VAT flat rate scheme, Pensions recycling, Employee shareholder scheme

The Autumn Statement included three announcements which may have an almost immediate impact on your clients. You need to talk to all those clients who use the VAT flat rate scheme, as changes from 1 April 2017 may make it uneconomic to use. Individuals who have drawn some pension benefits, but who are still employed, could be caught out by changes to the pensions recycling rules. Investors who are planning to use the Employee Shareholder Scheme need to be aware that the rules have changed from today.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Employee shareholder scheme

Under the employee shareholder scheme (ESS) employees can receive shares in their employing company if they sign an employee shareholder agreement under which they surrender a set of statutory employment rights, including redundancy pay. The employee receives up to £2000 worth of shares free of tax and NIC, and the company can claim a tax deduction for the cost of supplying those shares.

When the taxpayer disposes of his ESS shares the first £100,000 of gains are exempt from CGT. If the ESS shares were awarded under an employee shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition. This effectively gave an unlimited CGT exemption on disposal of the shares, as £50,000 was a huge amount of ESS shares to acquire.

There has been no restriction on who could receive the ESS shares; the shares could be awarded to existing shareholders, even those who hold a material interest in the company. So rather than being a way to incentivise ordinary employees, the ESS has been used by equity investors to award themselves tax-free shares in fast growing companies. Those investors are not concerned with surrendering their employment rights, as they generally have control of the company they invest in.

The Government has finally realised that the ESS has not been used for the purpose it was intended. It has removed the income tax, NIC and CGT reliefs for employees, but only in respect of ESS shares awarded under employee shareholder agreements entered into on or after 1 December 2016. Where the employee had already taken advice regarding the employee shareholder agreement before 1.30pm on 23 November 2016, that agreement can go ahead with the tax relief in place if it is signed by 2 December 2016.

The corporation tax deduction for the employing company remains in place. Also the CGT exemption for ESS shares already issued remains.