An "invisible hand" to support business
activity, hard work and entrepreneurship?
The Chancellor sees hard work as the growth strategy for the United Kingdom and its people to lead the country out of financial uncertainties. Against that backdrop, the Chancellor today announced an increase in the value of Enterprise Management Incentive ("EMI") options while continuing his "crackdown" on tax avoidance.
Enterprise Management Incentives ("EMI")
EMI, currently the most tax favoured and therefore the gold standard employee share option scheme, is set to become even more valuable. The Chancellor's announcement today to increase the individual limit of the value of shares under EMI options from £120,000 to £250,000 must be welcomed. The Government is intending to implement this measure as soon as possible, but this is subject to State Aid approval.
This announcement will be of particular relevance to employees who hold the current maximum number of EMI options.
While there is no relaxation of the definition of a "qualifying company" for EMI purposes, the Government has said it will consult on ways to extend access to EMI for academics who are employed by a qualifying company. Watch this space.
EMI and entrepreneurs' relief
In a welcome move today, the Government announced an intention for gains made on shares acquired through exercising EMI options on or after 6 April 2012 to be eligible for capital gains tax entrepreneurs' relief ("ER"), and therefore suffer tax at the rate of 10% rather than 28%. It remains to be seen how this relief will be given in practice, but it would seem reasonable to suppose that the requirement to hold 5% of the ordinary share capital and votes will be relaxed for those making gains made on shares acquired by exercising EMI options.
Review of tax advantaged employee share schemes
The Government intends to consult shortly on how to take forward a number of recommendations of the Office of Tax Simplification following its review of tax advantaged share schemes. Its report offers proposals for the streamlining and simplification of the applicable tax rules relating to tax advantaged share schemes. The key recommendations are:
- Introducing a self-certification system for company share option plans (CSOPs), save as you earn (SAYE) option schemes and share incentive plans (SIPs).
- Further investigation is required as to whether CSOPs should be replaced or phased out altogether. In recent years their popularity has decreased rapidly. In the year 2000/2001 there were 4,270 companies operating a CSOP, nine years on and this figure has fallen to just 1,490.
- Assuming that the CSOP is retained, this scheme should be merged with the current EMI share scheme.
A direct response from the Government is expected in the coming months.
General anti-abuse rule ("GAAR")
It comes as no surprise that the Government has accepted the recommendation of Graham Aaronson QC that a GAAR is introduced into the UK tax system. The aim of a GAAR is to allow tax avoidance to be tackled without making the UK unattractive to business. The proposal is for an anti-abuse rule as opposed to an, arguably, wider anti-avoidance rule. A consultation is expected to begin in summer 2012, with legislation to follow in Finance Bill 2013.
This is a further indication of the Chancellor's determination to block tax avoidance, which was recently illustrated by the introduction of retrospective anti-avoidance legislation and with further threats of that today.
45% top income tax rate from April 2013
The additional rate will reduce from 50% to 45% with effect from 6 April 2013 for individuals and trusts. The basic and higher income tax rates are unchanged.
To balance that, income tax personal allowances for those aged under 65 will increase to £8,105 from 6 April 2012 and to £9,205 from 6 April 2013.
The Chancellor did not announce the expected restriction for higher and additional rate tax relief on pension contributions. With the top income tax rate reducing to 45% from April 2013, the next 12 months will likely see increased pension contributions from high earners.
Cap on income tax reliefs
From 6 April 2013 a cap will be introduced on all uncapped income tax reliefs. A maximum cap of the higher of £50,000 or 25% of an individual's income will apply to reliefs that are currently unlimited. The new measure will not apply to reliefs already subject to their own limits such as relief for contributions to a registered pension scheme.
Corporation tax rate
It was announced today that the expected 1% reduction in the main rate of corporation tax to take effect from 1 April 2012 will be increased to 2% giving a main corporation tax rate of 24%. This will fall a further 1% each year to 22% from 1 April 2014.
While boosting enterprise was an aim of today, the Chancellor made it clear that all steps will be taken to prevent aggressive tax avoidance.
If you think you may be affected by any of the above or if you have any other questions, please contact:
Head of Tax
0141 271 5778
Director of Tax
0141 271 5773
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.