Enterprise Management Incentives ("EMI")
The Government has made some changes to the EMI regime which will ease the compliance burden for businesses.
The Government has announced that:
- from April 2023, it will remove the requirement for a company to set out details of the share restrictions within an option agreement and the requirement for a company to declare that the employee has signed a working time declaration ("WTD"); and
- from April 2024, the period for notifying HMRC of the grant of an EMI option will be extended from the 92 days from grant currently required to 6 July in the following tax year.
In many cases, the lack of details in respect of share restrictions, lack of a WTD and failing to notify HMRC, at least within 92 days, will likely make up the largest proportion of reasons that an EMI option may not qualify as an EMI option and resulting in enquiries to or ruling requests from HMRC.
The change to the notification requirement on the grant of the option should be a welcome change for companies as experience shows that this is another a part of the EMI compliance process where companies struggle to provide evidence of compliance for due diligence purposes. Companies also fail to comply with their annual reporting obligations once a scheme is set up and so aligning these may improve compliance with the annual reporting process. Leaving notification of the setting up of a scheme and grant of options until 6 July in the following tax year does present the risk of failing to notify at all. We suggest that businesses continue to seek to register their EMI share scheme and notify of the grant of EMI share options as soon as possible after the date of grant.
These appear to be sensible and welcome changes which should ease compliance requirements on companies and reduce pressure the on HMRC in dealing with compliance queries. We await to see the full details of the changes.
Seed Enterprise Investment Scheme ("SEIS")
Initially announced in the eventful "mini-budget" in September 2022, the amount of investment a company can raise is set to increase from 6 April 2023. Companies can currently receive a maximum of £150,000 through SEIS investments and this will be increased to £250,000. At the Budget, the Government announced further extensions to SEIS including:
- an increase to the level of gross assets to enable a company to qualify for investment - from £200,000 to £350,000;
- an increase to the age limit that applies to the definition of a company’s “new qualifying trade” at the date of investment - from 2 years to 3 years; and
- an increase to the annual limit of relief that investors may claim against their income tax liability – from £100,000 to £200,000.
More detailed rules will be contained in the next Finance Bill to be published on 23 March 2023.
British Patient Capital
The Government announced that British Patient Capital would be extended for a further ten years until 2033-34. British Patient Capital, a commercial subsidiary of the Government-owned British Business Bank, invests heavily in venture growth capital. It is now the largest domestic investor into UK venture capital, managing assets with a total value exceeding £3 billion. Its extension is good news for those companies in innovative sectors seeking additional funding. With a further £3 billion of Government investment, there is expected to be a renewed focus on R&D intensive industries, particularly life sciences, net zero efforts and technology.
Real Estate Investment Trusts (REITs)
Changes to the REITs regime will mean that REITs are easier to establish in practice, and property investment vehicles may wish to consider conversion to a REIT.
The documents published alongside the Budget confirm some amendments to the REIT regime to enhance its competitiveness, and remove some administrative and cost burdens for investors. Changes will be introduced in the next Finance Bill and, in summary, will:
- with effect from 1 April 2023, remove the requirement for a REIT to hold a minimum of three properties where it holds a single commercial property worth at least £20 million;
- make amendments to the rule which treats a disposal of property within three years of undertaking "significant development" as being outside the property rental business – it is intended that the definition of "significant" will better reflect increase in property values rather than be relative to expenditure; and
- amend the rules for deduction of tax from property income distributions paid to partnerships, to enable a property income distribution to be paid partly gross and partly with tax withheld.
The latter two measures will come into force on royal asset of the next Finance Bill. Further detail will be published when the Bill is published in draft on 23 March 2023.
Investment zones
The Budget has launched a refocused investment zones programme to catalyse growth in 12 clusters across the UK. This is a much scaled-back version of the levelling-up scheme that was initially announced by the Government in September 2022 (introduced by Liz Truss and Kwasi Kwarteng before being largely shelved in the Autumn Statement). Eight clusters have been shortlisted for England (the East Midlands, Greater Manchester, Liverpool, the North East, South Yorkshire, the Tees Valley, the West Midlands and West Yorkshire) and the remaining clusters are to be in Scotland, Wales and Northern Ireland with details to be announced by the end of 2023.
After some local authorities invested considerable time and resource applying for investment zones at the end of last year, there is now a new regime to contend with, and there is a lot to consider. Alongside the Budget, the Government published a policy prospectus and a zone selection methodology note. Full technical guidance on how to submit a proposal is awaited, but in the meantime the Government has invited local partners from the English clusters to begin discussions.
Each English investment zone will have access to support worth a stated £80 million over five years, including tax reliefs and grant funding. Investment zones will have access to a single five year tax offer consisting of enhanced rates of capital allowances, structures and buildings allowance, relief from stamp duty land tax, business rates and employer national insurance contributions. Alongside this, investment zones will have access to flexible grant funding to support skills and incentivise apprenticeships, provide specialist business support and improve local infrastructure (dependent on local requirements). The total funding can be used flexibly between qualifying spending and the tax advantages. Local authorities and their partners will need to undertake a review, and understand potential tax liabilities and reliefs in order to weigh up how allocation of funding is most favourable to them.
Pensions taxation
As widely touted beforehand, the Chancellor announced a number of changes to pension taxation allowances and thresholds. The Government suggests this package of measures is part of a broader attempt to get people, particularly those aged 54 to 60 back into work, and to stay in work longer.
Tinkering with pension tax allowances has been mooted for a number of years, particularly in response to the headline-grabbing issue of NHS doctors and other public professionals retiring early or reducing their hours to avoid exceeding the annual and lifetime allowances (over which they would face punitive tax charges), due to the multiple applied to their defined benefit pension schemes.
From 6 April 2023, there will be changes to the annual allowance, the lifetime allowance and the money purchase annual allowance.
The annual allowance imposes a limit on the amount which can be saved in a pension pot (including defined contribution and defined benefit schemes) in each tax year, without incurring a specific tax charge. For defined benefit schemes, the limit applies by reference to a multiple of the annual increment in pension benefit. From 6 April 2023, the annual allowance, will be raised from £40,000 to £60,000. There are also increases to the levels at which the annual allowance is tapered for higher earners (the adjusted income threshold will increase from £240,000 to £260,000).
The "rabbit out the hat" announcement in the Budget was the abolition of the lifetime allowance, the maximum amount of saving that a member can make in a registered pension scheme without incurring a tax charge. The lifetime allowance is currently £1.07 million. The charge will be removed from 6 April 2023 and abolished fully from 6 April 2024. Although there will be no limit on the size of the pension pot that can be saved without a tax charge, the tax-free 25% will continue to apply to only the first £1.07 million of pension savings.
The money purchase annual allowance (which limits the tax-relieved savings an individual can make into a registered pension scheme once they flexibly access their defined contribution pension savings) will be increased from £4,000 to £10,000.
The increased thresholds will only impact a very small percentage of the workforce and is particularly beneficial to higher earners who've earned enough in their lifetime to push these thresholds, typically those in government service or quasi-government service including doctors, senior teachers, civil servants and police officers. The majority of the UK population will not benefit from these changes. It has to be said that the policy objective could have been achieved more simply and without reintroducing a tax subsidy for retirement saving for the highest paid.
In addition to changes to the thresholds, the Government will also be consulting on aspects of the management of assets by the Local Government Pension Scheme in England and Wales. The Government has set out that it will publish a consultation shortly to propose:
- the transfer of all listed assets into their pools by March 2025;
- using a smaller number of pools in excess of £50 million to optimise benefits of scale; and
- the use of investment opportunities in illiquid assets.
A key tenet of an effective tax system is the ability for taxpayers to anticipate the tax effect of actions they take. This requires a degree of stability. Whilst appreciated by a small group of people in the short term, additional tinkering and complexities are the enemy of much-needed stability. Pension taxation and its reform needs to be considered as a whole in the long term and requires a considered approach: it appears unlikely to be forthcoming from this Government. The question will be what its successor will do when it takes office in less than two years from now.
If you would like to discuss any of the above measures please contact any member of the Tax team.
