Unapproved Share Schemes

By Inez Anderson

The Office of Tax Simplification (OTS) has been consulting on improvements to the taxation and reporting for both approved and non-approved share schemes.

The consultation for the former completed in 2012 and led to some welcome changes. The consultation for the latter completed last summer and the review of the comments made has just been published, together with the Government's proposals and draft legislation. In this, the Government has recognised the complexities of the current situation and has sought to address some of these.

Comments are invited on these new proposals by 4 February 2014.

We highlight three of the proposals that, subject to the further consultation, will be included in Finance Bill 2014.

  1. The introduction of a new rollover relief for certain share exchange arrangements for employment tax purposes (a relief is already available for capital gains tax) with effect for exchanges occurring on or after the date of Royal Assent of Finance Bill 2014. This is potentially a very valuable relief and should, for example, make it easier to exchange restricted shares and obtain a rollover without generating employment tax charges.
  2. An extension (with effect from the date of Royal Assent) to corporation tax relief for employee share acquisitions following the takeover of a company. Current rules do not allow such a relief where the shares are issued in a company under the control of another company that isn't listed. The proposed relief will allow a 90 day period to acquire shares following a takeover.
  3. A change (with effect for grants and awards made on or after 1 September 2014) in the basis of taxation of shares and options granted to internationally mobile employees to make it more consistent with the taxation of other forms of employment income. While this should simplify the whole area of taxing such employees, employers should be considering the tax implications of these imminent changes.

Currently there is no employment tax on charges under the restricted, or convertible securities, or options, or post acquisition benefits employment related securities legislation where the grant or award was made in a tax year when the recipient was not resident. The change will remove this exclusion and instead calculate tax on the date of the chargeable event and apportion any charges that arise on chargeable events to periods of UK and non-UK working for those to whom the remittance basis applies or who were non- resident for part of the period between award and chargeable event.

The change will have an impact on systems and procedures for accounting for employment tax in respect of awards to the affected individuals, and employers will need to consider the impact of the measures on the effectiveness of future awards.

Overall these proposals are welcome and should help simplify and improve the taxation of unapproved share schemes and therefore make them more attractive.

Apportioning The Price Paid For A Business As A Going Concern - Trade Related Property

By Colin Aylott

Where a business is sold that includes 'trade- related property', issues have often arisen on the allocation of proceeds amongst the assets acquired. This is important given the different tax and stamp duty treatment of different assets. In a number of these cases HMRC has, for example, refused to consider that a significant amount of value can be attributed to any goodwill that may exist. The corollary is that in HMRC's view the value should be allocated to the property itself.

A trade related property is defined as a property which has been designed for the business and its location is such that the property value reflects the trading potential of the business e.g. a public house, restaurant or cinema. Therefore, the property is intrinsically linked to the returns generated and arguably the business cannot be sold separately from the property.

HMRC has now issued a new practice note. In this, they accept that if a business is sold as a going concern, with trade-related property, the sale may include some element of goodwill. The question to be answered is what the value of the goodwill should be, as in HMRC's view, it is often difficult to directly attribute a sum to goodwill. HMRC prefer the deductive approach to calculating the value of goodwill rather than a just and reasonable apportionment. The deductive approach values all the other assets and deducts their value from the total to leave a balancing figure for goodwill value. This approach places great significance on the valuation method used for other assets when arriving at the balancing figure for goodwill.

According to Corporation Tax Act 2009 goodwill should have the same meaning as it does for accounting purposes. That is, the difference between cost of an acquired entity and its fair value of identifiable assets and liabilities. Therefore, a calculation of the value goodwill must begin with whether or not the accounts are prepared in accordance with generally accepted accounting practices (GAAP). When this is not the case purchased goodwill must be calculated as if the company has applied GAAP conventions.

The other assets in a business acquisition must also be valued, particularly the property itself. In the practice note, HMRC has indicated some ways of doing this and the assumptions to be adopted, comparing a 'profits' based and 'investment' based approach to valuation. The profits based approach assesses the trading potential of the property operated by a 'reasonably efficient operator' and is meant to exclude the impact of any profit in excess of that level.

The practice note also includes some examples showing how HMRC would approach calculating appropriate values in given circumstances.

The practice note gives HMRC's view of apportioning value in business transactions involving trade related property and is easier to understand than previous versions. However the note is written with an HMRC view and it may be useful to get another opinion before submitting figures based on the practice note for agreement.

VAT Alert: January 2015 Changes

By Hannah Dobson

Businesses should already be aware that supplies of telecommunication, broadcasting and e-services such as downloaded 'apps', music, gaming, e-books and similar services to private consumers located in other EU member states will become subject to VAT in the country of the customer from 1 January 2015.

To remove the need for relevant businesses to register in every EU member state where their customers reside, a voluntary simplification procedure known as the 'Mini One Stop Shop' (MOSS) will operate in each EU member state. The MOSS will allow relevant businesses to account for VAT via a single VAT return, in their own member state. This simplification is intended to remove the need for multiple EU VAT registrations that would inevitably result from the 1 January 2015 changes.

After much discussion and debate, the EU has finally issued guidance on how the MOSS will operate in each EU Member State. As we know, businesses are being advised to register for MOSS from October 2014, but the guidance is also useful in that it provides details on how the MOSS will operate for areas such as:

  • businesses that are 'established' and businesses that do not have an establishment (eg. premises from which they operate) within the EU
  • what happens where businesses are already registered in a number of EU member states. For example, as a result of 'distance sales' (typically mail order) of goods to private customers
  • information to be recorded on each MOSS Return
  • payment of VAT due for each EU member state, penalties, and other compliance issues
  • invoicing requirements.

If your business will be caught by the new rules, you will need to be aware of how the VAT regime will operate with effect from 1 January 2015, and make sure your systems are able to cope with the changes. You will also need to manage your pricing (to take account of different VAT rates across the EU) and invoicing (which will need to conform to rules set out in each EU country).

Upcoming Film Tax Relief Enhancements

By Matt Watts

In a further bid to support the UK's creative industries, the chancellor has announced further amendments to the UK film tax relief regime designed to give greater tax incentives on film production expenditure.

The Government first introduced UK film tax reliefs in 2007 and plans to enhance the regime in Finance Bill 2014. These latest measures follow the introduction of a tax credit system for high-end TV productions, animation and video games in April 2013. The key proposals in Finance Bill 2014 (which will become effective for films whose principal photography is not completed before a specified date, which will be on or after 1 April 2014) are:

  • to increase relief from 20% to 25% on the first £20m of qualifying production expenditure and 20% thereafter for small and large budget films
  • to 'modernise' the existing cultural test which currently ensures only British films which meet strict specific requirements will qualify for the relief. This test will be widened to include European culture films and increase the chance of visual effects, special effects and principal photography expenditure qualifying for the film tax relief
  • to entice overseas companies locating certain functions within the UK by reducing the minimum UK expenditure requirement as a percentage of the project as a whole from 25% to 10%.

The Government has also pledged to invest £5m into the National Film & Television School's Digital Village. The plan is to expand and upgrade its existing facility into a world- class training centre in an attempt to help sustain a supply of UK talent for the digital and creative industries.

These amendments to the existing regime are subject to state aid approval but are expected to be introduced in Finance Bill 2014. The Government has also stated that it intends to seek state aid clearance to increase the rate of relief to 25% for all qualifying expenditure when it renotifies film tax relief in 2015.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code NTD167 exp: 30/6/2014