Share Incentive Plans
Currently companies can obtain a corporation tax (CT) deduction where they make payments to the trustees of an employee Share Incentive Plan (SIP) to purchase shares from non-corporate shareholders for use in the SIP. There is no provision for the deduction to be denied in cases where the company makes the payment without any intention that shares will genuinely be passed to employees under the SIP. This has led to avoidance schemes. The company carries out transactions that alter the share capital or the rights attaching to the shares, so that employees in the SIP receive few if any shares carrying real value. The transactions effectively strip away the value of shares held in the SIP.
In relation to payments made and alterations to share capital or rights attached to shares taking place on or after 24 March 2010, CT deductions will not be allowed where a payment to a SIP trust is made as part of a tax avoidance scheme, where the main purpose or one of the main purposes of the company in making the payment is to obtain a CT deduction. The proposed legislation will also close a potential loophole in the rules allowing HMRC to withdraw approval of a SIP where alterations to share capital or changes in rights attaching to shares materially affect the value of participants’ plan shares.
Company Share Option Plans
Under an approved Company Share Option Plan (CSOP), a director or employee can be awarded options over shares with a market value of up to £30,000 at the time of the grant. Provided the requirements of the scheme are met, there is no charge to income tax or national insurance contributions on the exercise of the option.
HMRC have discovered that arrangements are being used which fall under the general description of ‘geared growth’ and which can be used to deliver additional reward to employees beyond that intended under the schemes. This avoidance involves share options granted over shares in companies that are under the control of a listed company. To counter this avoidance, with effect in relation to options granted on or after 24 March 2010, CSOP share options can no longer be granted over shares in a company which is under the control of a listed company.
Companies will be allowed a transitional period of six months to amend their scheme rules, if necessary, to bring them into line with this change.
Transactions in Securities
Legislation is to be introduced to replace the existing ‘transactions in securities’ anti-avoidance legislation with ‘clearer legislation targeted more effectively at arrangements involving tax avoidance’. The effect of the legislation will continue to be to counteract the income tax advantage obtained from the transaction. The measure will generally have effect for transactions where the tax advantage is obtained on or after 24 March 2010.
The new legislation will make it clear how the tax advantage is to be quantified but will continue to counteract it in the same way. A wider range of companies will be covered but the new income tax advantage test and a new exemption covering fundamental changes in ownership of close companies (broadly companies under the control of five or fewer participators) should mean that fewer people need to consider whether the legislation applies to them.
Double Tax Relief Avoidance
Provisions will be introduced to counter certain avoidance in relation to double tax relief (DTR).
In particular, legislation will be introduced to confirm that a person may only deduct foreign tax from any foreign income if that person has included the foreign tax in his taxable income. Furthermore, in relation to manufactured overseas dividends (MODs), regulations have been laid to ensure that where certain financial traders have used the MOD rules to offset foreign tax against a liability to pay tax on a MOD it pays, they cannot also claim relief under the DTR rules.
The amendments made by primary legislation will have effect for foreign tax paid on or after 1 April 2010 (for corporation tax purposes) or 6 April 2010 (for income and capital gains tax purposes). The amendments made to secondary legislation have effect in relation to MODs paid 21 days after 24 March 2010.
Disclosure of Tax Avoidance Schemes (DOTAS)
Amendments will be made which are intended to toughen the DOTAS regime.
The new provisions include the following:
- a new trigger point for disclosure which will be the date when the scheme promoter first communicates a fully designed scheme to a third party;
- a requirement that a person introducing a client to the scheme must provide HMRC with the client’s name and address and details of the scheme promoter;
- increased penalties for non-disclosure; and
- a requirement that promoters must provide details of clients implementing notifiable schemes.
Regulations will be introduced which extend the definition of ‘hallmarks’ for disclosable schemes.
NICs regulations will be introduced to mirror DOTAS legislation as it applies to income tax.
It is expected that these measures will have effect from a date in autumn 2010.