AAT RESPONSE TO THE HMRC CONSULTATION ON OFFICE OF TAX SIMPLIFICATION: REVIEW OF UNAPPROVED SHARE SCHEMES

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1 AAT RESPONSE TO THE HMRC CONSULTATION ON OFFICE OF TAX SIMPLIFICATION: REVIEW OF UNAPPROVED SHARE SCHEMES 1 INTRODUCTION 1.1 The Association of Accounting Technicians (AAT) is pleased to comment on the issues raised in the HMRC consultation document on Office of Tax Simplification: Review of unapproved share schemes. 1.2 AAT is a professional accountancy body which has 50,300 full and fellow members and 71,000 student and affiliate members worldwide. Of the full and fellow members, there are 3,800 Members in Practice (MIPs) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law. 1.4 In pursuance of those objectives AAT provides a membership body. We are participating in this consultation not only on behalf of our membership but also from the wider public benefit perspective of achieving sound and effective administration of taxes. 1.5 AAT s approach to responding to this consultation has been to comment on the principles of the proposed measures. 2 VESTED INTERESTS 2.1 AAT is responding to the consultation from the wider public benefit perspective of achieving sound and effective administration of taxes. 3 GENERAL COMMENTS - UNAPPROVED SHARE SCHEMES 3.1 Following an OTS review of unapproved share option schemes, HMRC has issued a consultation document in respect of the following issues: Share for share exchanges and rollovers; 1 Figures correct as at 30 April 2013

2 The availability of corporation tax relief following takeover of a company; The taxation of Employment Related Securities (ERS) awarded to internationally mobile employees; Section 222 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), and the rules concerning the making good of amounts paid by an employer in respect of tax on ERS; and The valuation rules for listed company shares. 3.2 The AAT notes that this is the second of a two-stage review on the tax aspects of share schemes for employees (the first was in respect of the four tax-advantaged schemes). 3.3 In the introduction to the condoc, the minister said: The second part of the OTS s review concerned non tax advantaged (or unapproved ) employee share schemes. This is generally recognised to be a complex area of the tax system, but I want to make it as simple as possible for employers and employees to apply the rules and pay the tax that is due when shares or other employment-related securities are awarded. 3.4 AAT supports any initiative to simplify the UK s tax system, but it observes that it becomes more complex as each year passes and ministerial statements about simplifying code remain unrealised as simplification in one area will be more than offset by increased complexity in other areas of the UK s tax canon. 4 CONSULTATION QUESTIONS Share for share exchanges and rollovers 4.1 The condoc says at 2.4: In its report, the OTS pointed out that where share options held by an employee are exchanged for new share options, for example on the takeover of a company, rollover provisions may prevent an income tax charge arising. However, no such rollover provisions apply in relation to restricted shares. Broadly, shares are restricted if they have conditions attached that potentially reduce their value. The OTS reported that this can lead to income tax charges where these shares are exchanged, or that companies may undertake complex and costly arrangements to prevent such a tax charge arising.

3 4.2 The OTS recommended that the exchange and rollover provisions currently in place for share options should be extended to restricted and nil or partly paid shares, thus establishing consistency in tax treatment of all employmentrelated securities in share for share exchange and rollover situations. 4.3 AAT supports this proposal. Corporation tax relief following takeover of a company 4.4 The condoc observes that CT relief is currently available for employee share acquisitions subject to certain conditions. The OTS pointed out that in certain circumstances relief that may have been available had shares been acquired by an employee prior to a company takeover, may not be available where the shares are acquired after a business has been taken over by an unlisted company. 4.5 The OTS has therefore recommended a change to the rules in this area, so that the CT relief for employee share acquisitions in Part 12 of CTA 2009 would, where appropriate, be available for a specified period following takeover by an unlisted company. 4.6 AAT supports this proposal. Internationally mobile employees 4.7 The condoc at 2.13 states that. the taxation of restricted shares and share options awarded to internationally mobile employees (IMEs) generally depends upon the residency status of the employee at the time that shares are awarded or options granted. 4.8 As a result, the current rules may lead to UK tax not being chargeable on ERS relating to UK employment; or to UK tax being chargeable on ERS relating to work carried out overseas. The OTS also pointed out that the ERS rules in this area are not aligned with those which apply for other forms of employment income earned by IMEs and that this misalignment can create complexity in a number of areas. 4.9 At 2.15, the OTS has recommended a change to the current position so that the tax treatment of ERS awarded to IMEs would be more closely aligned with that for other forms of employment income under the charging provision in S62, ITEPA AAT supports a proposal that all share plans (approved or unapproved) that give employees shares or a right to receive shares should be treated

4 consistently from a residence perspective and it seems sensible that the earnings basis in S62, should apply. Section 222, ITEPA 2003 and making good 4.11 In certain circumstances, some payments (including notional payments under share schemes) are treated as earnings under Chapter 12, ITEPA S222 covers situations where an employer is treated as having made a notional payment and the employer is required to make a payment of income tax in respect of the notional payment to HMRC If the employee does not make good the payment within 90 days, the income tax due amount is treated as earnings from the employment for the tax year in which the notional payment falls due The proposal is that the 90 day rule be replaced with P11D alignment such that the payments are due by 6 July following the tax year in question and the benefit would be subject to Class 1A NICs AAT recognises the problems with complying with the 90 day rule as outlined in the condoc, so the alternative suggestion by the OTS that this is aligned with the P11D reporting date, would appear to make sense We also recognise the practical difficulties for companies in determining whether NICs are due and whether the charge falls under Class 1 or Class 1A We welcome any changes which make this difficult area easier to understand for businesses The Government has stated that it wishes to align the income tax and the NICs systems, but AAT, along with other professional bodies, understands how difficult this will be. Valuation of shares 4.19 The condoc at 2.30 deals with a possible simplification of the valuation of listed shares the well-known quarter up method The OTS recommends a closing valuation as a simpler basis. Whilst that has the merit of simplicity, as the condoc notes, it also can lead to higher valuations and hence higher tax charges.

5 4.21 It is interesting that the alternative average of the day s bargains does not feature here as it does for say CGT purposes in S272(3), TCGA, thus offering the taxpayer a choice of valuation methods Perhaps consideration should be given to an average bargain method, which is easy to understand and to communicate. 5 CONCLUSION 5.1 AAT supports the proposals in this consultation document with the exception of the issue of the valuation of share where we have proposed that consideration be given to the average bargain method. If you have any questions or would like to consult further on this issue then please contact the AAT at: consultation@aat.org.uk telephone: FAO. Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY