Fortunately, however, the main target of the latest press release, issued on 7 May 2004, and entitled "TACKLING AVOIDANCE: EMPLOYMENT-RELATED SECURITIES" is not the much put upon freelancer but employees – often of larger businesses – who have benefited from these complex schemes which disguise cash bonuses as securities and then artificially manipulate the value of the securities in an attempt to reduce liability to income tax and national insurance contributions.
Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which was amended by the Finance Act 2003 to ”make the regime fairer”, provides the income tax rules in cases where securities, interests in securities or securities options are acquired in connection with employment.
In the Finance Act 2003 amendments were made to ensure that all of the value received by way of remuneration in the form of shares or other securities subject to restrictions is taxed at some time, while giving flexibility surrounding when the charge is taken - for example, the employer and employee can jointly elect to pay tax and National Insurance on a higher proportion when the shares are received, leaving future commercial growth in value of the shares in the capital gains tax regime.
The amendments made last year introduced provisions in Chapters 3A and 3B of Part 7 and were put in place to counter known tax avoidance schemes using artificial arrangements to manipulate the value of securities.
However, it appears that there were tax avoidance schemes that were managing to circumvent the 2003 amendments. Hence the Government has introduced new provisions, with immediate effect, to stop these schemes from working. A key to the new provisions is the insertion of new clauses into part 7 of the Income Tax (earnings and pensions) act 2003 (c. 1). One of the key new conditions is in clause 1A, which reads:
” (1A) This subsection is satisfied if the avoidance of tax or national insurance contributions was not the main purpose, or one of the main purposes, of the arrangements under which the right or opportunity to acquire the employment-related securities was made available..” (my emphasis)
As with much legislation of this nature there appears to be considerable uncertainty inherent in the drafting. Most schemes that are designed to reward and incentivise employees have an element of tax planning that aims to minimize the likely tax or national insurance impact of the scheme. I suspect that it will be left to the Courts to decide where to draw the line between schemes that have tax avoidance as “one of the main purposes” and those that do not.
Kevin Miller, MA FCA
Kevin Miller Consulting Limited
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