Our Tax Expert Group, in conjunction with our Share Schemes Expert Group, has prepared its annual proposals for taxation reform ahead of the Autumn Statement and 2017 Budget. Our proposals are designed to help inspire private sector growth and employment through:
Creating a simple and reliable tax system
We have become increasingly concerned that some areas of tax legislation impose a disproportionate compliance burden on small and mid-size quoted companies. We suggest creating a small-cap threshold that would exempt small and mid-size quoted companies from these rules either by increasing the size threshold beyond which these rules apply, or by allowing small and mid-size groups to voluntarily publish their annual tax strategy, so that such companies would then be rewarded with a light compliance touch in relation to these matters.
We suggest the introduction of a binding, paid-for clearance/ruling process which HMRC could use as a small revenue-raising mechanism.
We propose introducing a withholding tax relief regime applicable to interest payments, effectively extending the treatment set out in Section 911 of the Income Tax Act 2007. We have included a proposal on how this treatment could also be applied to interest payments made in situations where the double taxation treaty passport scheme is not in operation.
We also detail other provisions that could further simplify our tax system regarding transfer pricing, size tests, the tax treatment of employment income clawback and that the process of electronically registering employee share plans is improved and simplified.
Encouraging long-term investment and funding for growth
We encourage the removal of the 5% threshold for capital gains tax Entrepreneurs’ Relief in respect of shares held by employees/officers. We also propose a number of alternative measures which would help mitigate the negative effect of the 5% test on small and mid-size quoted companies if such test must be retained, such as aligning the treatment of Enterprise Management Incentives (EMI), Save As You Earn (SAYE) and Company Share Option Plan (CSOP) share option schemes and extending Entrepreneurs’ Relief to earn outs.
We propose considering the extension of the EMI size qualification criteria to that introduced for the comparable SME “notifiable state aid” R&D relief.
We also suggest that the Government should consider amending the 5% test to be more consistent with the substantial shareholdings exemption.
Further employee share ownership could be encouraged by relaxing some of the requirements of the Company Share Option Plan (CSOP), as suggested by the Office for Tax Simplification.
We also suggest enhancing the rules for using the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) to ensure that small and mid-size quoted companies are able to raise the finance they need to grow and create employment.
Creating a level playing field for equity and debt
We suggest that the costs of raising equity should be tax deductible, in order to create a level playing field and encourage more companies to raise equity finance. Case law in the VAT area already supports this principle and aligning the direct and indirect tax treatment would achieve greater consistency in the tax system. We have included detailed proposals of how this relief could work, as well as a comparison of the tax treatment of raising equity across 19 European countries, which highlights the UK’s extreme position on this matter. We estimate the cost to the Exchequer in any year to be approximately £75 million. As a potential transitional measure, we also propose that the cost of raising equity could be deductible by being included within the £2 million de minimis threshold.