Entrepreneurs Relief, OpRA and Tax Avoidance: what did the draft Finance Bill say?

Following the publication of the draft provisions for Finance Bill 2018-19 (“draft provisions”) and explanatory notes on 6th July 2018, Government published a range of policy papers and draft legislation.

Entrepreneurs Relief

One of the key provisions was the measure to change the rules on the disposal of shares. This is to ensure that entrepreneurs were not discouraged from issuing new shares due to the risk of their own personal stake decreasing below the 5% threshold which is required in order for the individual to qualify for a special rate of Capital Gains Tax (“CGT”) of 10% also known as ‘Entrepreneurs Relief’ (“ER”).

The measure was initially announced at the Autumn Budget 2017 with further consultation being published on 13th March 2018. A summary of responses to the consultation was published on 6th July 2018 along with a policy paper, draft legislation and explanatory notes.  

Currently, for a gain on a disposal of shares in a company to qualify for ER, the claimant must have at least 5% of the voting rights in the company by virtue of holding at least 5% of the ordinary share capital of the company for a period of one year leading up to the disposal.

Legislation will be introduced in Finance Bill 2018-19 to introduce a new Chapter 3A into Part 5 of Taxation of Chargeable Gains Act 1992 (“TCGA”), which will allow individuals to make two elections providing the relevant conditions are met. The conditions are set out in the draft legislation at section 169SC (2), (3)(a) and (b).

The new section 169SC will allow an election, where a company has issued shares for cash consideration for genuine commercial purposes, which has caused the individual’s shareholding to fall below the 5% threshold required to meet the ‘personal company’ definition in section 169S, in the circumstances where a disposal of the shareholding prior to the issue would result in a gain which would qualify for ER.

The election would treat the individual’s holding of shares in a company as having been disposed of and immediately reacquired at market value prior to dilution, giving rise to a chargeable gain on which they can claim ER.

The second election in section 169SD will be to defer the gain until an actual disposal of the shares. The legislation will specify rules in relation to claiming ER on the deferred gain.

The new legislation will effect relevant share issues which take place on or after 6th April 2019.

Changes to Optional Remuneration Arrangements (“OpRA”) rules for taxable cars and vans

Another measure announced in the draft provisions were the changes to the OpRA rules to address two anomalies ensuring that the rules work in the way that they were intended.

Those affected by this measure are;

• Employees provided with taxable cars and vans that are subject to the car or van benefit charge respectively and their employers
• Employees making a capital contribution towards a taxable car and their employers

The new legislation aims to address the two anomalies by;

• Ensuring that when a taxable car or van is provided through OpRA, the amount foregone which is taken into account in working out the amount reportable for tax and National Insurance Contributions (“NICs”) purposes, includes connected costs, such as insurance, which is regarded as part of the benefit in kind under normal rules

Under current OpRA legislation, connected costs are not included when calculating the amount forgone.

• Adjusting the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year

Legislation will be introduced in Finance Bill 2018-19 to make changes to Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) at sections 120A, 121A, 132A and 154A. Changes will also be made in Chapter 3, Part 4 of ITEPA at section 239.

The measure will have effect from 6th April 2019. HMRC plans to publish guidance for consultation at Budget 2018.

Please click here to view the documents published in relation to this.

Tax Avoidance involving profit fragmentation

Finally, Clause 10 of the draft provisions along with Schedule 6 introduces a new anti-avoidance rule to ensure that business profits cannot be taken out of the charge to UK tax by arranging for them to be attributed to offshore entities.

A summary of responses to the consultation, which was announced on 10th April 2018, was published on 6th July 2018 along with a policy paper, draft legislation and explanatory notes. 

From April 2019, the targeted legislation aims to prevent UK traders and professionals from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities which are residents of countries where there are significantly lower taxes to be paid on profits than there are in the UK. The targeted legislation will consider whether the following conditions are present;

• there must be a transfer of value from the UK trader to an offshore entity - this could be a diversion of income to the offshore entity, or payment of expenses to the offshore entity
• the effect of the arrangement must be that a significantly lower level of tax is paid on the profits than would be the case if they were correctly taxed in the UK in accordance with the current law
• the proprietor of the business, whether a sole trader or partner in an unincorporated business or as director and/or shareholder of a company, must be able to enjoy the profits that have been diverted
• the UK person must have arranged for the profits to be diverted to the offshore entity
• the diversion or payments mentioned in the first condition are not commensurate with the work undertaken by the offshore entity

The measure, initially announced at the Autumn Budget 2017, also includes a duty to notify HMRC where an arrangement meets the first 4 conditions set out above but have not made necessary adjustments to profits on or before the time that the relevant person is required to submit their tax return.