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Tax Bite - Highlights of “Tax Day” – Stamp duty reform, and possible changes for EOTs?

Tax Bite – Highlights of “Tax Day” – Stamp duty reform, and possible changes for EOTs?

Last Thursday 27 April was “Tax Administration and Maintenance Day”, which involved the publication of various consultations and proposals on tax measures, and the promise of more consultations to come.

Of most interest to those advising companies and their shareholders were:

• The announcement that there will be a consultation launched later this year on Employee Ownership Trusts (EOTs), which is clearly being driven by perceived abuse of the tax advantages they offer; and
• The launch of a consultation on modernising stamp duty (and SDRT) on shares – this is a topic that has arisen before, but this consultation contains various concrete proposals and in our view it is likely that many of them will be implemented.

EOTs

The government says that it will consult later this this year on “the use and effectiveness of the Employee Ownership Trust (EOT) tax regime, to ensure that the reliefs are targeted closely at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning”.

EOTs were introduced to promote employee ownership of companies, and the tax benefits (the principal one of which being a complete CGT exemption for the selling shareholders on the sale of a controlling stake in the company to an EOT, subject to various conditions) were intended to encourage such transactions and ownership structures. Employee ownership will no doubt continue to be encouraged, so the question is how far might the government look to go in scaling back the tax benefits to combat what it appears to perceive as abuse of the regime?

Obvious options in terms of the CGT exemption could be:-

• increasing the percentage of the company that must be sold to the EOT to qualify;

• further tightening some of the other more technical conditions for the relief (e.g. around the “all employee benefit” requirement or the “limited participation” requirement, under which the number of continuing shareholders who are directors / employees must not exceed 40% of the total number of employees of the company or group);

• scaling back the complete CGT exemption , for example by introducing a cap on tax-exempt gains, to try and discourage decisions being influenced too heavily by complete CGT exemption rather than promoting employee ownership; and/or

• extending the period in which the sellers’ gain could become taxable if the EOT loses control. Currently as long as the EOT trustees keep control until the end of the tax year after the transaction, the sellers escape any tax. This (and the absence of any kind of motive test on the transfer to the EOT) mean it is becoming common for sellers to park the shares in the EOT and then there to be an onward sale fairly quickly whereby any deferred consideration is paid down.

As yet we don’t know exactly when the consultation will be published, what the proposed changes will be, or when they could take effect. If you have clients in the midst of an EOT transaction process or considering one, they should be made aware of this upcoming consultation, and if proceeding, may well want to try and complete before the consultation appears in case of any anti-forestalling rules that could potentially be announced.

Stamp Duty on Shares

There has been a degree of modernisation of stamp duty on shares in the wake of the Covid pandemic, with stamping applications now made by email and HMRC’s stamping machines finally retired, however it is widely accepted that the stamp duty regime is still quite antiquated and ripe for reform.

The key points and proposals raised in this new consultation, which closes on 22 June, are:

• A new, single tax (STS) to replace stamp duty on shares and SDRT.
• STS will be self-assessed, and (for transactions not done through CREST) completed via a new HMRC online portal.
• STS would be triggered on the date of the agreement to transfer the shares, or when it becomes unconditional, rather than on execution of the STF, and the payment and filing deadline would be 14 days thereafter (shortened from the current 30 days from completion of the STF for share transfers, and in line with the current filing deadline for SDLT on property transactions).
• The “stampable consideration” rules would be amended, again broadly in line with the SDLT position, by incorporating SDLT-style rules on contingent and unascertainable consideration. This should remove one of the oddities in the current stamp duty rules, namely where there is an earn out, under which if there is a cap on the earn out stamp duty is paid on the maximum amount once and for all with no later adjustment, whereas if the earn out has no cap or collar and is truly unascertainable there is no stamp duty at all on the earn out consideration.
• Tricky questions around the territorial scope of UK stamp duty on shares should be simplified, as STS would simply apply to UK shares / securities wherever the parties are based and wherever the shares are traded.
• Some other things should remain basically unchanged e.g. the exemption for loan capital as long as it is not ”equity-like”, and the application of various reliefs e.g. group relief, reconstruction reliefs, and the “growth market” exemption (i.e. principally AIM shares) etc.
• The requirement for company registrars not to update registers of members until the stamping has been done will remain.
• The £1,000 consideration de minimis, below which no stamp duty is currently payable, is proposed to be removed.

Once the consultation has closed and the government has responded, we will provide a further update on these proposals.