We look at the changes which came into force on 1 August 2006 as they affect employee incentives.
The disclosure of tax-avoidance scheme rules were first introduced on 1 August 2004 and applied to employment and financial products with a separate regime for VAT. The purpose of the regime is to require promoters of aggressive tax avoidance schemes to report the details to HMRC (HM Revenue & Customs) who can then assess whether the scheme is effective and devise blocking legislation as necessary.
The legislation is widely drawn so it applies to straight-forward tax planning arrangements. However, the requirement to notify (under the old regime) was then restricted by a series of "filters" published by HMRC.
HMRC say 198 employment products were disclosed under the old regime from 1 August 2004 to 30 June 2006. The disclosures led to some changes in legislation, notably those announced on 2 December 2004 to block NIC (National Insurance Contribution) avoidance schemes.
HMRC's intention was always to broaden the scope of the disclosure rules over time and to adjust the "filters" so HMRC capture only aggressive tax planning.
In the pre-budget report on 5 December 2005 the Chancellor announced the scope of the disclosure rules would be widened to cover all income tax, corporation tax and capital gains tax avoidance. The changes came into force on 1 August 2006.
NIC avoidance will also be covered but this will require separate regulations and will in any case dovetail with the income tax disclosure regime.
HMRC issued revised guidelines on 16 June 2006 which replace the old "filters" with new "hallmarks" and supersede previous guidance.
Large businesses that devise aggressive schemes in-house will now have to report these within 30 days of implementation.
How Does it Affect Employee Incentives?
The old rules applied to "employment products", these were defined as arrangements involving securities, loans and payments to trustees and intermediaries. Potentially, the new rules apply to tax planning involving all employee incentives.
In practice HMRC consider the biggest area of abuse relates to securities. Since these were already covered by the old regime it is unlikely the extension will make much difference.
NIC avoidance will eventually be covered too, but in practice it was already covered by the old rules (because most NIC avoidance involves securities and coincidental income tax savings).
The New Hallmarks
The Employee Incentives & Benefits Group at Bird & Bird advise on a wide range of employee incentive issues, much of which involve routine tax planning. The issue is whether routine planning will need to be disclosed, this is governed by the new "hallmarks". The three "hallmarks" likely to be relevant to employee incentives are:
Confidentiality: could you reasonably expect a promoter to want to keep the arrangement confidential from other promoters and/or HMRC?
Premium Fees: could you reasonably expect the tax advice to command a premium fee?
Standard Products: is it an off-the shelf product? However, (approved share plans and EMI are specifically exempt).
The arrangement needs to be disclosed if it passes any one of these tests. HMRC say the hallmarks can also catch routine advice in areas of concern.
Old guidance (now superseded) excluded flexible benefits, salary sacrifice, straight-forward incorporations and dividend payments, dual contracts and termination payments. These are now reportable if caught by the hallmarks.
The rule of thumb is that if you pay for aggressive tax planning schemes, the promoter will be obliged to report it to HMRC. The scheme is likely to have a short shelf life and you run the risk that the scheme will be blocked retrospectively.
HMRC spell it out in the pre-amble to the new hallmarks saying: "a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect".
Potentially, providers of tax advice are promoters and have to decide whether to report. If providers have to spend time considering whether to report routine tax planning advice, the likely effect is to add marginally to costs.