Share scheme taxes: calm before the storm?
In July last year George Osborne set up the Office of Tax Simplification (OTS). It has now issued two reports: a review of tax reliefs, and an interim review of small business taxation. Those of us involved in employment taxation, and particularly in the taxation of employee share schemes, were keen to know what new initiatives might be contained in these two tomes, of 186 and 75 pages respectively.
The review of tax reliefs starts with Captain Kirk's proud boast: To boldly go where no man has gone before. Reading this we wondered - could we really be on the brink of the final frontier - a simplification of the tax rules surrounding share schemes?
The reports certainly raise some radical issues. Like other committees before it, the OTS points to the huge simplification of tax law that would result from:
- combining NICs and income tax
- aligning the total rates of tax (including NICs) on employed vs. self employed income
- aligning the rates of capital gains tax with income tax
Share schemes in particular would be revolutionised. The need for special approved schemes would probably disappear. And of the above proposals, the combining of NICs and income tax might even be achievable. But it is clear that the OTS accepts that there are huge problems with aligning tax rates. The government is in no position to cut taxes, so any alignment of these rates would mean a rise in the tax on self-employment and/or capital gains provoking howls of rage from the pro-business lobby and Tory heartlands.
Recognising this, the OTS retreats to a consideration of how the employed vs. self-employed distinction might be better policed, with a particular focus on reforming IR35. Sadly no very clear suggestions seem to emerge.
Employee share schemes
Naturally, we were keen to identify any proposals relating to share schemes. However share schemes are not mentioned at all in the small business report. In the tax reliefs report, we turned to the section Employment Related and there we found a whole range of benefits under review. The first of these is employer supported childcare. This, says the OTS, should remain (good news). Relief for cycles and cyclists' safety equipment also to remain (small cheer). Relief for meals on cycle- to- work days to be abolished (ho-hum). Luncheon vouchers out. Relief for repair and maintenance of work equipment in. Miners' coal allowances out.
But what about employee share schemes? Reading on, we come to Employment related securities for disabled employees. Should the relief for disabled employees arising from share option exercise in certain circumstances be retained? The OTS concludes: Due to a lack of information, we are not able to reach a conclusion.
There is some good news. In deferred purchase plans, where shares are acquired by employees for a small initial deposit, the unpaid balance is treated as a notional loan. But where the individual is a member of the core management team, and the company is a close company, the benefit of the loan is not currently taxed. The OTS recommends (indirectly) that this relief remains.
Also recommended for retention is the exemption from class 1A NICs on the grant of options to employees and on the award of Free Shares or the acquisition of Partnership Shares in a Share Incentive Plan (SIP). This is well and good, but the real point is that these events also attract income tax relief. On this matter, the OTS is silent.
A curious omission
And so what of the tangle of tax rules surrounding employee share schemes what should be done? Here, the committee is clear. We recommend that the whole area of employee share schemes be reviewed with a view to simplification. But isn't that what the committee itself was supposed to be doing?
And that is the end of the report in relation to employee share schemes. Not even the very popular, government approved Enterprise Management Incentive (EMI), gets a mention. In fairness, the document does cover a huge amount of tax territory and makes detailed and sensible recommendations in many areas. In particular, the committee recommends improvements to Entrepreneurs' relief, by simplifying the rules for qualification and (possibly) abolishing the current 5 million lifetime limit.
But the virtual omission of share schemes is curious, especially as the OTS devotes pages to Venture Capital Trusts and the Enterprise Investment Scheme (EIS). There are some big issues in relation to share schemes which the committee might have addressed. For example, why not make all share scheme gains subject just to CGT, tax avoidance schemes excepted?
An ominous calm
Pondering on these issues, we began to wonder if things are not as they appear. Two possibilities came to mind. Perhaps the OTS felt that it could not make recommendations in relation to share schemes until the really big issues mentioned above such as combining income tax and NICs had been considered. Or perhaps some changes to share scheme taxation have already been decided, and George Osborne has told the OTS that they needn't waste their time on the issue. After all, only a few days ago Cameron was proclaiming that the next Budget would see a major roll-back of business bureaucracy and the share scheme rules are among the most bureaucratic rules of all.
It is hard to regard the OTS reports as a major step forward. The OTS has identified, but not really tackled, the really big issues relating to the tax system. It says virtually nothing at all about share schemes. At the RM2 Partnership, we've filed away our copies of these reports and now await the main event the Budget on 23rd March.
If you would like more information on any of the issues raised in this note, please call us on 020 8949 5522 and ask to speak to one of our advisers.