The Chancellor made a number of announcements yesterday in relation to employment-related taxes. The following are some of the more interesting matters.
Employee shareholder status
Employee shareholder status is a form of employment status that was introduced in 2013. In return for giving up certain statutory employment rights (in particular, the right to a statutory redundancy payment and to claim unfair dismissal), the employee is issued with shares worth a minimum of £2,000. To the extent that the value of the shares does not exceed £50,000 at the time of acquisition, they are completely free of capital gains tax (“CGT”) on sale.
When it introduced this relief, the Government intended that it would be used primarily by start-up and struggling companies to encourage them to take on new employees and without the associated risk and cost around redundancy or unfair dismissal if things didn’t work out. In fact, it has been largely used by executives and senior management for whom the capital gains tax exemption is extremely attractive and who are not concerned about the loss of the statutory employment rights.
No doubt in response to this, the Chancellor has announced that for employee shareholder agreements entered into on or after 17 March 2016, the capital gains tax exemption will be limited to gains of £100,000. This will be a lifetime limit.
Existing arrangements will not be affected.
Reduction in CGT rates
At the same time, the Chancellor has announced that with effect from 6 April 2016, the rate of CGT will be reduced from 28% to 20% (for higher and additional rate taxpayers) and from 18% to 10% for basic rate taxpayers, although the 28% rate will still apply to gains on residential property (subject to the private residence relief) and carried interest.
The rate of 20% available on the realisation of capital gains from shares held by an employee in his employer company (or parent) contrasts favourably with top rates of 45% plus national insurance contributions (“NICs”) for cash-based remuneration, so it will still often be highly tax and cost efficient for employers to allow their employees to acquire equity as an element of their overall remuneration package. Where entrepreneurs’ relief is available, which delivers a 10% rate of CGT, the savings will be even greater. Entrepreneurs’ relief is currently available to officers and employees of trading companies who (broadly) hold 5% of the voting rights in the company (and 5% of nominal share capital) and who have satisfied the relevant conditions for at least 12 months (and to persons acquiring shares through the exercise of qualifying enterprise management incentive options).
The Chancellor also announced today an extension to entrepreneurs’ relief to individuals who have held shares in unlisted trading companies for a period of three years from 6 April 2016. This extended relief is not however available to officers and employees of the company – it is directed at external investors.
In its July 2015 consultation paper, the Government proposed changes to the tax treatment of termination payments and stated that it expected to make an announcement in the Autumn Statement 2015. In the event, the Autumn Statement was silent on this topic but it was unclear if its proposals had been shelved or deferred. Budget 2016 announces that changes will apply “to prevent manipulation” and to align the rules with income tax such that employer’s NICs (but not employee’s) will be due on termination payments in excess of £30,000. Legislation will also “clarify” that all payments in lieu of notice and “certain” damages payments are taxable as general earnings, and foreign service relief will be removed. All changes will apply from April 2018. We will issue a further update when details are available.
The Government announced in the Autumn Statement 2015 that it “remains concerned” about the growth of salary sacrifice arrangements and that it was considering what action to take, if any. Budget 2016 announces that the Government is considering limiting the range of benefits that attract tax and NICs advantages when provided under salary sacrifice, although it intends to preserve the benefits associated with pension saving, childcare, and health-related benefits such as Cycle to Work.
Employment intermediaries and personal service companies
It had been rumoured quite widely in the press that HMRC was going to announce a tightening-up of the rules which apply where individuals provide their services to an end-client through their personal service company. Special rules (known as “IR35″) currently apply to such companies under which, broadly speaking, if the worker would be an employee of the end-client had he been engaged directly, the personal service company is required to operate PAYE and NICs on a deemed payment of employment income.
Amid concerns over non-compliance with the IR35 rules, the Government has now announced that where personal service companies are used in the public sector, the public sector body will be responsible determining whether the IR35 rules apply and for paying the right tax.
For now, this change appears to apply only to the use of personal service companies in the public sector, and not to personal service companies generally.
The Government also states that it is looking into creating a simpler set of tests and online tools to determine whether the IR35 rules (presumably based around whether, on the facts, the individual would have been an employee of the end-client had he been engaged directly).
Loans to participators
The rate at which tax is payable when a close company makes a loan to a participator is to be increased from 25% to 32.5% for loans made on or after 6 April 2016. This is to remove the tax advantage of extracting value by way of loan rather than by way of dividend or salary.
Further measures aimed at disguised remuneration
The Government has announced further measures to tackle the use of “disguised remuneration” avoidance arrangements. These arrangements were the subject of legislation in 2011, and HMRC has since given users the opportunity to settle taxes. Some users have not taken that opportunity, whilst others have entered into new arrangements designed to side-step the legislation. HMRC intends to introduce further measures to ensure that these outstanding and new arrangements are caught.