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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.