gave early notice and therefore became liable to repay £162,500 to his former employer.

The appellant made an error and mistake claim for 2005/06 on the basis that whilst the full bonus had been taxed in that year, in retrospect the full amount had not been earned in that year and as such the repaid amount of £162,500 should not be taxable.

HM Revenue and Customs rejected Mr Martin’s claim for relief and argued that the full amount remained taxable despite the fact that most of it was later repaid.

This gave rise to an anomalous position whereby Mr Martin was worse off than if he had never accepted the signing bonus because the tax and NICs were in excess of the amount of the bonus that he actually retained.

The first tier tribunal found that relief should be available on the basis that the repayment of the bonus amounted to negative taxable earnings in Mr Martin’s hands.

 

Wholly and Exclusively for the purposes of trade

In recent cases there has been a wide ranging application of the definition of “wholly and exclusively for the purposes of trade”, which is the general test for deductibility of expenses.

Two recent examples of this are Mclaren Racing Ltd v HM Revenue & Customs and Interfish v HM Revenue & Customs.

In the case of Mclaren Racing Ltd, the fine relating to the spying of Ferrari amounting to £34m was deemed to be deductible by a first tier tribunal. This was because the act (which was fined) was wholly and exclusively for the purposes of trade and no laws were broken.

Whereas in the case of Interfish Ltd v HM Revenue & Customs the first tier tribunal deemed that sponsorship to a local rugby club was not incurred wholly and exclusively for the purpose of trade. This was because one of the reasons why the company sponsored Plymouth rugby club was to help the club to buy players, and therefore the sponsorship had a dual purpose.

These two cases could suggest to general taxpayers that there is a disparity between how the wholly and exclusively is applied on a case by case basis, although it should be noted that the points at question were quite different to each other.

 

Tax Investigations and Enquiries – The Importance of Advisors

With recent crackdowns on tax avoidance (highlighted by media coverage), and the introduction of a number of HMRC task forces, the spectre of tax investigations and enquiries is more apparent than ever.

Qualified tax advisors can help by giving advice on HMRC powers and procedures; disclosures, penalties and negotiating settlements when HMRC undertake investigation proceedings.

Such investigations can involve both business and individuals, including those involving potential allegations of serious fraud and Proceeds of Crime Act implications.

More commonly, HMRC will adopt a civil settlement approach, where experience in preparing relevant disclosure reports and negotiating settlements can be vital in ensuring that the taxpayer is able to settle the problem areas in as efficient and cost-effective manner as possible.

Serious investigations can be traumatic, exerting significant pressure on both business and family life. Having experienced advisors is an essential part of the objective of reaching a satisfactory settlement with as little drama as possible.

Technical Enquiries cover another aspect of possible dispute with HMRC.  They give the ideal opportunity to deal with potentially grey areas in the legislation, to ensure the client is defended robustly.

Despite the claimed ‘simplification’ of tax rules, the volume of tax legislation continues to increase. The 2012 Finance Bill was the largest ever, weighing in at 686 pages. With this ever-increasing pool of rules, it is inevitable that gaps in the intended legislation will occur.

Experience tax advisors are vital to ensure that the taxpayer’s position is represented fully in such situations. Eaves and Co are very experienced and specialise in providing advice on these sorts of tricky areas and would be delighted to hear from anyone with such concerns.

Tribunal Finds Against Services Partnership – Car Benefits

D J Cooper and Partners was formed as a partnership to provide services to one customer.  The customer was a limited company which traded as a builders merchants.  The partners were also shareholders / directors of the limited company.

HMRC challenged the tax treatment of cars which were owned by the partnership and used by the partners (who were also directors of the limited company).  HMRC said that the directors of the limited company should have declared a benefit in kind for usage of the cars which they said were provided because of their office.

The tribunal case hinged on the commerciality of the arrangements and the court held that the partnership was wholly dependent on the company.  This structure would not have existed without the connection and the partnership was seen as an attempt to avoid paying tax on what was primarily a personal benefit.

Refreshing look at Employment Status – Slush Puppie Ltd (TC2042)

Mr Sandford was a service engineer for Slush Puppie Limited (SPL).  From 2001 to March 2007 the individual had always considered himself to be self-employed and paid tax on that basis.

However; when his engagement ceased, the individual’s tax agents reviewed the situation and concluded that they believed he had been an employee of the company.

As a result they informed HMRC and sought a refund of self-assessment tax paid, suggesting SPL should be liable.

After a review of the facts HMRC accepted this view. They subsequently issued SPL with a notice that ruled Mr Sandford was an ‘employed earner’ and as result SPL were liable for income tax and Class 1 NICs.

SPL appealed.

The tribunal looked at several of the key indicators and found on balance Mr Sandford was self-employed.

Below are some of the key points which the tribunal felt indicated self-employment:

  • He was free to take on business from elsewhere and was able, having accepted a job, to find someone else to do it.
  • SPL’s supervision and control of his work was restricted to ensuring he complied with legal obligations
  • The use of a daily rate of pay was ‘a strong indicator’ that matters were based on a daily contract.  The fact that monthly invoices were raised for convenience did not alter this fact.
  • The lack of redundancy rights or other employment protection meant Mr Sandford shouldered financial risk.
  • The fact ‘that no substantial risks materialised in the course of five years is no indication that they did not exist potentially’.

The case does, however, highlight the importance of taking advice in this area as the company could have been liable for the tax due through PAYE should the tribunal have found that he was employed.