Alphabet shareholders may benefit from new amendments to the Finance Act
As previously reported in the November issue of In Practice, there were pre-Budget rumours circulating regarding large scale changes to entrepreneurs’ relief. Post-budget there is some relief in the accountancy world as it appears that – for the time being – entrepreneurs’ relief is here to stay. But the Autumn 2018 Budget did bring in two key changes which potentially could deny relief to shareholders. One of these has caused controversy and has resulted in ACCA, and other accountancy bodies, making representations to HMRC.
As detailed in our October 2018 budget newsletter, the Chancellor originally announced two key changes to entrepreneurs’ relief which may affect clients' plans. These are:
The first bullet point is mainly a planning opportunity as the changes are for disposals on or after 6 April 2019, so taxpayers affected had a short period in which to take advantage of the current rules. There are also transitional relief provisions where the claimant’s business ceased before 29 October 2018.
The second bullet point relating to the share rights/interests changes is the issue that has caused the most controversy and is the main reason behind the discussions with HMRC as the changes amount to a tightening of the rules. At present, in in order to qualify, the shareholder must have held shares which represented 5% of the voting rights. This is fairly straightforward to understand.
However, the new regime – which applies to all disposals after 29 October 2018 – includes a further requirement that the individual needs to have had an entitlement to 5% of the distributable profits and the assets available for distribution in a winding-up in addition to the existing stipulation of 5% of the voting rights.
Clearly HMRC was aiming at ensuring that the individual genuinely had an economic interest in the business rather than being part of an arrangement that brought them within the entrepreneurs’ relief scheme. However, a consequence would also be that holders of alphabet shares could be caught as the share structure would have been set up to allow unequal dividends to be declared and so there may not be ‘an entitlement’ as above. Therefore, these shareholders could potentially be denied entrepreneurs’ relief.
HMRC has listened to the views of ACCA and other accountancy bodies with a government tabled amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes.
The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the tests based on profits available for distribution and assets on a winding up:
New subsection (3) defines personal company. This requires an individual to: hold 5% of the ordinary share capital of the company and have 5% of the voting rights, and meet one of two new conditions found at new subsection (3)(c).
These are (i) that the individual is entitled to both 5% of the profits available for distribution and assets available for distribution in a winding up or (ii) in the event of a disposal of the ordinary share capital of the company the individual would be entitled to 5% of the disposal proceeds.
So alphabet shareholders who complied with entrepreneurs’ relief requirements – but who would have been inadvertently caught by the Finance Bill changes – will not be denied the relief provided that (ii) is complied with.
As at 11 January 2019, the Bill had completed report stage and third reading in the House of Commons with government amendments agreed to Schedule 15.
You can access ACCA's free webinar on key changes to entrepreneurs’ relief, which provides a refresher on the basics of entrepreneurs’ relief as well covering the changes introduced by Budget 2018.