Draft finance bill clauses

Comments from ACCA to HM Revenue and Customs
February 2014



Tax incentives for employee ownership trusts

ACCA has long supported diversity of business forms, and employee ownership and engagement in particular is an important feature of a healthy economy. We welcome the initiative to implement a carefully considered and fully consulted set of measures to encourage this important policy aim.

ACCA has long supported diversity of business forms, and employee ownership and engagement in particular is an important feature of a healthy economy. We welcome the initiative to implement a carefully considered and fully consulted set of measures to encourage this important policy aim.

The design of the draft clauses reflects a fair compromise between the competing policy aims, while seeking to prevent abuse. The one area in which ACCA would propose an amendment is in respect of the restriction of relief to disposals in a single year. As is well recognised, one of the key instances where a company may be transferred into employee ownership is where the founding proprietor is retiring, and wishes to transfer control and ownership of the business to their employees. While granting relief in respect of a prospective transfer of control would clearly be complex and potentially problematic, the granting of relief in respect of historic disposals would be less so. With this in mind, it should be relatively simple to allow for a claim for relief to be effected in respect of ‘relevant linked transfers’ in the previous four years (so as to align with the tax enquiry windows), being transfers by the same individual from the same pooled shareholding to the same EOT, with no other disposals in the period. Allowance of the claim could be at the discretion of HMRC.

Claims would be in the form of a letter in similar format to clearances currently commonly sought on other corporate disposals. The number of claims in any given year is unlikely to be so great as to impose a significant administrative burden on HMRC, and in most cases the eligibility of the disposal for the intended relief should be clear on first reading of the claim. Acceptance of the claim would result in a rebasing of the asset in the EOT, and trigger a repayment of CGT already paid by the disposing owner. Clearly the disposing owner will need to fund CGT payments in respect of the earlier disposals in the interim, but this would be no different to the current position, and the payments should not be ‘dry charged’, even where some element of the consideration is deferred. This measure allowing for retrospective application of the relief in limited circumstances would reduce the incentive to enter into other arrangements to try to ensure that as much gain as possible arises in the year of transfer of the controlling interest without defeating the other policy objectives of the measure or introducing scope for abuse.


Partnerships Review

Salaried members

In terms of the practical application of the 3 tests, there are a number of potential practical issues. While it is understandable that the existing Employment Status Manual Tests have been rejected as in inappropriate in a significant proportion of partnership cases (as they do not take adequate account of capital contributions in a partnership context) the shift to a new test will inevitably introduce some element of short term uncertainty.

There is likely to be a degree of uncertainty in the longer term arising out of the introduction of a new test of ‘significant influence’ in the legislation, which is not further defined in the legislation. While HMRC guidance is welcome in this area, the fact remains that this will of course not be binding and greater certainty for taxpayers must wait upon judicial pronouncement.

While the quanta of the two financial tests will always be subject to debate, there is a more fundamental aspect of their measurement, which is likely to give rise to some practical administrative difficulty for partnerships. The measurement of fixed/variable salary appears from the guidance to be tied to the partnership’s accounting year, which aligns with the usual allocation of profits.

The measurement of salary by reference to capital contribution however falls to be measured over the fiscal year, which may or may not align with the partnerships accounting year. The inconsistency in measurement will impose an administrative burden for any partnerships which account other than on the fiscal year, doubling the number of calculations required. We would welcome explicit alignment of the measurement periods so as to reduce uncertainty and administrative burdens.

Mixed memberships

ACCA has a number of deeper policy concerns about the impact and basis of the proposed measures, which have been explored more fully in written and oral evidence to the Finance Bill Sub-committee of the House of Lords Economic Affairs Select Committee. These are not repeated here, but can be accessed via the Committee website at http://www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-finance-bill-sub-committee/inquiries/parliament-2010/draft-finance-bill-2014/

In practical terms, the current proposed legislation is likely to pose significant administrative difficulties for those attempting to operate it. The reliance on a ‘reasonable’ supposition in Conditions X and Y, and the variables introduced in the calculation of ‘appropriate notional return’ by reference to ‘commercial rates, and ‘time value equal to an amount of money equal to B’s contribution to the firm’ will be fraught with difficulty for firms affected by the provisions.

The differing treatment of profits reallocated by reason of ‘deferred entitlement’ as against profits reallocated by reason of a ‘power to enjoy’ will require firms to be absolutely clear as to the extent of benefit taxed under each provision, again requiring judgements based upon ‘just and reasonable’ apportionments. The fact that it has been deemed necessary for the legislation to be based upon such subjective and burdensome bases gives weight to the suggestion that the deeper policy objectives need to be reconsidered. 


The draft clauses do not offer sufficient clarity on the treatment of profits where deferred remuneration ultimately fails to vest. It appears that in the case of eg securities which have been allocated to the partnership, tax will have been paid at the additional rate in respect of a gross amount giving rise to the relevant securities. The TIIN indicates that if the net securities are subsequently allocated to another partner “[t]here will be no further tax liability and no entitlement to recover the tax paid”. It is not clear what this would mean in respect of a payment to another partner whose tax liability would be more, or less than the original charge. Where the initial (uncrystallised) bonus had been for 100, would the remaining 55 be allocated to another partner as ‘taxed settlement’ of a profit entitlement of 100, or be treated as a gross payment of 55 and subject to further tax? The former mechanism seems unlikely to represent an accurate assessment of the tax which would otherwise be due, while the latter would effectively impose a double charge to tax on the partnership income required to generate the original holding of 100.

Assets disposals

The asset disposal provisions effectively operate as a TAAR. Accordingly, given their restricted application the reliance on the subjective intention test is in line with existing anti-avoidance rules elsewhere in the tax code.


Capital gains tax private residence relief final period exemption

The effective final 36 months’ exemption from capital gains tax in respect of disposals of private residences has attracted attention in recent years as a result of a number of high profile cases where individuals have made repeated use of the relief. As such reduction of the period would reduce the attractiveness of this perceived abuse. However, the timing of the introduction does have the effect of immediately ‘stopping the clock’ on relief for those who have had a property on the market since October 2012, a perhaps not uncommon situation in the current property market.

A more phased introduction for sellers caught in such a situation would align more closely with the principles of certainty and stability in the tax system. While this would come at the cost of some simplicity, there is in any event an impact on those individuals who will now have to calculate and return a gain on properties where the gain would otherwise have been exempt.

ACCA welcomes the decision to retain the existing 3 year relief for individuals moving into residential care. While again this introduces an element of additional complexity to the rules, the policy objective is clear and welcome. In many cases such properties may be less attractive to younger buyers without carrying out of some work, which lengthens the timetable for disposal. The likelihood of any abuse is far smaller, and serial benefit from the extended exemption period appears to be extremely unlikely.

The position under the legislation seems clear, and unlikely to trouble a qualified accountant or tax adviser. Nevertheless, ACCA would encourage HMRC to consider carefully the nature, content and accessibility of any guidance relating to the relief. Many of those who would benefit will be of limited means and perhaps less familiar with the tax system. The published guidance should place emphasis on clarity, and made available in appropriate formats, perhaps with a view to distribution among residential and nursing homes.


Transferable tax allowance for married couples

The proposals to introduce a transferable element of personal allowance for those not currently entitled to the married couples allowance represent a benefit aimed at those on lower incomes. Based on current thresholds and average earnings figures the measure will broadly apply only to couples where the average of the aggregated income for each partner falls below the national average income. As such it is a targeted measure, but the conditions have been drafted comparatively broadly and with a view to simplicity which is appropriate in context.

The measure is not extended to those taxpayers who currently qualify for the Married Couples Allowance. While there would be an element of duplication in the impact of the measures, this is nevertheless of course a disappointment for those taxpayers who do currently qualify for the MCA, who are also of course a naturally shrinking, but clearly defined population.


Social investment tax relief

ACCA welcomes the proposals to encourage social investment. The current draft clauses have been prepared expressly with the intent of meeting EU restrictions on state aid while allowing for future extension of the reliefs so as to encourage investment still further. Welcome as this is, care must be taken that the sustainability and long term effectiveness of the relief is not compromised by the initial design.

It is notable that the capital gains relief will not be available in respect of companies limited by guarantee. While there may be sound company law reasons for this, the fact remains that the guarantee company is a common vehicle for charities. The time and effort spent by government centrally on framing a relief which gives them the same advantages as other charities without the need for conversion to another form is likely to be far less than the disruption caused by widespread conversions, which would inevitably reduce the time and money available for pursuing the charitable aims of each organisation.

Modifying the regime applicable to debt instruments which otherwise qualify for the income tax relief so as to ensure that they are excluded from the QCB regime and instead enjoy a status equivalent to investments in shares in a relevant enterprise would enhance the attractiveness of investment into the sector without imposing the transition costs on existing enterprises. Given that there are already qualifying conditions for loans to fall within the regime, and stringent anti abuse provisions, the scope for unintended opportunities for abuse should be minimal.

The legislation itself is in any event currently complex, incorporating a number of formulae to calculate different aspects of the relief which may be available. While this may be amenable to some simplification in the future if state aid rules can be shown not to apply, it is nevertheless disappointing to see such complexity of drafting in an area where transaction costs should be kept to a minimum, even though it may be the case that a typical investor will be of a similar profile to those currently accessing EIS and the like, and so likely to be either financially literate or in a position to pay for suitably qualified advice.