Capital Gains Tax - the review by the Office of Tax Simplification
The Office for Tax Simplification’s (OTS)
most recent report
doesn’t just look at tax simplification, but includes policy recommendations
relating to capital gains tax (CGT) - an interesting extension of the
Treasury’s usual instructions to the OTS.
Some of the recommendations, if implemented, could create significant
negative outcomes for a variety of government recognised tax advantaged
schemes, including Enterprise
Management Incentives (EMI), Sharesave/SAYE and Share
Incentive Plans (SIP), as well as other popular plans such as Growth Share
Plans.
Alignment of tax rates
Probably the most important point in the report relating to share
schemes is the suggestion that the government suggests a closer alignment
between the rates of CGT and income tax.
The argument is that the current high differential between those rates
can “create … an incentive for taxpayers to arrange their affairs in ways that
effectively re-characterise income as capital gains”.
This is a reasonable argument. Readers
of previous OTS reports may remember that this differential has previously been
referred to in the OTS review of non-tax advantaged share schemes in 2012, when
the OTS recognised the various attempts to deliver value to employees to be
taxed as a gain rather than as income. That
report also noted the raft of anti-avoidance legislation created to preclude
the use of such tax planning.
RM2 does not have any particular concerns about the points made by the
OTS here, and we recognise that certain share plan arrangements continue to be
driven very strongly by tax planning rather than a desire to motivate and
involve employees.
All employee share schemes
Our main concerns lie with the approach to tax advantaged schemes, including
those aimed at all employees such as SAYE and SIP. These long-standing and well understood
vehicles give all employees – not just higher earners - the opportunity to
become shareholders and part-owners of their employing company in a way which
would otherwise simply not exist.
In particular, we note that the report references the argument that
share schemes provide “a strong incentive to forgo salary in favour of other
more lightly taxed forms of remuneration, for those with the financial
flexibility to do so”.
There are two points here:
- firstly, of course, that the all employee share plans are not aimed at higher earners with financial flexibility; indeed the financial limits on those schemes are so low as to be almost irrelevant to anyone described as a “higher earner”. For example, the SIP allows an individual to use a maximum of £1,800 p.a. out of pre-tax salary to buy shares in their company; and
- secondly, in respect of Enterprise Management Incentives in particular - is that it is true that many cash-strapped smaller companies will offer options to attract key hires, in return for a lower salary. That was the whole point of EMI! Inevitably, the EMI option will deliver tax benefits only if there is a capital event and, if that happens, HMRC will have collected plenty of tax in the meantime from what has obviously become a successful company. In other words, EMI is at least self-financing for the Treasury, and probably a big money earner. There seems little doubt that for a high earner this is very much not a “more lightly taxed form of remuneration” – no remuneration is in contemplation, and there is a significant risk to the participant that the option will in fact never deliver the hoped for capital outcome.
Think like owners
In RM2’s experience, in terms of tax advantaged share plans, the tax benefits of such schemes are a
motivator towards adopting a share scheme, but not a driver – in much the same
way that a tax advantaged ISA or pension plan encourages saving. Business owners wishing to implement a share
plan invariably cite employee motivation, employee retention and the general
concept of “making employees think like owners” as the reasoning behind share
plan establishment. Cross-party support for these plans by governments of all
hues demonstrate the same intentions, underpinned by research showing superior
performance in companies with broad-based employee share plans.
RM2’s view
We recognise the importance of simplifying the tax system, and are not
averse to some closer alignment of CGT and income tax rates where there is clear
evidence of significant tax avoidance and lack of commercial intent.
Nonetheless, we very much hope that subsequent OTS reports will take a
more holistic view of the benefits of employee share schemes, not least
benefits to HM Treasury which needs successful companies from which to collect
taxes. The current view seems very myopic and may result in the employee share
schemes baby being thrown out with the tax avoidance bathwater.
If you would like to speak to us about your employee share scheme email us at enquiries@rm2.co.uk and one of our advisers will arrange a call with you.