05 April 2022
The measures taken by the Chancellor to increase personal taxes, such as the 1.25 per cent increase in National Insurance from 6 April 2022, along with freezing allowances and tax bands, will undoubtedly result in some reviewing their tax affairs to see if they can alleviate the financial cost.
Tax increases are rarely a cause for celebration but do not always result in a distortion of taxpayer behaviour. Indeed, some may have seen the tax increases as relatively modest measures when they were originally announced, accepting that something needed to be done. However, when faced with the grim reality of household costs spiralling upwards, many individuals are now wondering what their options are to reduce the tax impact.
Given the significant differences between the tax rates on capital gains and on income, employees are more likely to be attracted to company share schemes which offer a capital return in the future.
Some of these share schemes are effectively approved by HMRC and provide significant tax advantages to employees and key staff, with preferential tax rates potentially applying when the shares are eventually sold. So, rather than receiving a bonus that could be subject to tax at an effective tax rate of 48.25 per cent, an employee could acquire shares in the business and sell these subject to a tax rate as low as 10 per cent in the future.
There are however potential traps that both employees and the owners of the business can fall into when providing shares in the company. These issues commonly arise in privately-owned or family-owned businesses and relate to the value of the shares when they are acquired.
If an employee or director acquires shares in a business, there can be income tax implications if they are not acquired at their market value price. The difficulty businesses face is that there are very few circumstances in which HMRC will confirm the market value of shares in an unlisted company.
This is an increasing problem that is causing issues in transactions and can potentially result in the collapse of deals to acquire a company. The buyer of the business is often concerned about whether the shares provided to staff and directors were correctly valued and the risk that income tax and potentially National Insurance should have been paid to HMRC.
In the absence of being able to obtain a confirmation of the value from HMRC, an important step that businesses can take is to obtain an independent valuation of the shares from a third-party at the time. This can provide a potential buyer with comfort and would also provide evidence to support the valuation in the event of an enquiry from HMRC. Share schemes may well be an answer to relieve financial pressure in the longer term but care is needed to make sure they’re not going to cause bigger problems down the line.