View the related Tax Guidance about Enterprise Management Incentives (EMI)
Penalties for late filing
Penalties for late filingIntroductionA single regime that imposes penalties for failure to make or deliver returns or documents on or before the statutory filing date for the particular return in question was legislated in FA 2009, Sch 55.Despite this intention, the FA 2009, Sch 55 penalty regime does not apply to:•corporation tax returns•inheritance tax returns•share scheme returns•digital services tax returns•VAT returnsThe penalties under the FA 2009, Sch 55 regime and the penalties outside of that regime are summarised below.When is a return considered to be delivered to HMRC?Online returns are automatically recorded as being received as soon as the HMRC computer system receives the return. Simple checks are carried out automatically and HMRC reviews the return to ensure it is complete.Returns sent by post or delivered in person are considered to be delivered when physically handed over to HMRC office staff, or placed in an HMRC office letter box during work hours. HMRC will update its computer system to show the return has been received, either on the day of receipt or as soon as possible afterwards. Again, simple checks are carried out and the return reviewed to ensure it is complete.Taxpayers or agents who post or hand deliver paper returns to HMRC should retain evidence of the date on which this was done; for example, proof of postage or a contemporaneous file note.FA 2009, Sch 55 late filing penalty regimeFor a list of taxes to which the FA 2009, Sch 55 late filing penalty regime applies, see Simon’s Taxes A4.550.The FA 2009, Sch 55 penalty regime
Introduction to share schemes
Introduction to share schemesIntroductionHistorically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions. However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.The share schemes legislation sets out a wide range of scenarios where income tax and, potentially, national insurance are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.However, share schemes are still a popular method of incentivising employees and there are a number of specific plans set out by tax legislation for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note.From 6 April 2014, share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the company must provide notification within a certain time frame and self-certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.Given that tax-advantaged schemes confer tax benefits on the shares or
Why use an enterprise management incentive (EMI) scheme?
Why use an enterprise management incentive (EMI) scheme?The legislation, primarily in ITEPA 2003, Sch 7, gives employers a strong clue as to the intended benefits of enterprise management incentives (EMI) schemes. It suggests that they should be used to recruit and retain members of staff.When the legislation was originally introduced in 2000, the belief was that small, fast growing companies, particularly in the IT sector, would need a boost to assist in the retention of staff in a highly competitive market.Many start-ups struggle to pay market rates and are therefore constantly at risk of losing the employees that they need to develop. As a result, EMI were introduced to help small companies. Today, most smaller companies are able to benefit from EMI and if they are able to do so, almost certainly should take advantage.A good source of further information is at ETASSUM50000.Note that although state aid approval for EMI schemes expired on 6 April 2018 and was only renewed by the European Commission on 15 May 2018, EMI options granted in the intervening period are treated as qualifying EMI options. The European Commission originally extended state aid approval for EMI schemes until 2023. HMRC confirmed in October 2020 that EMI schemes continue to be available under UK law from 31 December 2020 onwards. The Subsidy Control Act 2022 provides a new framework for the provision of subsidies within the UK. EMI is now registered on the UK subsidy database as a scheme that gives a subsidy in the
Company share option plans
Company share option plansWhat is a company share option plan (CSOP)?Options issued under a company share option plan (CSOP) provide employees with a right to acquire shares at a set point in the future for their market value as at the date of grant of the option. Provided that certain qualifying criteria are met throughout the period from grant to exercise, no income tax or Class 1 national insurance contributions (NIC) arise on the exercise of the options and instead any gains on sale of the shares are chargeable to capital gains tax (CGT).A number of changes were made to CSOP by FA 2013 and FA 2014 to simplify the administration of the scheme and harmonise some of the rules with that of other tax-advantaged schemes. One of these changes means that from 6 April 2014 a qualifying CSOP is known as a ‘Schedule 4 CSOP scheme’.Benefits of a Schedule 4 CSOP schemeA Schedule 4 CSOP scheme is a tax-advantaged share option scheme which means that, provided certain criteria are met, HMRC allows preferential tax treatment for the employee when compared with non tax-advantaged share option schemes.Provided the employee and the company continue to meet the relevant qualifying conditions for the Schedule 4 CSOP scheme and the employees exercise their options at least three years after the date of grant (or, if they exercise earlier, by reason of ill-health, disability, redundancy or retirement), no income tax or NIC is payable on the exercise of the option.Sales of shares acquired through a
Complex share award schemes
Complex share award schemesCompanies engage in more complex planning for their share incentive arrangements for a number of reasons. These include funding issues for participants where:•the initial value of an award is relatively high•companies are having to deal with headroom issues (ie they may have reached their limits on shareholder dilution)•companies wish to take advantage of potentially beneficial tax treatment for their employees where such companies do not qualify for statutory tax advantaged plans which satisfy the requirements of ITEPA 2003, Schs 2–5 (the qualifying plans), including Enterprise Management Incentives (EMI) and company share option plan (CSOP)As such, more complex plans aim to provide a share-based award for employees with a low initial value but with the potential to generate growth in the shares that is subject to capital gains tax rather than income tax.This note looks at two different structures often used to achieve this aim by summarising the commercial considerations, an outline of the structure and briefly discusses the tax treatment of each:•jointly owned share plans, or joint share ownership plans (JSOP )•growth share plans (GSP)It should be emphasised that professional advice should be taken before embarking on the implementation of either of these arrangements, as this note is a summary and not a comprehensive guide.Commercial objective for both types of planThe objective of both of these arrangements is to reward the participating employee with an increase in the value of shares in his employing company or other group company, often linked
Agreeing share valuations with HMRC
Agreeing share valuations with HMRCWhere allowed by HMRC, it can be useful and desirable to agree with the value of private company shares used in employee share schemes with HMRC’s Shares and Assets Valuation (SAV) team in order to have certainty on the tax treatment for both the employee and the employer.Where shares are listed on a recognised stock exchange, market value can be determined and relied upon without further reference to SAV using one of the prescribed methodologies found at ETASSUM44160.Shares listed on the Alternative Investment Market (AIM) or other junior stock exchanges still need to have their value agreed with SAV if comfort is desired that the value can be relied upon. However, in practice, a methodology can usually be agreed upon and used to determine the market value of that grant and all subsequent grants. What is a share valuation used for?Where shares issued or acquired on the exercise of options by employees are readily convertible assets (RCAs), the employer must withhold income tax and national insurance contributions (NIC) via PAYE on their ‘best estimate’ of the taxable amount. There is also an obligation to file employment-related securities (ERS) annual returns with HMRC annually. Employees may be required to account for chargeable events or capital gains pertaining to their shares on their self assessment tax return.In terms of tax, there remain other aspects to consider other than overall effective tax rates, for instance timing of payment of tax, which are considered further below. But there are
Weekly tax highlights ― 20 May 2024
Weekly tax highlights ― 20 May 2024Direct taxesHMRC consults on draft changes to new penalty rulesHMRC is consulting on draft regulations which will update the new late-payment penalty rules, to enable HMRC to assess the second of the two late-payment penalties before the tax due has been paid in full. The draft Penalties for Failure to Pay Tax (Schedule 26 to the Finance Act 2021) (Assessments) Regulations 2024 will make the necessary changes.Under the current position, HMRC can assess the second penalty when the amount of outstanding tax is paid in full, within a two-year time limit. The two-year period will still apply, but the change removes a potential avoidance opportunity where taxpayers try to avoid the penalty by not paying the tax before the end of that period (and where HMRC would then be out of time).The new penalties currently apply for VAT (from 1 January 2023) and for those who have voluntarily signed up to Making Tax Digital for Income Tax Self-Assessment (from 6 April 2024).The consultation closes on 10 June 2024.HMRC issues new guidelines on football agent contractsHMRC has published new Guidelines for Compliance aimed at football agents and clubs, setting out its view on dual-representation contracts (where the agent purports to work for both the club and the player, and the fee paid by the club to the agent is characterised as a split between the two).HMRC takes the view that agents work primarily for the player and fees for services should be apportioned accordingly:
Disguised remuneration ― overview
Disguised remuneration ― overviewIntroductionLong before the disguised remuneration (DR) legislation, HMRC had challenged employee benefit trusts (EBTs). Macdonald (HMIT) V Dextra and Sempra Metals Ltd v Revenue and Customs Comrs, heard the decade before disguised remuneration, were largely considered by the profession to have set a clear precedent on the tax treatment for contributions to and benefits received from EBTs. The tax purpose of the DR legislation was to create a tax charge upon certain events ― ‘earmarking’ thereby rendering the use of third party arrangements to ‘remunerate’ employees obsolete without tax advantages. However, the DR legislation, when considered against the disclosure of tax avoidance schemes legislation, the promoters of tax avoidance scheme legislation and the general anti-abuse rule, is intended to change the perception of tax avoidance. On 26 November 2020, HMRC published a report ‘Use of marketed tax avoidance schemes in the UK (2020 to 2021)’. The report states “circa 99% of the avoidance market was disguised remuneration schemesâ€. HMRC published the names of 18 promoters and 20 schemes between April and September 2022 (see the current list of named tax avoidance schemes, promoters, enablers and suppliers at GOV.UK).The DR legislation was introduced over a decade ago by FA 2011.The Government confirmed at Budget 2016 that a further package of measures would be introduced to tackle the ongoing use of DR avoidance schemes. These were the subject of a technical consultation (which closed on 5 October 2016) on provisions to be introduced in Finance Bill 2017. However,
Effect of company takeover on existing share scheme
Effect of company takeover on existing share schemeBrief overviewIf a company (usually referred to as the target) is taken over, any employee or director holding options, share awards or other rights over securities in that company will be concerned about what will happen to their awards. Generally, the plan rules and/or award agreements will set out what will happen in specific circumstances to ensure the participants, the Target and the acquirer of the company (the “Acquirerâ€) have comfort about what their rights and responsibilities are. The plan rules may also offer additional choices.It is common that in takeover situations, plan rules will allow participants the chance to acquire shares in the Target (or where shares have already been acquired, the restrictions may fall away) to the extent that the options or awards have vested. Participants may then be offered the right to sell the shares in Target for cash, shares in the Acquirer or a combination of the two. Alternatively they may have the chance to exchange their options or share rights for equivalent options or awards over shares in the Acquirer. The rules often state that where participants do nothing, their awards will lapse after a specified period, commonly less than six months, and all rights are lost.The acquirer may also propose paying cash to participants to give up their awards (known as cash cancellation), or invite them to participate in the Acquirer’s existing share scheme. Tax-advantaged plans have specific rules to enable continued qualifying status. What is
Annual reporting for tax-advantaged share schemes
Annual reporting for tax-advantaged share schemesSTOP PRESS: The remittance basis is to be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in Finance Bill 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.If a company is operating any type of share scheme or arrangement (including EMI), they must make an online annual return by 6 July after the end of the tax year in which the scheme or arrangement was registered, and then each year during the life of the scheme or arrangement. This includes where the company is making a nil return. HMRC’s 6 July deadline is a strict one and failure by a company to make the relevant annual return and / or declaration will have serious consequences, including penalties and, in respect of certain tax-advantaged schemes, the loss of associated tax reliefs. It is commonly raised as an issue in due diligence exercises, which can delay company transactions and reorganisations.It is therefore essential that companies operating these types of schemes are familiar with and fulfil their compliance obligations. HMRC has no obligation to issue reminders to a company about making its annual return(s). It is therefore important that the company is prepared to make the annual return(s) on time. The person responsible for making an annual
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