James Paull examines business tax reliefs in Accountancy Daily

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James Paull, Head of Incentives Group at Andersen LLP, examines tax reliefs for business and explains how to use some of these complex reliefs as well as examining potential pitfalls, in Accountancy Daily.

James’ article was published in Accountancy Daily, 22 June 2021 and can be found here.

It’s difficult to put a precise number on the different ways to be subject to tax in the UK but it’s fair to say it’s a lot. With the tax burden so high, the Government recognises that there are times when it is appropriate that taxpayers get some relief. However, the rules which allow these reliefs to be accessed can sometimes be complex and prescriptive and if taxpayers are not vigilant, they may find they don’t qualify or have, through what might seem wholly innocent actions, lost the benefit of what could have been a valuable relief. In this article we take a brief look at a few common tax reliefs and highlight some potential pitfalls which could result in the entitlement to that relief being lost.

Capital Gains Tax: Business Assets Disposal Relief (“BADR”)

BADR (formerly entrepreneurs’ relief) provides a preferential rate of Capital Gains Tax (“CGT”) of 10% (for higher and additional rate taxpayers) on the first £1m of lifetime gains. It can therefore generate a saving of up to £100,000 over the taxpayer’s lifetime. In order to qualify, there are a number of conditions that need to be satisfied and if sufficient attention is not paid these conditions could cease to be met. For example, in order for shares to qualify, generally the individual needs to be an employee or director during the two year period ending with the date of the disposal. If the individual ceased to be employed before the disposal of the shares this condition would not be satisfied. Similarly, the company should be a trading company or the holding company of a trading group. If the company holds material non-trading assets for a prolonged period this condition could cease to be met, with BADR being lost.

It’s also worth noting that if a taxpayer sells their BADR qualifying shares but accepts as consideration an earn out then there may be a further gain realised on the payment of the earn out, but this gain would not attract BADR.

Enterprise Management incentives (“EMI”): disqualifying events

EMIs are employee share plans which give beneficial tax treatment for employees of early stage companies. No income tax will arise on the exercise of the option (if the option price is at least equal to market value at grant) and the shares will attract BADR on sale with the holding period starting from the date of grant of the option and not the acquisition of the shares.
The EMI code prescribes certain “disqualifying events”, for example ceasing to be an eligible employee by leaving or reducing hours. There will be no income tax if the options are exercised within 90 days of a disqualifying event. However, if the option is not exercised within the 90 day limit then any gain from the date of the disqualifying event will be taxed as income (with potentially NIC) rather than capital gain. This illustrates the importance of being aware of what constitutes a disqualifying event and tracking when it happens. All too often, this is only discovered on a transaction, by which time nothing can be done to rectify the situation.

Share for share exchanges

When shares in one company are sold in exchange for consideration satisfied in the form of new shares then it is often possible to roll over the capital gain into the new shares and pay only when these are disposed of. On the face of it, this relief looks fairly straightforward but there are still pitfalls. For example, to qualify, the consideration shares need to be issued so the transfer of existing shares would not qualify. If the acquirer is a group, if different companies acquire the shares and deliver the consideration shares then this would not qualify so care needs to be taken.

Where the consideration is a mixture of new shares and an earn out satisfied in cash the shares element could qualify for rollover CGT relief but the earn out would not. This would need to be valued at the disposal of the shares with CGT paid on the value at that point and then trued up when the earn out amount is known. If, on the other hand, the CGT on the earn out could be deferred if the earn out is satisfied in shares or loan notes.

Enterprise/Seed Enterprise Investment Scheme

EIS and SEIS provide valuable income tax and capital gains tax reliefs to investors in high risk start up companies. It is important to ensure that the position of investors is considered at all stages of the development of the company to ensure relief is not inadvertently lost. For example, if there is a group re-organisation this could, if certain conditions are not met, result in the loss of relief. Likewise, if the investor receives certain types of value from the issuing company. It’s therefore important not to lose sight of the importance of EIS/SEIS once the initial set up has taken place.

And the list goes on… statutory deductions for employee share schemes and business property relief and agricultural property relief from inheritance tax are all valuable relief which contain traps for the unwary.

These are just a few examples that highlight the importance of paying attention to tax, not just at the outset but also being aware of ongoing potential pitfalls and taking advice to avoid them if possible. In some cases, it’s likely professional advice may be taken on a transaction but it may not include tax advice. In others, the action causing the relief may seem so innocent that no advice is taken at all. In many cases, the relief could have been easily have been retained with some simple structuring. Sadly, this is often only discovered when it is too late.

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