UK: Remuneration Delivery And The 2012 Budget Statement

Last Updated: 13 April 2012
Article by Amanda Solomon

Compared to 2011, in relation to the impact on remuneration delivery strategies, yesterday's Budget statement was relatively benign. In fact, as most of the changes announced have either gone through a process of consultation or will not come into effect until the 2013 Finance Act and had been trailed through extensive briefing over recent weeks, one might even say that it was a little dull in terms of legislative changes. You won't hear complaints about that here! Our view is that the new process for producing tax legislation is a good one and we should all benefit from the production of law that is better at giving effect to the intention of Parliament and creates more certainty for taxpayers. The 2012 Finance Bill will be published next Thursday, 29th March.

None of this is to say that changes weren't announced which impact upon the form of remuneration delivery and upon strategies that employers will adopt in the short to medium term. We have highlighted some of the issues that we believe will have the greatest significance for our clients.

Reduction in the Additional Tax Rate to 45%

Effective 6 April 2013, the additional tax rate on taxable income in excess of £150,000 will be reduced from 50% to 45%. HMRCs own figures indicate that, in gross terms, this will have an annual cost of £3bn to the Exchequer, but that it expects the net annual cost after behavioral changes (notably, less taxpayer mitigation) to be less than £100m. Is Laffer correct, or is this "voodoo economics"?

The introduction of the additional rate on 6 April 2010 was originally announced by Chancellor Darling in his 2008 Pre-Budget Report; in his 2009 Budget statement, he announced the increase in the rate from 45% to 50%. The pre-announcement of the introduction of the additional rate encouraged acceleration of income; Chancellor Osborne stated that up to £16bn of income was accelerated into 2009/10 at a cost of £1bn to the Exchequer.

The introduction of the reduced additional rate to 45% announced by Chancellor Osborne affords a similar opportunity, and makes the deferral of remuneration attractive in the short- to medium-term. Employers should begin to explore strategies for deferring remuneration into 2013/14 (and beyond, if one believes that the additional rate may be removed completely in the future), especially since participation can be offered to employees on a voluntary basis. Indeed, HMRCs own calculations estimate that £6.25bn of income will be deferred in this way.

Reduction in the Main Corporation Tax Rate

In some - but not all - situations, deferral of remuneration will also lead to the deferral of relief in respect of amounts to be paid in the future. A reduction in the main rate of corporation tax has the effect of lowering cost to the employer of its deferred tax asset derived from deferred remuneration.

It should be noted that, for the vast majority of employers, it is possible to defer remuneration into 2013/14 without deferring the deduction for that remuneration for corporation tax purposes.

Cap on Unlimited Tax Reliefs

Legislation will be introduced in the 2013 Finance Bill to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs that are currently unlimited; it should exclude pension contributions, for example, as there is already a capped tax relief. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater). Draft legislation will be published for consultation later this year.

The Liberal Democrats in particular have made much of the introduction of a "tycoon tax". There is already a backlash since the most obvious form of unlimited tax relief is charitable giving; others under threat are likely to include BPRA (but to exclude EIS, VCT and the new SEIS for seed capital). In any event, this measure will also encourage the deferral of income as a means of tax mitigation.

Observations on Deferred Remuneration Delivery

On the basis that deferral of remuneration is set to become even more popular than is already the case, it is appropriate to consider the current state of play. The disguised remuneration legislation introduced in the 2011 Finance Act fundamentally changed the landscape, making the use of trusts considerably less appealing; for a tax charge not to arise prior to receipt of earnings, the remuneration to be delivered by the trust must be forfeitable. Far greater flexibility may be achieved through contract-based solutions, which may take one of a wide number of forms; on the basis that no conditions as to forfeiture are required to achieve deferral, the proposition for employee participation on a voluntary basis becomes far more attractive.

Deferred remuneration is inherently wealth creative for employees, making the proposition attractive to participants even before the reduction in the additional tax rate. To summarise, it is possible to award contract-based deferrals on a mandatory or voluntary basis on terms that can be tailored to meet specific business objectives and afford flexibility. In addition, the employer's deduction for its liability to pay remuneration may not be deferred.

One of the objections often raised by employers and employees relates to creditor risk. In fact, it is possible to introduce measures into a contract-based deferral structure to secure the contractual obligation. We are aware of arrangements that achieve this outcome for a retirement benefit scheme through adopting a regimented approach to ensuring that the conditions for falling outside the disguised remuneration legislation are met. We have concerns for this approach in relation to plans established to provide retirement benefits (but not to the same extent for other contract-based deferrals not based on retirement) because of statements made in the 2010 Treasury consultation into pensions tax relief (emphasis added):

  • Under the current rules it is possible for individuals to "top up" their retirement provision through unregistered pension saving arrangements – including EFRBS. These vehicles are essentially a type of employee benefit trust (EBT), and alongside other intermediary vehicles can be used to disguise remuneration and avoid, reduce or defer payment of tax. The June Budget confirmed that the Government will take action against intermediary vehicles, including EFRBS, being used in this way. If EFRBS were not included, employers/individuals would simply switch to use them rather than other forms of trusts as the way to provide immediate cash and other benefits to employees.
  • New and extensive use of EFRBS to provide retirement benefits would create significant risk around the yield projected from the restriction of pensions tax relief, and is not in keeping with the principle of creating a more affordable pensions tax regime. Without action, EFRBS would be more tax advantaged than registered pension schemes for pension savings above the AA.
  • In keeping with the need to preserve coherence of the registered pensions tax regime, to protect revenues, and to stop people moving from other EBTs to EFRBS in order to disguise remuneration and avoid, reduce or defer income tax and NICs, the Government cannot support the use of EFRBS in these ways. It will bring forward legislation as part of the consolidated draft clauses planned for Finance Bill 2011, due to be published for consultation towards the end 2010, that will ensure that funded EFRBS are less attractive than other forms of remuneration. It will also continue to monitor changes in patterns of pension saving behaviour for all other forms of EFRBS, on which it will be ready to act if necessary to prevent additional fiscal risk.

One of the more interesting features of yesterday's Budget was that there was absolutely no reference to the disguised remuneration legislation whatsoever, whether in respect of securing pension promises or otherwise. It is hard to believe that the legislation now found in Part 7A ITEPA is operating in exactly the way that HMRC expected (there certainly are still issues with it from a taxpayer/practitioner perspective), so perhaps we can expect a relatively settled period for the tax treatment of the various remuneration delivery strategies available.

Pensions Tax Relief

All told, the Budget statement contained nine changes relating to pensions. Given the level of recent press speculation, however, it came as a pleasant surprise that the annual limit on which higher rate tax relief is available for pension contributions will remain unchanged at £50,000; nor was there any fiddling with any of the other pension reliefs. It is worth noting that the relief for contributions is more valuable to an additional rate taxpayer in 2012/13 (at 50%) than in 2013/14 (at 45%).

One remuneration delivery strategy that has recently gained traction is employer pension contributions to a pension scheme established for an employee's spouse or other family members. In our view, this is completely outside the spirit of Government policy and it should come as no surprise that legislation is to be introduced to remove the tax and

NICs advantages for employers making such contributions as part of their employees' remuneration package. What is surprising, however, is that the legislation needed to withdraw these advantages will not be introduced prior to the 2013 Finance Bill, so there is tacit acceptance that this strategy can be pursued until such amendments are enacted.

Qualifying Recognised Overseas Pension Schemes (QROPS)

Changes will be introduced in the 2013 Finance Bill to strengthen reporting requirements and powers of exclusion relating to the QROPS regime to support the changes in secondary legislation published for consultation on 6 December 2011. The Government also announced that where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are not intended or available under the QROPS rules, the Government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS.

Review of Tax Advantaged Employee Share Schemes

The Government will consider the recommendations of the Office of Tax Simplification's review of tax advantaged share schemes, and will consult shortly on how to take a number of these proposals forward. Legislation will be in future finance bills.

Enterprise Management Incentives (EMI)

A number of measures were announced in relation to EMI arrangements. Unfortunately, they do not have a definitive timescale as the proposals are subject to obtaining EU approval for State aid.

The Government plans to increase the individual limit on qualifying EMI options from £120,000 to £250,000, as soon as possible (this can be done by statutory instrument so is not dependent upon the annual Finance Bill cycle). The Government also plans to make reforms to the EMI scheme in the 2013 Finance Bill 2013 so that, among other things, gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for capital gains tax entrepreneurs' relief (which would within limitations have the effect of reducing the effective rate of capital gains tax on the disposal to 10%). On the assumption that State aid approval will be forthcoming, it would be worth the while of EMI award-holders to defer any planned option exercises to 6 April to take advantage of this proposal.

Reform of the Taxation of Non-UK Domiciled Individuals

Following consultation in summer 2011, legislation will be introduced with effect from 6 April 2012 to make changes to the taxation of non-domiciled individuals to:

  • allow such individuals to bring their overseas income and gains to the UK tax-free in order to make a commercial investment in a qualifying business;
  • increase the existing £30,000 annual Remittance Basis Charge to £50,000 for those resident in the UK in 12 or more of the last 14 tax years; and
  • reduce the complexity of some aspects of the existing remittance basis rules.

The 2012 Finance Bill will also include measures that will ostensibly (because the legislation is only going to apply to future transactions, so the historic difficulties will

remain) simplify the capital gains tax treatment of foreign currency bank accounts. Draft legislation has already been published and no significant amendments are expected.

Residence and Ordinarily Residence

In the 2011 Budget statement, the Government announced its intention to introduce a statutory residence test with effect from April 2012. On 6 December 2011, following public consultation, the Government announced that the test would be legislated in Finance Bill 2013 and take effect from 6 April 2013, to allow further time to finalise the detail of the test. A summary of responses and draft legislation for consultation is to be published.

As part of this legislative change, it was announced in this Budget statement that ordinary residence will be abolished for tax purposes but overseas workday relief will be retained and placed on a statutory footing. The Government also intends to put Statement of Practice 1/09, which provides an administrative easement for employees who are resident but not ordinarily resident in the UK and have a single contract of employment covering duties carried out in the UK and overseas, on a statutory footing. The Government will consult on draft legislation to be introduced in the 2013 Finance Bill to be effective from 6 April 2013. The existing SP1/09 will remain in force for 2012/13.

Harmonisation of Income Tax and NICs

The Government has signalled its intention to press ahead with the Office of Tax Simplification's suggestion of harmonisation, and will shortly consult on a broad range of options for employee, employer and self employed NICs.

General Anti-Abuse Rule

The Government has accepted the recommendation of the Aaronson Report, published on 11 November 2011, that a GAAR targeted at artificial and abusive direct tax avoidance schemes (plus SDLT) would improve the UK's ability to tackle tax avoidance whilst maintaining the attractiveness of the UK economy as a location for genuine business investment. Consultation will commence in summer 2012 with a view to introducing legislation in the 2013 Finance Bill.

Personal Services Companies

The Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies and to make the existing IR35 legislation easier to understand. This will include HMRC strengthening specialist compliance teams, simplifying the way IR35 is administered, and consulting on proposals that would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source.

Stamp Duty Land Tax (SDLT), Capital Gains Tax and "Non-Natural Persons"

We did not expect to be covering SDLT in a Budget update focused on remuneration delivery. However, some of the measures announced in yesterday's Budget statement are likely to impact upon residential property ownership by EBTs. If this proves to be the case, then care must be taken to ensure that no unexpected charges arise under the disguised remuneration legislation or otherwise if changes are made to the EBTs

ownership arrangements.

The Government will introduce legislation in Finance Bill 2012 to apply a 15 per cent rate of SDLT to UK residential properties over £2 million purchased by certain "non-natural persons", with immediate effect. In addition, the Government will introduce paving legislation for an annual charge.

In addition, the Government will consult on the introduction of a capital gains tax charge on UK residential property owned by non-UK resident "non-natural persons". Legislation will be introduced in the 2013 Finance Bill with the measure coming into effect in April 2013. This measure will be consulted on in conjunction with the SDLT enveloping annual charge for high-value residential properties.

At this juncture, we have no indication of what these two provisions will look like, but it is easy to envisage that it will apply to valuable residential properties already owned by EBTs, typically via a company. It is definitely a case of "watch this space" if you are likely to be affected by the SDLT enveloping and capital gains tax provisions.

Luncheon Vouchers

Finally, bad news for those employers and employees who enjoy Luncheon Vouchers. The tax and NICs exemption up to a value of 15p per day is being removed – from 6 April 2013!?!

Final Thoughts

Ostensibly a quiet Budget, there is actually quite a lot going on, whether you are (the employer of) an employee affected by the 50% additional tax rate and would like to take advantage of remuneration deferral, a non-domiciled and/or an internationally mobile employee, a business that engages with Personal Services Companies, or a beneficiary of an EBT that has invested in valuable residential property in the UK. We have experience of advising in all of these areas and would be happy to discuss how we can help you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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