Saturday 9 January 2010

Moving to 50% tax: a New Year's resolution to take action before 6 April 2010?

Companies need to think carefully about what action to take to minimise the impact of the 50% income tax rate on their employees very soon.

HMRC views


On 9 December 2009, the Chancellor of the Exchequer published his Pre-Budget Report.  Some feared he would use this opportunity to clamp down on companies accelerating bonuses etc, to obtain a more favourable tax rate – possibly using a similar approach to the pensions tax legislation, in which increased pension contributions cannot now qualify for full relief for higher earners even though the main part of the relevant legislation does not come into effect until 2011.

However, the Pre-Budget Report contained no relevant legislative announcement.  While there must clearly still be a chance that an announcement to this effect could be made in the actual Budget – whenever that will be in an election year – this must now be remote.

On this basis, fear of reversal on the tax effect of acceleration, thus making any tax planning efforts meaningless, is at least one problem which no longer realistically needs to concern companies.

ABI views

Many share plans contain provisions which do not allow them, or awards under them, to be amended to the benefit of participants without prior shareholder approval.  While there are generally de minimis levels which have to be exceeded before these provisions are relevant and maintaining favourable tax treatment for participants is also a permitted exception, companies and advisers have been concerned to know where (notwithstanding scheme rules) the ABI would set its own threshold in requiring prior shareholder approval for accelerating receipt of benefits.

Although it chose not to include anything on this in its December 2009 restatement of its share scheme guidelines (where only a minimal change was made), the ABI has indicated that it draws a distinction between allowing the acceleration of a bonus or vesting of a share award where the performance target has been achieved (which it believes is acceptable) and one where the performance target has not yet been achieved (which it believes is not).
 
For example, with a December year end company which normally only pays bonuses in May on the basis of performance to December, it would be acceptable to pay bonuses early in March as company performance would be known by then.  However, a 31 March year end company, which would have to pay a bonus before 6 April 2010 to avoid the 50% tax liability would be in a more difficult position to be sure that it had definitive performance figures to act on (particularly as the figures will not have been audited).

A June or September year end company would have even more difficulty.

Vesting of share awards with performance conditions can be analysed similarly.

Companies may, however, take their own view on whether they can effectively protect shareholders' interests, including by way of clawback or other means e.g. a forfeitable loan back to the company.

Matters to Consider
 

These may include:

  • Making sure an "unconditional" payment is made in the 09/10 tax year.  If it is not, and the payment becomes unconditional in the 2010/11 tax year, the position is that tax is payable at 2010/11 rates.
  • Particular issues with loans and clawback/forfeiture.
  • How to estimate performance for the balance of a period or start of a period.
  • Shareholder disclosure issues.
  • Compliance with the Model Code and reporting requirements.
  • Particular issues with employee share plans as opposed to cash plans.
  • Avoiding "wasted" tax and NICs if the award is not ultimately earned, yet the tax and NICs have been paid early.
  • For affected financial services companies, interaction with bank payroll tax.
  • Employee consent and communication issues.

Saturday 2 January 2010

The New UK Disclosure Opportunity - The Truth


Following a previous attempt by the UK's Revenue and Customs (HMRC)  in 2007 to persuade tax evaders to reveal undisclosed offshore assets and pay tax on them, the NDO ("New Disclosure Opportunity") was launched this summer and finally closed on 4 January 2010.

Many have been bombarded by leaflets, e-mails, postcards, webcasts and other elaborate marketing tools explaining why it is such a good idea to come forward and go into the new NDO not just by HMRC but by Accountants and
Solicitors!

There are many practical reasons why this second NDO is unlikely to be a success.

Indeed HMRC have now announced (11 January 2009) that some 10,000 account holders have come forwaed whereas their own intelligence suggests that some 40,000 UK residents have offshore accounts.

Why is a second facility necessary? 

In the original facility 45,000 people came forward and paid outstanding tax liabilities and a fixed 10% penalty facility recovering approximately £400m in unpaid tax.

Sadly, the economic environment we live in today is far different from that of 2007 when the first facility was operated. It is exactly those economic conditions which prompted HMRC to launch the new NDO. 

The threat of large penalties and possible criminal prosecution are being wielded against those tax evaders who did not come forward in the first NDO. However, the first NDO has not produced a large number of criminal prosecutions (although it has certainly produced some) and the reality is that many tax evaders go around their normal lives unaffected by HMRC's threats.
As with anyone who has got away with something for a long time, when
they do not feel it directly or hear of people getting caught, it gives them renewed confidence.

There are four key reasons why the NDO is not attractive to many tax evaders.

Reason 1- Illiquidity

Many of thr evaders in question no longer have the liquid resources to pay HMRC. Or if they do, they have no other capital assets because their businesses, property investments, shares are either not producing income, standing at a loss, or are unsalable.

They cannot let go of their one remaining asset and security whatever the risks.

Reason 2 - Potential Tax Penalties on Undisclosed Income/Gains

Their Offshore bank deposit, property or investments are the proceeds
of long-standing UK tax evasion and entering the NDO would not help as
they are likely to be rejected and subject to a lengthy full scale tax
Enquiry with large penalties and a tax bill dwarfing the NDO figure.

Reason 3-Interest Chargeable

If the tax evasion has been going on for 20 years or more the HMRC offer of a reduced 10% (or 20% penalty rate) will be swamped by the interest bill, that will usually be around two and half times the tax owed and will make up the majority of any sum owed!

Reason 4- Many Evaders will Leave UK

Most tax evaders have a firm belief that if they are caught they will simply leave the UK, even if that means abandoning their home! 

The favourite destination of choice, is Spain! (Many are devastated to learn that the EU MARD Treaty of 2002 and the OECD Mutual Administrative Assistance in Tax Matters Treaty 2008 means that in all EU Countries and some further 19 Countries local Tax Authorities can simply be asked by HMRC to collect the tax owed! So, they will have to run far further to more remote unknown and possibly unattractive destinations to achieve their solution).

Conclusion

The combined effect of these reasons is that in spite of heavy, elaborate marketing by HMRC and Accountants and Solicitors, the practical reality is that most NDO prospects will not be coming forward.

The Liechtenstein facility holds more hope for a solution, especially
as its lengthy timescale ( now until 2016) offers a chance for tax evaders to be in a better financial position to pay up. 

However, to enter it, assets need transferring to Liechtenstein and that is not be so easy.


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