Budget: October 2018
Mr Hammond’s budget on 29 October didn’t look on the face of it to have very much in the way of excitement for share schemes, but there was certainly food for thought in particular for seekers of Entrepreneurs’ Relief (“ER”). The changes mean that Enterprise Management Incentive (“EMI”) share options will now need to run for 2 years before the magic ER 10% tax rate kicks in – but meanwhile ER has been made more difficult for non-EMI participants, particularly if the shares to be sold no longer meet the more stringent tests set out by the Chancellor.
A summary of the key share plan points from the Budget are below. We’ll be following up with more blogs, as the devil is invariably in the detail.
Entrepreneurs’ Relief changes (noting the particular impact on Enterprise Management Incentives)
The government have decided that they do want to keep the “rather expensive” ER. However, they have made a couple of changes to ensure that it is more targeted at true entrepreneurship (as distinct from simple investment or employment).
Minimum period
Firstly, they have extended the minimum period throughout which certain conditions must be met to be eligible for ER from one year to two years. This measure will apply to all disposals on or after 6th April 2019 (except where a business ceased before 29 October 2018 where it remains one year). This change is of particular relevance to EMI options as the two-year period will now apply in relation to shares acquired under an EMI option plan. However, it is important to remember that for EMI options this period does start to run from the date of the grant of the option (and not the later date that the relevant shares are actually acquired following the exercise of the EMI option).
“Personal company”
Secondly, they have added 2 new tests to the definition of a “personal company”, requiring the claimant to have a 5% interest in both the distributable profits and the net assets of the company. This measure will apply to disposals on or after 29 October 2018. Here, RM2 note the particular advantage of EMI schemes in that they do not have to comply with the 5% tests.
The government have decided that this measure is necessary to ensure that the claimant has a true material stake in business in order to claim entrepreneurs’ relief.
RM2 advise that those who are intending to benefit from ER revisit their arrangements with their tax advisers (particularly if the arrangements entered into were complex or perhaps related to growth/flowering shares) to ensure that they will comply with these new requirements to claim ER on a future disposal.
Finally, as a separate but related point on ER, it is noteworthy that the government has now republished their draft legislation to amend ER to preserve relief in certain circumstances where shareholdings are diluted below 5%. Although there have been some changes, the extension of relief appears to remain unavailable where dilution occurs due to employees exercising options.
Off-payroll working (“IR35”) in the private sector (large and medium-sized companies)
In an extension of a measure already introduced in the public sector, essentially large and medium-sized companies will have the onus and the responsibility to determine whether their “contractors” are genuinely self-employed. This measure is due to be introduced with effect from April 2020. However, “contractor” arrangements entered into from now will need to be considered very carefully to allow compliance with this regime when it is introduced.
Stamp Duty and Share Incentive Plans
There was also a minor technical change to the Share Incentive Plan (“SIP”) legislation as the parliamentary draftspeople forgot to amend the reference to the relevant stamp duty legislation when introducing the self-certification process (and abolishing the “approval” procedure) for SIP back in 2014. The legislative changes required will apply retrospectively to ensure that HMRC customers are not negatively affected by this oversight.
If you’ve any questions about the impact of the budget on your share plan arrangements, get in touch with one of our consultants on 0208 949 5522 or email us at enquiries@rm2.co.uk