The 2011 Budget confirms that draft Part 7A of the Income Tax (Earnings and Pensions) Act 2003 will be amended to exclude certain arrangements that are not used for avoidance purposes.

HM Revenue & Customs (HMRC) published draft legislation on 9 December 2010 (see Legal update, Draft anti-avoidance provisions to tax disguised remuneration (including EBT benefits and EFRBS) to tackle certain arrangements for providing benefits to employees using trusts (including employee benefit trusts) or other intermediaries in a way which sought to avoid or defer liabilities to income tax and NICs. Practitioners raised concerns that the draft legislation was very broadly drawn and could potentially catch many straightforward arrangements (including normal employee share plans) that had no tax avoidance purpose. In response to these concerns, HMRC published guidance on 21 February 2011 in the form of frequently asked questions (FAQs) (see Legal update, HMRC publishes FAQs on draft anti-avoidance legislation on disguised remuneration). The FAQs confirmed that HMRC intended to amend the legislation to create safe harbours for certain types of arrangement.

The 2011 Budget documents state that the legislation will be amended to add exclusions from the new rules for some arrangements that cannot be used for tax avoidance, including:

The revised draft legislation is not yet available, and HMRC notes that it will be published in the Finance Bill 2011 on 31 March 2011. The legislation is expected to apply from 6 April 2011 (although anti-forestalling provisions will apply retrospectively to certain transactions between 9 December 2010 and 5 April 2011).

Source: 2011 Budget - Overview of Tax Legislation and Rates, para 2.21: Disguised remuneration, page 16 and Tax Information and Impact Note.

In the 2011 Budget, the Chancellor announced that, with effect from 6 April 2011, the lifetime limit for entrepreneurs' relief will increase from £5 million to £10 million.

The relief is available to individuals and trustees who dispose of qualifying business assets and shares and meet certain other conditions (see PLC Tax, Practice note, Entrepreneurs' relief: overview). For disposals on or after 6 April 2011, the first £10 million of qualifying capital gains will be taxed at a rate of 10%, with gains in excess of that figure being taxed at the individual's marginal rate. To the extent that any gains realised by the taxpayer before that date exceeded the lifetime limit of entrepreneurs' relief in force at the date of disposal, capital gains tax will remain payable at the full rate of 18% or 28% on the excess (see Practice note, Tax year 2010-2011: selected tax, NICs and share schemes data: CGT), but only the £5 million of relief claimed will be set against the increased limit for future qualifying disposals.

No other changes to entrepreneurs' relief were announced in the 2011 Budget. This is despite the fact that many commentators and the Office of Tax Simplification (OTS) have called for the amendment or removal of the rule that the individual must hold 5% of the ordinary share capital and voting rights for one year prior to the disposal to qualify. This rule severely limits the availability of entrepreneurs' relief in an employee share plans context, as few employees hold 5% of the shares in their employer for at least one year before disposal. It remains possible that the government will consider further changes to entrepreneurs' relief in its response to the OTS proposals.

Source: 2011 Budget - HMRC Overview of Tax Legislation and Rates, para 1.7: Entrepreneurs' relief, page 2 and Tax Information and Impact Note A9.

In addition to the announcements on Part 7A and proposed changes to entrepreneurs' relief, the 2011 Budget included several other measures and announcements that may be of interest to share schemes practitioners. These include a further reduction in corporation tax rates, an increase to the personal allowance for 2012-13 (with no associated reduction in the higher rate threshold), a proposal to consult on the merger of income tax and NICs and proposed changes to the taxation of non-domiciled individuals.

PLC has published an comprehensive analysis of the key business tax announcements in the 2011 Budget. To view this update, which includes links to related press releases and other materials, see Legal update, 2011 Budget: key business tax announcements.