Can you defer paying £3,000 tax?

Until recently personal tax bills of up to £2,000 Could be repaid through your PAYE tax code. Next year the figure rises to £3,000, Can you take advantage of it now?


PAYE Advantages Those paying their taxes through the PAYE system, directors, employees and pensioners, can choose to spread their tax bill for one year over a later one. This is done by adjusting their PAYE code for the later year adjusted to recover what they owe. Finance Act 2011 increased the amount recoverable in this way to £3,000 from the next tax year but HMRC has now brought this forward.


Not too late The notes to the 2010/11 tax return correctly state that you cannot have any underpayment coded out if it is more than £2,000. However HMRC have recently announced they will extend this option for bills of up to £2,999.99. (See http://www.hmrc.gov.uk/payinghmrc/taxcode-vdp.htm#1 )

TaxTip Even if you have already submitted your 2010/11 return showing tax payable by 31 January 2012, you can take advantage of HMRC's recent offer by telephoning them asking for your tax bill to be coded out.


December Deadline If you haven't completed your return yet, but suspect you owe HMRC money, you need to get your return to them by 30 December to take advantage of the coding option., After this date, the coding option is not available and any tax due must be paid by 31 January 2012,


No Tax Return If you are not in the self assessment system but have received a tax calculation (Form P800) for 2010/11,you'll automatically benefit from the new limit. HMRC will simply include the amount due in your 2012/13 code. If this does not happen, contact HMRC immediately.


Time-to-pay-deals Bad news for those paying their tax under a time-to-pay deal. HMRC have said the new coding-out rule will not apply to them and they must stick to the schedule of payments already agreed.


To Do If you owe tax of less than £3,000 for 2010/11, phone HMRC by 30 December and ask them to reduce your 2012/13 code to take this into account. This will spread the bill over the next twelve months beginning in April 2012.

Employee Share Gains: Income Or Capital?

The Court of Session has recently provided the final word on a long-running tax dispute on whether personal rights and rights outside the articles of association can be taken into account when calculating the market value of shares for employees.


Point at Issue


The significance of this is that if shares are acquired from employees for more than their market value (eg on a sale of a private equity company), then that excess amount is subject to income tax and National Insurance contributions (NICs) (which needs to be accounted for by the employer under PAYE) rather than the more favourable capital gains tax regime.


The Facts


In Grays Timber Products Ltd v HMRC, ( the case is available here ) an employee acquired shares in a company. 


A shareholders' agreement signed more or less simultaneously by the majority of the shareholders gave him a right to receive a disproportionately large amount of any sale proceeds if certain targets were met and he remained in employment. This was in contrast to his entitlement under the articles, which would just have given him a pro rata amount based on the number of shares he held compared with the number of shares other shareholders held. 


A sale duly occurred and the employee received the larger amount of proceeds.


HMRC subsequently challenged the tax treatment of his gain.


Argument


The employee repeatedly argued throughout all proceedings that his rights in the shareholders' agreement should be treated as if they attached to the shares and were included in the articles, and so contributed to the shares' market value. 


Decision


However, the Court of Session upheld the rulings of the lower courts in  agreeing that market value meant the value of the shares and rights which passed to a prospective buyer. External rights (in shareholders' agreements, for example) or personal rights, which did not affect the buyer or the intrinsic value of the shares, could not affect the market value of the shares. 


Accordingly, the shares' market value remained the pro rata amount the employee was entitled to under the articles (some £450,000) and not the enhanced amount (some £1.5 million).


This meant an income tax and NIC charge on the excess amount, which was payable under PAYE. 


In this case, the excess amount was over £1 million. Fortunately, however, the buyer of the company had operated a retention and so it was able to cover at least some of the amount sought by HMRC from that sum rather than having to go against the employee to recover its PAYE liability – which, as the sale occurred in late 2003, would now be difficult.


Comment


While not a surprising result, the case acts as a timely reminder, as capital gains tax schemes become more important, of the need for properly drafted arrangements to give employees additional rights on exit or achieving targets.


Crucially, these rights should be included in the articles rather than being expressed as personal rights. 


The downside of this can be that the employee shares can have a slightly higher value on acquisition than their pro rata value, but this is hope value and so should not normally amount to any significant premium. 


In the Grays Timber case, had the employee's full rights been included in the articles up-front, it is likely that, while he might have had to pay a little more to acquire his shares, his full £1.5 million would have been subject to capital gains tax after all and so he would have saved some £300,000 in tax.