The March 2010 Budget included an announcement by HM Treasury that there would be "consultation in summer 2010 on taxing ... returns from geared growth, following the increased use of tax-motivated arrangements involving employment-related securities" . . . "to ensure that income from employment is taxed correctly".

This appears to refer to arrangements such as growth share plans and shared growth/joint ownership and carried interest arrangements, which are intended to secure that employees pay capital gains tax (at 18%) rather than income tax (at 40 or 50%) on gains on shares (and other securities) or interests in them. There has been increased interest in these arrangements in anticipation of the increase in the highest rate of income tax on 6 April 2010. Any changes to their tax treatment may not include concessions for securities and interests already acquired by employees. The consultation and the threat of changed tax treatment will be of interest to employers and advisers who use "geared growth" arrangements.

The March 2010 Budget included an announcement that the government will be taking action to tackle tax avoidance arrangements using employee benefit trusts (EBTs) and similar vehicles. The government will consider introducing legislation to counter arrangements which have the purpose of "avoiding, deferring or reducing liabilities to income tax and national insurance contributions or avoiding restrictions on pensions tax relief". If legislation is introduced, the March 2010 Budget Report notes that will take effect from April 2011.

This announcement is not surprising, as HM Revenue and Customs had already announced an intention to pursue companies which are using EBTs and family benefit trusts to avoid tax on benefits provided to employees (or their dependants). (Family benefit trusts are similar to EBTs, but provide benefits only to dependants of employees, rather than employees themselves.) For more details, see Legal update, HMRC avoidance spotlight on family benefit trusts and Legal update, Taxpayer and HMRC withdrew their High Court appeals in Sempra Metals case on family benefit trusts.

See March 2010 Budget - PN03 - Protecting Tax Revenues: Future action on the use of trusts and other vehicles to reward employees and March 2010 Budget - Chapter 5, Budget Report- paragraph 5.63.

On 24 March 2010, HM Revenue and Customs (HMRC) published a consultation response document about the disclosure of tax avoidance schemes (DOTAS).

The consultation was announced in the 2009 Pre-Budget Report, and included questions on the extension of DOTAS to new "hallmarked" schemes including those relating to avoidance of employment income and those seeking to substitute a capital gain for income (see 2009 Pre-Budget Report: consultation on disclosure of tax avoidance schemes: incentives aspects).

The consultation response document confirms that HMRC will finalise regulations to extend DOTAS to employment income schemes and so-called "income to capital" schemes in summer 2010, with a view to them coming into force in autumn 2010.

The consultation response document notes that many respondents to the consultation considered that the scope of the proposals relating to employment income and "income to capital" schemes was too wide and would catch many ordinary tax planning arrangements. Consequently, HMRC proposes to amend (with input from the consultation respondents) the draft legislation to include descriptions of the types of schemes which must be disclosed, rather than a generic definition with a list of exceptions. However, the document does not give any further details of the types of arrangements which will be included on the list of disclosable arrangements.

See March 2010 Budget - BN64 - Disclosure of Tax Avoidance Schemes and HM Revenue & Customs: Disclosure of Tax Avoidance Schemes (DOTAS): Consultation Response Document, 24 March 2010.

The March 2010 Budget includes anti-avoidance measures which restrict the award of tax-favoured CSOP options. Before 24 March 2010, these could be awarded over shares in an unlisted subsidiary of a company listed on a recognised stock exchange. On and after 24 March 2010, CSOP options can no longer be granted over shares of this description. CSOPs which permit the grant of CSOP options over unlisted subsidiary shares will lose their HM Revenue & Customs approval, if they are not amended to reflect these changes before 24 September 2010.

These measures are designed to block CSOPs which grant options over special growth shares in unlisted subsidiaries of listed companies, which entitle their holders to participate only in any growth in value of the company after the date of grant. As these growth shares have a lower value than ordinary shares at the time of grant, they allow a greater potential gain to be sheltered within the limits on individual CSOP participation. However, the changes will also disrupt CSOPs which use ordinary shares in subsidiaries of listed companies.

The March 2010 Budget confirmed that legislation is planned in 2010 to amend provisions in the enterprise management incentives (EMI) legislation to allow companies with a permanent establishment in the UK to grant EMI options, as previously announced (see 2009 Pre-Budget Report: amendments to enterprise management incentives legislation). However, the change will now:

In the 2009 Pre-Budget Report, it had been announced that this change would apply for options granted on or after 6 April 2010. Currently, only companies which carry out a qualifying trade wholly or mainly in the UK can grant EMI options. The amendment is needed to ensure that the EMI legislation complies with EU state aid rules.

See March 2010 Budget - BN13 - Enterprise Management Incentives.

The March 2010 Budget included (in BN02) an up-to-date summary of HM Revenue & Customs' detailed proposals for the bank payroll tax (BPT), as amended following consultations with financial sector firms and their representatives (for more information see the updates listed in PLC Share Schemes & Incentives bank payroll tax tracker). Updated draft BPT legislation does not appear to have been published on the date of the budget (24 March 2010). However, the BPT budget note will be welcomed by banks and other companies subject to the BPT and their advisers, as it provides a clearer statement of several points announced in previous HMRC statements. We will report in more detail when updated draft legislation becomes available. (See March 2010 Budget - BN02 - Bank payroll tax.)

The March 2010 Budget includes anti-avoidance measures relating to the availability of corporation tax (CT) deductions for contributions to an HM Revenue & Customs (HMRC) approved share incentive plan (SIP). The legislation will be included in Finance Bill 2010 but will have effect for contributions made on or after 24 March 2010.

This measure has been adopted to prevent companies from claiming CT deductions in relation to contributions to a SIP in circumstances where little real value is actually awarded to employees under the SIP, because the share capital or share rights are altered after the contribution is made to reduce the value of the SIP shares. The measure also gives HMRC powers to withdraw approval of a SIP where changes are made to share capital or share rights which materially affect the value of SIP shares, even if none have yet been awarded to participants.

Legislation will be introduced in the Finance Bill 2010 to deny a corporation tax deduction to a close company releasing or writing off a loan to participator (who pays tax on the write off as if it was a dividend rather than employment income). This change will take effect for loans released or written off on or after 24 March 2010. No change is to be made to the taxation of the borrower.

This development will be of interest to share schemes practitioners advising close companies on share incentive arrangements involving loans to participators.

See March 2010 Budget - BN15 - Release of loans to Participators in Close Companies and draft legislation.

Enabling legislation will be introduced in the Finance Bill 2010 to allow HMRC to require financial security from employers where amounts due under pay as you earn (PAYE) and as national insurance contributions (NICs) are "seriously at risk". (It would appear that HMRC will consider amounts to be seriously at risk where there has been a history of serious non-compliance in terms of paying late or not paying at all.) The detail (including the amount of the security and the right to appeal the request for security) will be set out in secondary legislation, which will be published in draft for public consultation.

In addition, a new criminal offence of failing to provide security will be introduced (punishable by a fine of up to £5,000).

It is intended that the new measures will take effect from 6 April 2011.

See March 2010 Budget - BN70 - Review of HMRC powers, deterrents and safeguards: security for payment of PAYE and Enforcement and compliance: Arrears of Tax: PAYE - Holding Securities.