Weekly Tax Update - Monday 15 October 2012

1. Private Clients

   1.1. Employee-owners

   The Chancellor of the Exchequer has announced plans for a new kind of employment contract called an owner-employee contract.

   New employee-owners will exchange some of their UK employment rights for rights of ownership in the form of shares in the business they work for, any gains on which will be exempt from capital gains tax.

   Companies of any size will be able to use this new kind of contract, but it is principally intended for fast growing small and medium sized companies that want to create a flexible workforce.

   Under the new type of contract, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax. In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required to provide 16 weeks' notice of a firm date of return from maternity leave, instead of the usual 8.

   Employee-owner status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires. Companies recruiting employee-owners will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.

   Legislation to bring in the new employee-owner contract will come later this year so that companies can use the new type of contract from April 2013. The Government will consult on some details of the contract later this month. Employee-owners receiving full capital gains tax relief on the shares awarded as part of their contract will still be eligible for existing employee share ownership schemes such as the Enterprise Management Incentive.

   The Government consultation on the employee-owner contract will include the details of restrictions on forfeiture provisions to ensure that if an employee-owner leaves or is dismissed, the company is not able simply to take the shares back but is able to buy them back at a reasonable price.

   http://news.bis.gov.uk/Press-Releases/No-capital-gains-tax-on-employee-share-ownership-for-new-employee-owners-68152.aspx

2. PAYE and Employment matters

   2.1. Employees resident but not ordinarily UK resident, taxed on the remittance basis, carrying out duties both in the UK and overseas under a single contract of employment

   HMRC has published responses to the consultation on legislating SP1/09, together with draft legislation for its implementation. SP1/09 applies to employees who:

   are resident but not ordinarily resident in the UK; are taxed on the remittance basis; and carry out duties both in the UK and overseas under a single contract of employment. Such individuals will typically have their employment income paid into a single overseas bank account. This will by definition hold a mixture of UK and overseas earnings which will mean that it is a 'mixed fund' for the purpose of the remittance basis. Mixed funds are accounts containing more than one kind of income, capital gains or capital, or containing income, and/or capital gains and/or capital from more than one tax year. There are statutory provisions setting out how money or other property within a mixed fund is to be treated for tax purposes in section 809Q of the Income Tax Act (ITA) onwards ("the mixed fund rules"). The mixed fund rules operate on a transaction by transaction basis.

   This single overseas bank account will normally be used to fund an individual's day-to-day living expenses, resulting in a very large number of transactions within a single tax year. Therefore a strict application of the mixed fund rules would be administratively complicated for individuals in this position. The purpose of SP1/09 is to provide a simpler alternative to the mixed fund rules for those who meet the relevant criteria. Under SP 1/09, such individuals can calculate their UK tax liability by reference to the total amount transferred out of their overseas account during the tax year as a whole, rather than by reference to each individual transaction.

   The Government's aim in legislating SP1/09 is broadly to preserve the features and details of the existing practice, whilst recognising the need for a pragmatic approach to deliver simplification and clarity for the taxpayer. As a result of responses to the consultation, the Government proposes to extend the legislation to cover:

   existing accounts, possibly with a requirement that they are cleared of all funds before being used as a SP 1/09 account; accounts held jointly with a spouse, where the spouse makes no economic contribution to the account in line with the relaxation introduced by HM Revenue and Customs when SP1/09 was published; and accounts containing funds from more than one employment which have duties both in the UK and overseas. In relation to employment related securities, the consultation indicates special mixed fund rules will continue to apply to income and gains from employment related securities (ERS) in the same way as they do currently under SP1/09. There will still be an exception for the sale proceeds from employee share schemes where the employee is able to sell the shares but decides to retain them for a period before disposing of them.

   The legislation to facilitate this is complex. There is an alternative approach - to treat all deposits of ERS income as tainting the account, and for them to be subject to the rules for deposits made in error outlined in the consultation document.

   The proposed legislation has been drafted on the basis that ERS income may be deposited into the qualifying account in the following limited circumstances:

   1. the securities or options were acquired pursuant to a right or opportunity available by reason of an employment of the individual;

   2. the disposal is or occurs in conjunction with, or as soon as reasonably practicable after, a relevant event involving those securities or options; and

   3. employment income from the employment for the tax year in which that relevant event occurs is mixed employment income (or would be if there were any).

   http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_032353

3. Business tax

   3.1. EU Financial Transaction Tax

   On 9 October Anni Podimata, the MEP spearheading Parliament's position on establishing a financial transaction tax, made the following statement about the intention of 11 countries to press ahead with the FTT.

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