ETC Tax- Summer Newsletter 2023 | Tax Matters That Matter

Up and coming ETC Tax online events

Should we be going nuts for QNUPS?

A guide to Qualifying Non-UK Pension Schemes (“QNUPS”)

Tax Disclosures...

What you need to know

A webinar discussing how to handle a tax disclosure

14TH SEPTEMBER 10.00AM - 11.00AM

SPEAKER

Andy Wood Consultant

• Book early to secure your place and don’t miss our early bird offers!

• Free ticket for Tax Partner

Pro Members

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19TH OCTOBER 10.00AM - 11.00AM

SPEAKERS

Vincent Costello Senior Manager at ETC Tax

To view our next up and coming events, and to purchase your tickets click here

Making the complex simple

04 Enterprise Management Incentives (EMI)

- A Powerful Tool for SMEs in the Battle for Talent 08

Tax-efficient funding for SMEs Struggling with cashflow at the moment? Raising finance is key! 10 Guest article Protecting your business, are you covered?

14 Discovery Assessment – Tips you need to ‘discover’.

16 Case of the Month HMRC allows VAT recovery on libel case legal fees.

"Shall I compare thee to a summer's day?"

– William Shakespeare

Summer is well under way; Europe is melting under the heat of the burning sun whilst the UK gazes out of their windows confused by all the rain! Typical weather as the schools break for summer!!

Tax Matters, That Matter is here once again so we hope reading our summer edition will brighten your day. Don’t forget our e-Newsletter will arrive via your inbox each month so you won’t miss out on any tax news and updates from our expert tax advisers!

This quarter we bring you…

Battling for talent? - Clive Haworth talks Enterprise Management Incentives (EMI)

Feature guest article from Elaine Roche of Kuits tell us how to protect the value of your business should you lose mental capacity or pass away.

Struggling for cash – Olivia Pryer gives us the options on Tax-efficient funding for SMEs.

Vincent Costello brings us Top Tips for discovery assessments.

Case of the month – Keith Miller discusses VAT recovery on libel case legal fees.

Don’t forget to reserve your place on our next live webinar “Should we be going nuts for QNUPS” on 14th September at 10am click here for more information

Many thanks to Sarah Aston and all the contributors who made this edition happen.

If you have any queries, comments, or observations, then please let us know. We’d love to hear from you.

Best wishes, Angela

Angela Wood Managing Director angela.wood@etctax.co.uk

ENTERPRISE MANAGEMENT INCENTIVES (EMI)

- A POWERFUL TOOL FOR SMEs IN THE BATTLE FOR TALENT SMEs - LISTEN UP AND PAY ATTENTION TO ENTERPRISE MANAGEMENT INCENTIVES OR EMI!

SMEs often face challenges in attracting and retaining talent, putting them at a disadvantage compared to their larger competitors. However, securing the right individuals for key positions and retaining them is crucial for success.

While share incentives as part of remuneration packages might seem more common in large companies, EMI specifically targets SMEs, offering favourable tax treatment for both employers and employees.

EMI encourages smaller businesses to offer share ownership to key employees and directors through option arrangements. EMI aims to assist growing companies in seeking, retaining, and rewarding key employees for playing their part in the success of the business, especially if a company lacks the finances to offer competitive remuneration packages.

SME

Clive Haworth Senior Manager clive.haworth@etctax.co.uk

Overview

A share option grants someone the right to purchase shares at a fixed price in the future. Such options are highly effective in incentivising and retaining key employees since, if the shares appreciate in value, employees can reap significant gains upon selling them and pay less tax than they would on other forms of remuneration or incentives.

EMI options can be granted by independent trading companies with gross assets not exceeding £30 million.

Options over shares with an unrestricted market value (UMV) of up to £250,000 per employee can be granted at the date of issue. Generally, there will be no income tax or NICs (National Insurance Contributions) when the options are granted or exercised. A qualifying company can grant EMI options up to an overall limit of £3 million.

There is no approval process or clearance mechanism for EMI per se, but the share valuation can be agreed in advance with HMRC. However, companies must notify HMRC within 92 days of granting an EMI option. Additionally, there is an annual reporting requirement.

Tax Benefits

For the Employee

Grant of Options: No income tax or National Insurance is applicable upon the grant of a qualifying EMI option.

Exercise of Options: If exercised within ten years of the grant, with no disqualifying event, and no discount at grant, there will be no income tax or National Insurance on exercise.

Sale of Shares: Capital gains tax will be payable on the disposal of the shares. Business Asset Disposal Relief may apply in many cases, resulting in a tax rate of just 10%.

For the Company

When an option is exercised, the company obtains a corporation tax deduction for the EMI "Profit" – i.e., the difference between the market value of the shares at the time of exercise and the total amount paid for the option grant or exercise.

The share valuation can be agreed in advance with HMRC

Enjoying this article, but need more advice on any of the topics covered?

To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

Practical Considerations Valuation

Prior to granting options, a valuation must be agreed with HMRC for the shares.

It is important to have experienced advisers negotiate with HMRC to ensure an optimal value is agreed, potentially involving a significant minority discount for smaller numbers of shares.

Flexibility – Scheme Design

The key to maximising the benefits of the EMI scheme lies in its design. The scheme offers substantial flexibility in terms of conditions that can be placed on exercise and sale. For example:

• Exercise and the number of options can be linked to the attainment of performance targets – individual, corporate, or both.

• Exercise may be tied to specific events or dates, subject to meeting pre-agreed targets.

There are few limitations, enabling the scheme to be tailored to the specific requirements of each business.

Qualifying Conditions

For the option to qualify conditions relating to the company and the employee must be met.

EMI can be ideal for both start-ups and other SMEs seeking to enhance shareholder value, potentially in preparation for an exit event and can also be customised to achieve objectives.

If you are interested in finding out more on Enterprise Management Incentives and the benefits of introducing an EMI or other share incentive scheme, please do get in touch.

Editor’s note: It is worth noting that the government has recently published draft legislation to extend the time limit for notification of the grant of EMI options. Currently, companies must notify HMRC of an EMI option grant within 92 days of the date of grant. This limit will be extended for EMI share options granted on or after 6 April 2024. Instead, companies will need to notify HMRC of an EMI option grant on or before the 6 July following the end of the tax year in which the grant was made.

Exercise and the number of options can be linked to the attainment of performance targets – individual, corporate, or both.

TAX-EFFICIENT FUNDING FOR SMEs

For many start-up or small-medium sized companies, attracting investors can be a long and daunting process, particularly during economically uncertain times.

To ask investors to part with their precious money and put their confidence into your business plan can present a difficult task.

Struggling with cashflow at the moment?

Raising finance is key!

So how can you make that investment just a little more attractive?

Tax

Though not an ‘attractive’ word, it can be a significant factor for choosing where to place your money.

By offering investors the chance to take advantage of a number of generous tax breaks, this could be the driving factor which steers them to taking a leap of faith in your company.

Below we have discussed two tax-advantaged funding methods which may help your business attract those valuable investors.

Options

1. Enterprise Investment Scheme (EIS)

This investment may offer the following tax advantages:

• A tax reducer of 30% x their investment (up to £1m, or £2m if considered a ‘knowledge intensive company’).

• An option to carry back the tax reducer by 1 tax year, if more beneficial.

• If the investor has incurred a gain on another asset, they may be able to defer this gain to a later date, to assist with cash flow.

• If the investor claimed the tax reducer and the shares were owned for at least 3 years, any gain is exempt from Capital Gains Tax (CGT) on eventual disposal.

• If the disposal results in a loss, this is allowable as a reduction against their net income.

All the above are subject to conditions met by the investor and the company.

It can also help your company raise money of up to £5 million each year, and up to a maximum of £12 million in your company’s lifetime.

Olivia Pryer Tax Adviser

olivia.pryer@etctax.co.uk

How can a company offer an EIS investment?

Firstly, the company must be unquoted and have a permanent establishment in the UK.

It cannot operate a prohibited trade, such as financial, farming, market gardening, hotel and property development.

The assets of the company must not exceed £15 million prior and £16 million after the share issue (the focus is on smaller-medium companies).

The company must employ less than 250 fulltime employees (500 if knowledge intensive company).

The issue must take place within the first 7 years of its first commercial sale (10 years if knowledge intensive company).

The cash raised must be used for the trade within two years.

Risk-to-capital Condition

It must be reasonable to conclude that:

- The company plans to grow and develop its trade on a long-term basis

- There is a significant risk of a loss of capital (greater than the return on the investment).

The main objective of the relief is to focus on companies with high growth potential. This condition is in place to prevent EIS availability to companies who aim to preserve their invested capital.

There are also a number of conditions that the individual must meet to take advantage of the relief. For example, they cannot be connected with the company, and must hold their shares for at least 3 years.

There are various other conditions that should be considered. We recommend that if your company is considering implementing one of the schemes, please get in touch to discuss it with a professional tax adviser.

2. Seed Enterprise Investment Scheme (SEIS)

A slightly smaller version of the EIS scheme, more focused on incentivising smaller start-ups who wish to raise funds of up to £150,000.

They offer the same tax advantage with some subtle differences:

•The tax reducer available is 50% x their investment (up to £100k).

• If the investor has incurred a gain on another asset, they may be able to exempt the gain entirely.

How can a company offer an SEIS investment?

For a company to qualify, the conditions are very similar to EIS with the below main differences to note:

The assets of the company must not exceed £200k prior to the share issue.

The company must employ less than 25 fulltime employees.

The cash raised must be used for the trade within three years.

The qualifying activity must be a trade no more than 2 years old.

Again, the risk-to-capital is another particularly important condition which applies.

How can you apply for EIS and SEIS Advanced Assurance?

Most investors will require advanced assurance that the company they are investing in is eligible for EIS or SEIS funding. Therefore, an application should be submitted to HMRC before your company starts offering it out to investors.

During the application process, HMRC will require the details of at least one proposed investor. They will also require the company’s business plan, 3-year financial forecast, a copy of the latest accounts and a range of other documents.

Summary

These tax rules are complicated, detailed and as can be anticipated, strictly interpreted and enforced by HMRC.

Although many conditions have been noted above, there are further conditions which can be difficult to interpret, both for the investor and the company.

Here at ETC Tax, we are well versed in helping clients navigate through these rules.

We can assist potentially eligible companies in obtaining the necessary assurances that any investment received may qualify for EIS/SEIS and continually ensure that this is case.

Furthermore, we can also structure investments so that individuals may maximise their individual reliefs available to them.

If you are a company or individual who would like to discuss the above schemes in more detail and explore how these might apply to your business, please do not hesitate to get in touch.

PROTECTING YOUR BUSINESS, ARE YOU COVERED?

BUSINESS,

Guest article

Ranked highly in both Chambers UK and Legal 500, clients consider us ‘quick to respond’, ‘diligent’ and ‘thorough and educated’ in our responses. Our approach is to work closely with our clients to understand their needs and objectives, and in doing so provide the best solutions for you.

Protecting your business, are you covered?

Do you know what would happen to your business if you were to lose mental capacity or pass away? Not the happiest question but knowing the answer to it will ensure that your business can continue without you, protecting the value of the business as well as looking after your employees, customers and suppliers.

The starting point for what needs to be done depends on the structure of your business; things need to be dealt with differently depending on whether you operate as a sole trader, partnership (with or without an agreement) or as a limited company. I’ll take each structure in turn, but first a summary of the documents.

Lasting powers of attorney

A Lasting power of attorney (LPA) allows you to choose one or more people to take decisions for you if you lose mental capacity, temporarily or permanently. There are two types, one for financial decisions and one for health decisions. Whilst both are important, in this article I’ll be referring to financial LPAs. If there is no LPA in place, then an application needs to be made to the Court of Protection to appoint a deputy. However, it currently takes the Court over 9 months to grant a deputyship, so it’s not a quick process.

Whilst an attorney can make decisions whilst you do not have capacity, when you die the power under the LPA dies with you. At this point the terms of your Will take over.

Wills

As a business owner, you probably want the value you’ve built up in your business to pass to your family, but they might not necessarily be the best placed to deal with the day to day running of the business. Putting a will in place will allow you to:

• Choose who will administer your business

• Choose who will inherit the value of your business

• Time when your family will inherit your business

• Save Inheritance Tax

• Protect the business from divorce or bankruptcy

Sole trader

As a sole trader, there is no legal distinction between you and your business. Therefore, putting an LPA in place allows someone to make decisions in your place if you lose capacity You might want to appoint different people to deal with your business assets and your personal affairs, but you’ll need to make sure that the two LPAs are accurately drafted so there is no confusion.

When a sole trader dies, their business assets along with all their personal assets are frozen until probate is granted. Only once probate is granted, the executors will be able to access the assets and wind up the business.

Kuits is a leading, UK200-listed commercial law firm based in Manchester city centre. We provide legal and commercial advice to businesses, their owners and high-net-worth individuals, promoting the growth and success of the North West.

Roche Partner

Tax

Partnership

The starting point for a partnership is your partnership agreement; what does it say happens when a partner losses capacity or dies? If you are an informal partnership, the Partnership Act is silent on what happens on the incapacity of a partner. However, if there is an LPA in place, the attorney can step into that partner’s shoes to make decisions alongside the other partners.

To ensure a partner’s family don’t have to get involved with the business, you should put a business specific LPA in place which appoints another partner as the attorney to make business decisions.

If you don’t have a partnership agreement and a partner dies, under the Partnership Act, the partnership is automatically dissolved, which cause issues for the remaining partners wishing to carry on the business as well as for the family of deceased.

If you do have an agreement, make sure that when a partner dies their share does not automatically pass to the other partners. If this happens, the share does not qualify for the CGT uplift that assets usually get when the owner dies. This could result in an unexpected

tax bill further down the line which could have been avoided if the share has passed under the deceased partner’s will.

Limited Company

In a limited company, director’s decisions need to be considered separately from shareholders’ decisions. It is possible to appoint an alternate director to stand in and take director’s decisions. However, the powers of an alternate director are tied to the original director. If they die or lose capacity, the alternate directorship comes to an end. Directors’ decisions cannot be delegated so an LPA is of no use in this situation.

Directors are appointed by shareholders. So, if there are enough shareholders to form a quorum, they can appoint a new director to replace any incapacitated or deceased director.

If a shareholder has lost capacity, an attorney can step into their shoes and vote at shareholder meetings, including to vote on the appointment of a new director.

What happens when a shareholder dies is governed by the company articles or any shareholders’ agreement that is in place. A

good set of company documents can ensure:

• Inheritance Tax reliefs are maximised;

• Your shares can pass to your family or a trust for their benefit;

• There is no automatic contract for sale;

• There is a cross-option backed by life insurance, so the other shareholders have the funds to purchase your shares from your estate;

Sole director and shareholder

Things are more problematic for business owners who are sole shareholder and sole director. If you lose capacity and don’t have an LPA there is no-one to vote in a new director to keep the business going.

When you pass away, if you have a will, your executor can step into your shoes as the shareholder. However, they cannot vote in a new director until they have probate, so there will be a period (6-12 months would not be unusual) where there is no-one to take the day-to-day decisions in your business. If you appoint a second director now there will still be someone to keep things running if anything happens to you.

As you can see, what needs to be done to protect your business is not one size fits all, so it is vital to review your situation and get specialist help to make sure your business is protected if something should happen to you.

Editor’s comment: Whilst rumours abound that IHT may be abolished, these are just rumours. Many business owners and individuals are shocked when they realise, often quite late in life, just how much inheritance tax they may have to pay and sometimes, for some, it can be too late to do too much about it. As can be seen from Elaine’s excellent article it pays to get your affairs in order well in advance, and whilst none of us like to think about dying or even losing mental capacity, we like Elaine, would advocate planning as early as possible especially where a business is involved, as unfortunately know of us know what is around the corner. If you or one of your clients would like to talk about planning for the future, please do get in touch.

Discovery Assessment – Tips you need to ‘discover’.

What is discovery assessment?

A “Discovery” is a power held by HMRC that allows it to reopen closed periods, there are conditions that apply restricting the situations in which HMRC may raise such an assessment.

HMRC's Authority for Discovery Assessments

HMRC possesses the power to initiate a discovery assessment when they discover one of the following:

Vincent Costello Senior Manager vincent.costello@etctax.co.uk

Prior to initiating discovery assessment, it is essential for the taxpayer to receive written notification of HMRC's intention to review their tax return.

Background on HMRC Enquiries

Every year, HMRC conducts checks to verify the accuracy of the information provided in the over 10 million self-assessment tax returns it receives

While HMRC may randomly select returns for enquiry, they retain the authority to investigate any tax return.

They may choose taxpayers based on suspicion of irregularities or when significant tax is at stake, deeming their financial affairs worthy of closer examination.

Taxpayers who fall under the purview of specialised teams like the Wealthy Team within Wealthy & Mid-Size Business Compliance can anticipate heightened scrutiny of their financial matters.

HMRC is bound by prescribed rules and procedures that include specific time limits for initiating a formal enquiry.

(a) Failure to assess income or chargeable gains that should have been subject to tax; or

(b) Insufficiency in a tax assessment, either current or past; or

(c) Provision of excessive tax relief.

Top tips when dealing with Discovery Assessments…

1 Understand the difference: Differentiate between a "discovery" and an "enquiry." A discovery reopens closed periods, while an enquiry investigates open years.

2 Familiarise yourself with relevant legislation: Know the legislation applicable to various taxes, such as Taxes Management Act 1970 s.29 for Income Tax and Capital Gains Tax, Schedule 10 of Finance Act 2003 for Stamp Duty Land Tax (SDLT), and Schedule 18 of Finance Act 1998 for Corporation Tax.

3 Identify the loss of tax: Recognise situations leading to a loss of tax, such as unassessed tax, insufficient assessment, or excessive tax relief.

It is essential for the taxpayer to receive written notification of HMRC's intention to review their tax return

4 Error or mistake defence:

If an error or mistake in the tax return led to the loss of tax, no discovery can be made if the return was prepared under the generally prevailing practice at the time.

5 Conditions for assessment:

Understand the conditions for making a discovery assessment, which include taxpayer's careless or deliberate behaviour, HMRC's awareness of the loss of tax, or the issuance of a counteraction notice for a double tax relief scheme.

6 Burden of proof: HMRC bears the burden of proof to demonstrate the validity of a discovery assessment raised.

7 Time limits:

Be aware of the time limits for discovery assessments based on different circumstances, such as incomplete disclosure (4 years), careless conduct (6 years), offshore matters (12 years), deliberate actions or non-notifiable tax avoidance schemes (20 years).

8 Presumption of Continuity (PoC):

Understand the PoC principle, where the same under-declaration of tax is presumed to have occurred in previous years unless proven otherwise by the taxpayer.

9 Verify assessment validity:

When receiving a discovery assessment, ensure it has been validly issued by HMRC, as they may sometimes use it to bypass enquiry rules.

10 Take immediate action:

If you receive a discovery assessment letter from HMRC, respond promptly. Consider appealing the assessment within the 30-day time limit to HMRC or, if necessary, appeal to the First Tier Tribunal.

Remember to consult an ETC Tax adviser for expert advice on specific cases or further clarification on the topic. Please note that seeking advice from a tax professional or consulting HMRC's official guidelines is recommended for specific cases or further information on the subject matter.

HMRC ALLOWS VAT RECOVERY ON LIBEL CASE LEGAL FEES

RECOVERY

Keith Miller Associate VAT Director keith.miller@etctax.co.uk

Their limited company is VAT registered, accounts for VAT on income received from advertising contracts and personal appearances, etc, and recovers VAT on related costs. Significant amounts of VAT were incurred on legal costs defending the client against defamatory accusations. We argued that the VAT on the legal costs was fully recoverable by the rights company because the legal defence was essential to maintain the good name of the brand and thus further the image rights company’s taxable business. Having initially suspended the client’s VAT claims, HMRC ultimately agreed with our arguments and refunded our client’s VAT claim.

Next steps – If you have any VAT queries please do get in touch.

Our client is a well-known celebrity who manages their image rights though a limited company.

The latest news round-up from the ETC team

Sparkle & Shine

When the atmosphere is buzzing, bottles are popping, and the food is flowing freely, you know you're in for a fantastic evening!

Our second Ladies that Launch eventSparkle and Shine - was a tremendous success and thoroughly enjoyed by everyone! The evening began with host Angela (MD of ETC Tax) discussing the importance of personal branding and how to put a stamp on the value you bring to others. Angela’s presentation, which covered 5 steps to building a strong personal brand, set the perfect tone for the evening.

We were fortunate to have Judy Parsons, also known as "The LinkedIn Lady," join us from across the Pennines to provide valuable insights into the world of LinkedIn. Judy educated us on crafting attention-grabbing headlines, treating our profiles as websites, and using the platform to generate curiosity. It's safe to say that it's time for all of us to review our LinkedIn profiles! www.judithparsons.com

After a bite to eat, it was time to bring out our phones for a lesson on capturing the perfect photo with Julie Harris of Julie Harris Photography. Julie took us from Hiding to shining, highlighting the importance of showcasing our brand

through authentic, branded images. www.julieharrisphotography.co.uk

As is customary for our events at ETC Tax, we always incorporate a charitable aspect. This time, we chose Girls Out Loud, a worthy charity that empowers girls to unlock their potential and make positive life choices. Their programmes focus on building confidence, emotional resilience, self-assurance, and self-esteem, which ultimately leads to true ambition, real change, and long-term success. We are delighted to announce that we were able to donate £530 to this wonderful charity.

www.girlsoutloud.org.uk

The evening concluded on a high note with a selection of excellent raffle prizes and happy winners, each taking home a goody bag filled with treats. I'm sure everyone will agree that it was a fantastic evening at The Con Club in Altrincham. And ladies, you'll be pleased to know that we are already discussing our plans for the next event!

Never miss out on an ETC event again, contact comms@etctax.co.uk to be added to our mailing list

Report

Up and coming Events

Should we be going nuts for QNUPs? A guide to qualifying non-UK pension schemes.

14th September 10am

Tax Disclosures –What you need to know.

19th October 10am

Our monthly case review and activity report

Crypto compliance and disclosure

Becoming UK Tax Resident Residency advice

Transfer pricing and transfer of assets abroad advice

EOT

CGT on House Sale

Limited Liability Partnerships advice

Tax computations and corporation tax returns

IHT Planning

Newest Member of the team

Olivia is delighted to announce that she has passed her CTA awareness exam with a mark of 82% which means she can now become a member of the The Association of Taxation Technicians.

To become a member of the ATT, Olivia had to pass 3 exams on taxation topics such as taxation for individuals and businesses, corporate matters, inheritance tax, SDLT and VAT.

She also had to pass 3 additional exams on accounting, law and professional responsibilities.

Olivia now has only 3 exams left to pass until she can become an official Chartered Tax Adviser and a member of the CIOT.