Recent articles on employee ownership – professional journals are raising awareness of EO

avatar Posted on October 11th, 2014 by Graeme Nuttall OBE

In 2014 UK professional journals have published more articles on employee ownership (“EO”) than in any previous year. This is tremendous step forward in raising awareness of EO. A key idea in the Nuttall Review was that regulatory change would encourage more publicity for EO and this has happened. In 2013, changes to the Companies Act rules on share buy-backs and treasury shares prompted articles in journals such as Company Secretary’s Review. The introduction of the new tax exemptions for employee-ownership trusts (“EOTs”) in the Finance Act 2014 has prompted most of this year’s articles. Raising awareness of EO was one of the Government’s reasons for introducing these new tax exemptions. As HM Treasury explained in July 2013 “Following the findings of the Nuttall Review and in order to support this sector, the Government has decided to introduce … tax reliefs to encourage, promote and support indirect EO structures” and more explicitly “these tax reliefs will promote awareness of the sector and increase the attractiveness of indirect EO structures for businesses which might be considering converting“.

The following is a selection of recent articles on EO:

Employee Ownership: One Year On (Company Secretary’s Review, 15 January 2014) – “I have every expectation that when we look back at 2013 we will recognise it as having laid the foundations for a thriving and growing employee ownership sector in the UK. (Jo Swinson, Minister for Employment Relations and Consumer Affairs). Graeme Nuttall and Jennifer Martin from Fieldfisher explain more…”.

One minute with Graeme Nuttall, Partner, Field Fisher Waterhouse LLP (Tax Journal, 7 March 2014)

The life changing power of employee ownership (HSBC Corporate World, Spring 2014) – “Why would you want your employees, in Nick Clegg’s words, to own “a big chunk” of your company? The answer is simple – for many companies, employee ownership improves business performance, economic resilience, employee commitment and engagement. EO is a distinctive business model, a different perspective. And for some companies this is life-changing…”

The employee ownership business model (Tax Journal, 13 June 2014) – “Conventional approaches to the use of employee share plans need revisiting. In addition to understanding how to get shares tax efficiently into the ownership of individual employees, it is now important to understand the wider concept of EO, and especially the idea that a company may be owned by the trustee of an employee trust on behalf of all its employees…”

Securing the succession (Taxation, 24 July 2014) – “Everyone dealing with private companies should be familiar with employee-ownership trusts, especially as a business succession solution…”.

Neat – Graeme Nuttall OBE sees employee ownership trusts as the perfect succession solution (Trusts and Estates Law & Tax Journal, September 2014) – “Too many owner managers have overlooked employee ownership as a business succession solution. New tax exemptions should ensure that the indirect employee ownership business model achieves the recognition it deserves: one that provides a neat exit that is good for a business; good for employees and good for the UK economy…”

The employee ownership business model is incredibly welcome news – Expert Guide (Corporate LiveWire, September 2014) – “Read all about it “The UK Government endorses tax free buy-outs”. EO is finally getting the headlines it deserves. Tax exemptions introduced in the UK Finance Act 2014 are encouraging EOT buy-outs and this successful and versatile UK business model is attracting momentum internationally…”.

New Vehicle for Employee Shares (Company Secretary’s Review, 24 September 2014) – “The Government continues to demonstrate its support for employee share ownership in all its forms with the publication on 17 July 2014 of an open consultation seeking views on the introduction of a new employee shareholding vehicle…”

Tried and tested – Graeme Nuttall explains how employee ownership trusts can produce better business outcomes (Tax Adviser, October 2014) – “EOTs provide a refreshingly different ownership model for private companies. Anyone who focuses on the tax savings achievable through the new EOT tax exemptions is missing the big picture: EO can produce better business outcomes as well as a great place to work…”.

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Prosecutions for tax evasion up again

avatar Posted on September 30th, 2014 by George Gillham

In September 2010, the Chief Secretary to the Treasury, Danny Alexander, pledged to make funding available to HMRC for a five-fold increase in criminal prosecutions for tax evasion. In January 2013, the incumbent Director of Public Prosecutions, Kier Starmer QC, said, in respect of non-organised tax fraud, that the Crown Prosecution Service (“CPS”) was aiming to prosecute seven times as many people in 2014/15 as it had done in 2010/11.

I have always been uneasy with the concept of ‘targets’ for prosecutions. Absent a five-fold increase in staffing in HMRC’s criminal investigations team (which was unlikely ever to happen, it takes years to train a good investigator) and a five-fold increase in the number of criminal investigations and raids, a five-fold increase in number of prosecutions could also be achieved by HMRC and the CPS ‘lowering the bar’ on the chances of a conviction before suspects were charged. If this were happening we would expect to see lower conviction rates for tax evasion offences going forward. The latest figures hint that this might indeed be starting to happen.

In a previous post on this blog about HMRC’s criminal investigations activity. I explained that there are three figures I track (I aim to exclude prosecutions for tax credits fraud) that reveal the extent of HMRC’s criminal investigations activity, and the extent of its success (or failure).

1. warrants executed by HMRC (“raids”);
2. decisions by the CPS to charge for tax offences (“prosecutions”); and
3. convictions for tax offences in the courts (“convictions”).

All three are tracked because they deal with different stages in the prosecution cycle. It often takes a year or more between a raid and a prosecution; and a similar period again between a prosecution and any conviction.

I now have the complete figures for all four years tax year from 201/11 to 2013/14 derived from a combination of Parliamentary Answers and Freedom of Information Act requests.

Year          Raids       Prosecutions       Convictions
2010/11    498          420                   280
2011/12    731          545                   401
2012/13    793          770                   522
2013/14    744          774                   682

As I noted in June there was a dramatic increase, in all three metrics, between 2010/11 and 2012/13, with raids up 59%, prosecutions up 83%, and convictions up 86%. However, the indications are that the HMRC criminal investigations team has reached maximum capacity, with the number of raids falling 6% in 2013/14 and the number of decisions to prosecute (which is a function of the number of files HMRC forwards to the CPS) static. The number of convictions rose 30% in the period but that is a function of the lag between decision to prosecute and the decision of the court.

What is more concerning- and bears out my previously- expressed fears about a target- driven culture- is the hint that the percentage of prosecutions which result in a conviction is falling: that is, there are more cases where the conclusion of the court is that HMRC were wrong when they accused the defendants of tax evasion. If we take the lag between decision to prosecute and conviction to average a year, the conviction rate is 95% in 2011/12, 95% in 2012/13 but falls dramatically to 88% in 2013/14 as the first wave of cases from the ‘great leap forward’ of 2011/12 result in trials.

If you are a regulated (SRA, FCA, ICAEW or the like) professional and are charged with a criminal tax offence, because these are dishonesty offences it is inevitable (at the moment) that you are going to have your licence to practise suspended, and thus will lose your means of earning a living, for at least a year- even if you are eventually found to be innocent by a jury. If the alleged offence relates to a complex conspiracy to defraud, with lots of co-defendants, it may take two, three, or even four years (I have known it be longer) for the case to come to trial. If you are acquitted, even if your previous professional firm will have you back again, you will never get back the money you could have earned in that time, nor will you get back the full sum you have spent on legal fees.

In other words, being charged with a criminal tax offence is likely to mean virtual financial ruin for a regulated professional, whether or not you actually ‘did it’. So, if HMRC show an interest in you; and you have a concern that something is, or might be perceived to be, open to question or to adverse interpretation in your tax affairs; talk to a lawyer, under the protection of legal privilege, as soon as possible.

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Skandia – VAT grabs the headlines again – VAT groups and imported services

avatar Posted on September 18th, 2014 by Nick Beecham

The decision of the ECJ in Skandia America Corp. (USA), filial Sverige v Skatteverket ECJ Case C‑7/13 has been widely reported.

In brief, the facts of the case are that a company based outside the EU acted as a global purchaser of IT services which it supplied to its Swedish branch.  The Swedish branch was registered as a VAT group with other related Swedish companies.  Under normal circumstances, no supply would be recognised between a company’s head office and its branch so the reverse charge to VAT would not apply to the importation of the services.  The first question referred to the Court was whether:

… supplies of externally purchased services from a company’s main establishment in a third country to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State.

The court actually answered a wider question (in that it was not restricted to supplies of externally purchased services) in ruling that:

…supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a group of persons whom it is possible to regard as a single taxable person for value added tax purposes.

On this basis, the VAT group was liable to account for the reverse charge on the imported services.

Clearly, then, this is going to result in increased VAT costs for partially exempt VAT groups in this position.

A planning point appears to arise where a partially exempt branch consumes at least part of the imported services (rather than supplying them on to other companies within and outside the VAT group).  In such cases, the branch should consider being removed from the VAT group – the import of services from its head office will then remain outside the scope of VAT.

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Lump Sums from Pensions Schemes – Budget takes effect

avatar Posted on July 21st, 2014 by Andrew Prowse

Our Pensions team has published a client alerter explaining the issues around the new provisions allowing lump sums to be paid by Pension Schemes to Scheme Members. 

You can view the alerter here.

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Helping owners and their businesses

avatar Posted on June 30th, 2014 by Andrew Prowse

The Fieldfisher Tax & Structuring Group has launched a new brochure, aimed at owner managed businesses.  The brochure explains how we can help business owners and their businesses.  Thinking about the tax position of the business owners as well as the tax position of their business is often overlooked, which can lead to disjointed advice.  We take a more holistic view.  You can take a look at our brochure here.  To mark our recent office move to Riverbank House, we have included a picture of our new offices on the front cover of the brochure!

 

 

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Employee ownership trusts – HMRC explanation of report stage amendments

avatar Posted on June 26th, 2014 by Graeme Nuttall OBE

The Government tabled a series of amendments to Schedule 33 to the Finance Bill 2014 (Companies owned by employee-ownership trusts (“EOTs“)) on 25 June 2014.

HM Revenue & Customs has explained in an email to those who have engaged with the Government on the introduction of this legislation that:

“… these amendments are to provide protection against abuse without creating unfairnesses which might expose the UK to legal challenge.

They provide for relief from capital gains tax ["CGT"] to be withdrawn, and for further claims to relief to be barred, if certain events occur. They also amend the relief requirements which must be met for a claim to be made. Where relief is withdrawn and further claims barred, this will supplant the deeming of a gain or loss on the trustees. The amendments are intended to prevent abuse of the relief where an EOT exists only for a short time.

… we have defined ‘disqualifying events’ at section 236O TCGA in terms similar to the relief requirements at section 236H(4), and if a disqualifying event occurs then a gain or loss is treated as accruing to the trustees of the EOT. As a result of the new amendments:

  1. it becomes a condition for the CGT relief to be claimed that the relief requirements in section 236H(4) must not cease to be met at any time during the year in which the disposal occurs (a requirement may be met for only part of the year, but once it has begun to be met it may not cease).
  2. if a disqualifying event occurs during the tax year following that in which the disposal to the trustees occurs, any CGT relief given is withdrawn and no new claims may be made.
  3. section 236O will continue to apply when disqualifying events occur at other times.

We recognise that these rules are new to the scheme, and so they will not apply to disposals of shares to trustees which took place on or after 6 April 2014 but before 26 June 2014.”

The amendments are available on the Parliament website at http://services.parliament.uk/bills/2014-15/finance/documents.html There is an accompanying explanatory note.

For additional information on these EOT reliefs see the article The employee ownership business model and Nuttall Review of Employee Ownership – quick guide to source materials

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Upper Tribunal confirms right of appeal: protracted correspondence amounts to opening an enquiry and issue of a closure notice

avatar Posted on June 18th, 2014 by Nick Beecham

In the case of Portland Gas Storage Limited FTC/123/2013, the Upper Tribunal has confirmed that our client has a right of appeal against HMRC’s decision to reject its amendment of an SDLT return on the basis that the amendment was (according to HMRC but disputed by our client) made out of time.  In doing so, the Upper Tribunal allowed our client’s appeal against the decision of the FTT to strike out the appeal.

In VAT and SDLT matters, the statute prescribes only limited matters against which there can be an appeal to a tax tribunal.  One of the prescribed matters is the issue of a closure notice by HMRC (Paragraph 35(1)(b) Schedule 10 FA 2003).  HMRC asserted that in rejecting our client’s amendment of its SDLT return on the basis that it was out of time, it had neither enquired into the amendment, nor issued a closure notice, so that our client had no right of appeal.

The Upper Tribunal held that although HM Revenue & Customs’ initial letter rejecting the amendment did not amount to the opening of an enquiry (on the basis that the only examination carried out by HMRC at that stage was to ascertain that the filing date of the original return was more than 12 months before the amendment was sought) the subsequent protracted correspondence between HMRC and our firm amounted to HMRC opening an enquiry and issuing a closure notice, against which our client has a right of appeal.

This raises a point of considerable public importance by preventing HM Revenue & Customs from regarding itself as the final arbiter in such matters.

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Convictions for tax fraud up 143%

avatar Posted on June 11th, 2014 by George Gillham

There are three figures we track that reveal the extent of HMRC’s criminal investigations activity, and the extent of its success (or failure):

  1. warrants executed by HMRC (“raids”);
  2. decisions by the Crown Prosecution Service (“CPS”) to charge for tax offences (“prosecutions); and
  3. convictions for tax offences in the courts (“convictions”).

 

All three are tracked because they deal with different stages in the prosecution cycle. It often takes between 12-24 months between a raid and a prosecution; and a similar period again between a prosecution and any conviction. From a combination of Parliamentary Answers and Freedom of Information Act requests, we can provide the figures for 2010/11 to 2013/14 (save the prosecutions figure for 2013/14 which has yet to be released):

 

Year Raids Prosecutions Convictions
2010/11 498 420 280
2011/12 731 545 401
2012/13 793 770 522
2013/14 744 ? 682

 

There has been a dramatic increase, particularly in convictions, from 2010/11 to 2013/14: up a startling 143%. (Prosecutions were up 83% to 2012/13; and it will be interesting to see the figure for 2013/14 when it is released.) The number of raids increased markedly between 2010/11 and 2011/12, but the increase slowed and then the trend reversed, with there being fewer raids in 2013/14 than in 2012/13. It is too early to reach a definite conclusion regarding this; perhaps the obvious candidates for a raid have already been served with a warrant; or perhaps the HMRC Criminal Investigations team have reached peak capacity.

In September 2010, the Chief Secretary to the Treasury, Danny Alexander, pledged to make funding available to HMRC for a five-fold increase in criminal prosecutions for tax evasion; and in January 2013, the incumbent Director of Public Prosecutions, Kier Starmer QC, said, in respect of non-organised tax fraud, that the CPS was aiming to prosecute seven times as many people in 2014/15 as it had done in 2010/11.

It seems pretty clear that both these targets were rather over-ambitious.

But missing these targets is not in itself a bad thing. I have always been a bit uneasy with the concept of ‘targets’ for prosecutions. Absent a five-fold increase in staffing in HMC’s criminal investigations team, a five-fold increase in number of prosecutions could be achieved by the CPS ‘lowering the bar’ on the chances of a conviction before proceeding to charge. That, almost certainly, would lead to lower conviction rates going forward, and the incurring of significant amounts of unnecessary costs for both accused and accusers.

Added to which criminal investigations are enormously time consuming for HMRC and I suspect, absent the unquantifiable deterrent effect, unprofitable.

 

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An employee ownership health check

avatar Posted on May 20th, 2014 by Graeme Nuttall OBE

Extract from the Foreword to the Nuttall Review One Year On Report:

“There are key questions asked by the Nuttall Review, the answers to which provide a health check for the state of employee ownership. These questions are set out below, and I would encourage all those promoting employee ownership, whether in Government or not, to use this health check to monitor their progress towards making employee ownership a mainstream part of the UK economy.

An employee ownership health check

How well can these questions be answered?

  • Is the meaning of employee ownership sufficiently clear?
  • Does the expertise and experience exist among professional advisers and more generally across the business community to support employee ownership?
  • Are the benefits of employee ownership understood and are they demonstrated by success stories, backed up by research?
  • Are there practical tool kits in use to implement every form of employee ownership?
  • Is there Government support for employee ownership backed up by incentives and a commitment to remove obstacles?
  • Do we have the necessary champions of employee ownership?
  • Is there an ambitious target against which we are measuring success?”
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One minute on life, the universe and employee ownership with the Tax Journal

avatar Posted on May 16th, 2014 by Graeme Nuttall OBE

Tax Journal is the leading tax publication for the UK corporate and business community: it publicised employee ownership to its readers in a recent article …

One minute with Graeme Nuttall, Partner, Field Fisher Waterhouse LLP

How did you end up in tax?

Unusually for my generation of lawyers, I started in tax. A perceptive managing partner encouraged me to qualify into tax. He predicted law firms would develop full service tax consultancies.

Who in tax do you most admire?

My (business) partner of many years, Nicholas Noble. He combines a tremendous breadth of technical expertise with an instinct for practical solutions.

Looking back on your career, what is the key lesson you’ve  learnt?

If you get out there, good things happen.

What are you working on?

Everything relates to a core philosophy that organisations need the right ownership and governance structure to work well. Businesses, not for profits and private wealth all need the right structure. Standard answers are not necessarily the best solution. In particular, I am working with clients and the UK government to get the employee ownership business model much more widely adopted. It works well at every stage of the business life cycle: in start-ups, as a way to achieve and sustain growth, in business turnarounds and, especially, as a succession solution. The idea works across all sectors and sizes of business.

You are a government adviser on employee ownership, and made numerous recommendations in Sharing Success: The Nuttall review of employee ownership, designed to promote employee ownership. What’s been achieved now that we’re more than one year on?

The BIS One year on report confirmed progress against all 28 recommendations and in over half this is significant. There is now a government minister for employee ownership. Company law changed from 30 April 2013 to allow private companies greater flexibility to buy back shares and hold shares in treasury, which improves liquidity for employee share plans. New tax exemptions in this year’s Finance Act will promote the ownership of companies by employee trusts and the idea of selling a controlling stake to an employee-ownership trust. Why sell to a lifelong competitor when you can sell to your employees?

What’s your view on the new employee shareholder rules?

Thankfully, the chancellor changed the confusing original name of this new employment law status from ‘employee ownership’  status. This is not a Nuttall review recommendation. Nick Clegg calls this measure ‘niche’. The measure sparked a helpful and lively debate, in which almost everyone said they preferred the Nuttall review vision of employee ownership – a significant chunk of a company owned by or on behalf of all staff, without giving up employment rights.

If you could make one change to UK tax, what would it be?

Only one more change? It would be great not to worry about the loan to participator rules when a close company lends to an employee trust.

Would you describe life as a tax lawyer as adventurous?

It can be. I was on the last seat of the last plane out of Skopje when the Kosovo war started. I was working with the Federation of Trade Unions of Macedonia on a collective employee ownership model and realised, when I was the only civilian left in my hotel, that I was a little too close to the war zone for comfort and for my family’s peace of mind.

This article was first published on 7 March 2014 by Tax Journal

www.taxjournal.com

http://tinyurl.com/1minwithGJN

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