HMRC cuts: what they mean for share schemes
Over the last five years HM Revenue & Customs has lost more than 30,000 jobs, most of which have resulted from the merger of the former Inland Revenue with Customs and Excise. Leslie Straithie, HMRC's Chief-Executive, has recently announced that as part of the Coalition cuts, a further 13,000 jobs will be lost among full-time members of staff over the next 5 years.
Recent documentaries on ITV and Radio 4 reveal that the job cuts and office closures have caused a collapse of morale and widespread chaos in the organisation. Staff are said to have no confidence in the decisions of senior management. There is now a backlog of 15 million open tax cases and errors are endemic. The chaos was recently compounded by the loss of computer discs containing personal tax and financial information for millions of UK tax payers.
What are the implications for the administration of employee share schemes? There are three principal departments involved and, despite the problems mentioned above, the level of service has so far remained remarkably good:
Small Companies Enterprise Centre (SCEC): this looks after the administration of the Enterprise Management Incentive (EMI). It also administers the Enterprise Investment Scheme and Venture Capital Trusts. Usefully, SCEC provides a telephone helpline on which members of the public can obtain informal advice from officials about the relevant tax rules and HMRC's interpretation of them (written confirmation is supplied on request). You can contact SCEC on 0115 974 1250.
This service is still available and the advice given is of a high standard. However, morale will not have been improved by a recent move of SCEC head office to Nottingham. If the helpline service is withdrawn, greater pressure will be placed on companies and their advisers; errors in documentation or procedure could come to light after a scheme is established, causing loss of tax benefits.
Employee Share and Securities Unit (ESSU): this administers the three UK approved schemes: the Company Share Option Plan (CSOP), Share Incentive Plan (SIP) and the Save-As-You-Earn (SAYE) Option Scheme. In principle, officials are prepared to answer queries over the telephone but they can sometimes be hard to track down. ESSU now shares an office with SCEC and can be contacted on the same number: 0115 974 1250.
Shares and Assets Valuation (SAV): Also based in Nottingham, this unit negotiates agreed values of shares and securities for tax purposes. Companies or their advisers normally submit an initial written valuation and SAV will either accept it or decline it, giving their reasons. Again, it is possible (and indeed normal) to speak to SAV officials on the telephone. Valuations for approved schemes are normally agreed within two working weeks, unless there is fundamental disagreement. In other cases, valuation agreements can take longer but over SAV still offers a good service. You can contact them on 0115 974 2222.
Where valuation is agreed after the event on a sale or purchase of shares by an employee, for example SAV offers a post transaction valuation check (PTVC) to help taxpayers assess, within a workable time frame, the extent of any tax liability. There is speculation that this service may be withdrawn. This would create special problems in relation to PAYE, for example where an employee must make a refund of tax to the employer. If not paid within 90 days the unpaid amount will be grossed up and taxed again as a benefit in kind. If a PTVC is not available, PAYE could be underpaid and a (large) unexpected penalty could arise later.
The implications for share schemes
In general HMRC provides a good service in relation to employee share schemes. There is concern however that this could be eroded by the ongoing job cuts and low morale. Without access to informal guidance from HMRC, unintentional errors could lead to very costly consequences for employers and share scheme participants.
If there is a problem with HMRC service standards, it occurs at the level of the local tax office. Here it is usually difficult to find an official with any knowledge of employee share schemes. In a recent case involving an RM2 client, a local office refused to give an opinion on a PAYE matter until after the deadline for paying the tax had passed. This exposes the taxpayer to substantial, and largely avoidable, risk.
If you would like further information on any of the matters discussed above, please call The RM2 Partnership on 020 8949 5522 and ask to speak to one of our advisors.