ENTREPRENEURS’ RELIEF
There were two important changes affecting the scope of entrepreneurs’ relief (ER).
The first change is that, while the Chancellor announced that the relief will be maintained in the face of some pressure to abolish it, the minimum qualifying period in which certain conditions need to be met will be extended from one year to two years.
Secondly, in addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company in order to claim the relief.
FTI COMMENT:
This has a number of implications:
- This would seem to be retroactive in that it will apply to all disposals from the date of announcement, as a result affecting existing shares and rights and causing entrepreneurs who have owned shares and invested in their companies for many years to lose their anticipated relief.
- It will also have an adverse effect on share rights designed to incentivise participation in the growth in the value of companies (growth shares).
- Conversely, it will make Enterprise Management Incentives (EMI) more attractive as shares acquired through the exercise of EMI options are not required to satisfy the 5% participation test.
- It may also encourage the use of other forms of share incentives (such as jointly share ownership plans or JSOPs) which offer a simpler structure but do not qualify for ER.
- It will impact how growing entrepreneurial businesses are structured when raising additional capital.
These changes are in addition to the previously announced changes to the rules around dilution below the 5% threshold. This will allow an election when an individual’s shareholding is reduced below 5% after fundraising such that there is a deemed disposal and reacquisition of the shares while ER is still available. A second election can then defer the gain until the shares are sold.
FTI COMMENT:
Importantly, the valuation of the shares on the deemed disposal will be calculated as a simple percentage of the fundraising and would not need to be reduced for other factors such as minority interests.
EMPLOYMENT STATUS IN THE PRIVATE SECTOR
Companies, organisations or agencies will be required to determine if the rules apply to their individual engagements with contractors. Such entities will be responsible for determining if, “but for the existence of the contractor’s personal service company”, the contractor would be considered to be an employee using the key status indicators derived from the extensive case law on the subject.
Where the contractor is considered to be a would-be employee the “employer” will be responsible for deducting the resulting tax and national insurance as if the individual was an employee.
Small organisations will be exempt from the new rules, with the intention that there is no undue burden applied to small
businesses.
HMRC has an online tool – the Employment Status Service tool – to help those potentially affected by these changes to confirm their status. The tool provides guidance on HMRC’s opinion as to the employment status of an individual, however this is not necessarily the same conclusion that either a more detailed review or a tribunal/ court would agree upon.
FTI COMMENT:
As has been widely expected, the government has finally announced the expansion of the off-payroll working rules, commonly referred to as IR35 to the private sector, following their implementation to the public sector from April 2017. The rules will come into effect from April 2020, in order to give businesses time to prepare.
ENTERPRISE INVESTMENT SCHEME (EIS) KNOWLEDGE-INTENSIVE FUND STRUCTURE
The Enterprise Investment Scheme (EIS) rules allow for investment through, amongst other sources, approved investment funds. Funds are not obliged to become approved but the status provides certain advantages over non-approved funds including investors potentially being able to claim relief sooner and decreased administration for investors.
Finance Bill 2019-20 will require approved funds to focus on investments in knowledge-intensive companies (‘KICs’) by ensuring the invest at least 80% of funds raised in KICs. It will allow a longer investment period with 50% of funds raised to be invested within 12 months and it all to be invested in two years. Finally, it will allow investors in approved funds to set their income tax relief against liabilities in the year before the fund closes where previously this was only permitted in the same year the fund closes.
FTI COMMENT:
These changes will be broadly welcomed and whilst not going as far as some of the measures suggested in the consultation, a balance has been sought between simplicity, stability and the aim to ensure that knowledge-intensive companies are able to attract the capital they need.
Draft legislation is expected in the summer of 2019 with the changes effective from 6 April 2020.
OTHER MEASURES
Personal Allowance and Tax Bands
The personal allowance will increase from £11,850 to £12,500 from April 2019. The higher rate threshold will also increase from £46,351 to £50,000 from April 2019. Both are expected to remain constant until April 2021. The lifetime allowance for pensions will also rise to £1,055,000.
The National Living Wage
The National Living Wage will increase from £7.83 to £8.21 in April 2019 for those aged over 24. In addition, it will increase for 21 to 24-year-olds from £7.38 to £7.70 per hour; for 18 to 20-year-olds from £5.90 to £6.15 per hour; for 16 to 17-year-olds from £4.20 to £4.35 per hour; and for apprentices from £3.70 to £3.90 per hour.
National Insurance Contributions
The planned abolition of Class 2 NICs for self-employed individuals from April 2018 will no longer go ahead as previously announced in September. However, the government will continue to legislate two other previously announced changes to NICs, regarding the treatment of termination payments (where NICs will be payable by employers on any termination payment in excess of the £30,000 threshold), and income from sporting testimonials, albeit this is now delayed until April 2020.
Short-term business visitors (STBV)
The government intends to widen eligibility for the STBV Pay As You Earn (PAYE) special arrangement rules and extend its deadlines for reporting and paying tax. This is intended to reduce administrative burdens on UK employers with internationally mobile staff with effect from April 2020.
Employment Allowance reform
Employment allowance will be restricted from April 2020 to employers with an employer NICs bill below £100,000 in their previous tax year. The Employment Allowance provides businesses and charities with up to £3,000 off their employer NICs bill.
Capital gains tax – private residence relief
From April 2020 the government will reform lettings relief for capital gains on disposal of a residential property so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant. The final period exemption will also be reduced from 18 months to 9 months. There will be a consultation prior to implementation of these changes. The stated intention is to better target private residence relief at owner occupiers.