3 January 2019
Back in early November, we blogged about some worrying changes to entrepreneurs’ relief as a result of what looked like sloppy drafting in the Finance Bill.
Amendment to the Bill
Happily the Government tabled, on 20 December, a proposed amendment which has gone some way to addressing our concerns.
The amendment turns the problematic new requirement into an ‘either/or’ test, keeping the entitlement to 5% of distributable profits as the ‘either’ part but offering as an ‘or’;
“in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds”
For the example company from our last blog, with 40 A shares and 60 B shares, the amendments seem to solve the problem.
But all is still not well.
A sting in the tail
That’s because the two-part test is followed by an explanatory section detailing how to interpret whether or not the test is met. That section includes the phrase;
“it is to be assumed that the amount of the proceeds to which the individual would be beneficially entitled at that time [a notional sale] is the amount of proceeds to which, having regard to all the circumstances as they existed at that time, it would be reasonable to expect the person to be beneficially entitled, and … the effect of any avoidance arrangements is to be ignored.”
Arrangements are ‘avoidance arrangements’;
“if the main purpose of, or one of the main purposes of, the arrangements is to secure that any provision of this Chapter applies or does not apply”
Tax law (all law, for that matter) should deal in certainty.
Where sizeable gains are in question we suspect taxpayers will not be all that comfortable relying, for their tax relief, on HMRC’s view of what is reasonable and what is avoidance being the same as the taxpayers’ view.
It has previously been common practice, where legislation contains this type of subjective test, to provide a statutory advance clearance mechanism whereby HMRC can be asked in advance of a transaction to confirm their view.
There’s no sign of any such statutory clearance process in the amendment although taxpayers may be able to revert to the non-statutory clearance procedure instead.
What’s the message?
It seems to be that the rules are tougher than they used to be, but aren’t as tough as they would have been without this amendment.
Perhaps the more important message though is that the devil of tax law continues to be in the detail and that assuming a tax relief will be available is a dangerous game. As the tax law gets lengthier and ever more complex, the need for professional advice in advance of transactions becomes more acute.
For more information on the changes to entrepreneurs’ relief, contact me or your local UHY tax adviser.