This bulletin outlines some significant recent developmentsin employment-related taxes, including Budget 2012measures.

TAX RATES AND ALLOWANCES

The Chancellor announced in his Budget on 21 March 2012that the additional (top) rate of income tax is to be reducedfrom 50% to 45% with effect from 6 April 2013. In theabsence of any specific anti-avoidance measures, this is aclear incentive for executives and employees who payincome tax at the additional rate to defer receipt of incomeinto the tax year 2013/14. This might be achieved through,for example, bonus deferrals and deferring the exercise ofshare options. Consideration could also be given toaccelerating payments which confer tax relief, such aspension contributions (subject to the annual allowance).

In line with the reduction in the standard additional rate, thedividend additional rate will also reduce from 42.5% to37.5%, reducing the effective rate on the net dividend(taking into account the tax credit) from 36.11% to 30.56%.

The personal allowance is to increase to £9,205 with effectfrom 6 April 2013. However, the threshold at which higherrate tax becomes payable will also be reduced at the sametime to £41,450 (currently £42,475). The benefit to higherrate taxpayers who can still claim the full personalallowance will be just £15. However, there will also be areduction in the Class 1 NIC Upper Earnings Limit to thesame threshold (to £41,450 from £42,475) which will reducethe employee's primary NIC contributions by 2% of thedifference.

From, 6 April 2013, age-related allowances will be frozen attheir 2012-13 levels until they align with the personalallowance.

EMPLOYEE SHARE INCENTIVES

Improvements to the Enterprise management incentive("EMI") share options

Subject to EU State Aid Approval, the Government intendsto:

■ increase the maximum individual participation limitfrom £120,000 to £250,000. This change will beimplemented as soon as possible;

■ extend entrepreneurs' relief ("ER") to gains on sharesacquired through EMI. This will involve relaxing thenormal requirement that to qualify for ER, the individualmust hold shares which represent at least 5% of thenominal share capital and carry at least 5% of the votingrights. This means that, regardless of the level ofshareholding, individuals who exercise EMI options willbe capable of qualifying for ER in relation to the sharesacquired on exercise. However, the other conditions forER will still have to be satisfied. In particular, the sharesmust still be held for at least 12 months prior to thedisposal and the individual must have been an officer oremployee throughout that period.

Whilst the new rules will apply in relation to optionsexercised on or after 6 April 2012, the 12 monthrequirement means that the earliest date from whichdisposals will qualify will be 6 April 2013. The 12month requirement also means that exit-related exercises

EMPLOYMENT TAXALERT

April 2012

will still not qualify. Companies might thereforeconsider granting options which can be exercised atan earlier date, prior to the exit. The value of theshares at the time of grant will need to be taken intoaccount because an income tax charge will arise onexercise to the extent that the exercise price is less thanthe grant date market value. However, where the cost/tax charge in these cases would otherwise beprohibitive, there may be some scope to arrangematters to minimise these costs;

■ consult on extending the availability of EMI options toUniversity academics employed by a qualifyingcompany. It is not clear what the Government has inmind here, but it may involve relaxing the working timerequirement for academics or possibly allowing spin-offcompanies to remain controlled by the Universitywithout this prejudicing EMI status.

For further information about EMI options, please ask for acopy of our leaflet on EMI share option plans.

Office of Tax Simplification review of approved shareschemes

At the beginning of March 2012, the Office of TaxSimplification announced that it had completed its review oftax advantaged share schemes and published a reportcontaining various recommendations for simplification.The report anticipated that the Chancellor would respond tothe findings in the forthcoming Budget.

In the event, the Budget announcement is limited to astatement that the Government will consider theserecommendations and will consult shortly on "how totake a number of these proposals forward" with legislationin "future finance bills".

The main recommendations of the report were as follows:

■ to introduce a self-certification process for approvedCompany Share Option Plans ("CSOPs"), SAYEschemes and approved Share Incentive Plans ("SIPs")and to remove the requirement for prior HMRCapproval. The report recognises that this will involveaddressing certain issues, such as recoupment of tax ifthe scheme is subsequently found not to meet therelevant requirements;

■ to review whether there is still a need to have CSOPs atall;

■ if the review of CSOPs suggests that there is a reason forretaining them, to combine the CSOP with EMI andhave a single set of tax rules governing all taxadvantaged discretionary option grants for companiesregardless of size or trading activities, but with smallerhigh risk companies able to benefit from higher limits.The report proposes a two-step phased introduction.Step 1 would be "largely administrative" though theproposals include the following: restrictions on shareswould be permitted (for both types of scheme) as withEMI now; the option exercise price would be flexible (aswith EMI); certain disqualifying events would not resultin loss of favoured tax treatment and the period ofexercise following a disqualifying event to maintainfavourable tax treatment would be 6 months; and the 92

notification window for EMI grants would be removed.Step 2 would have cost implications for the Exchequerand therefore would require fuller consideration andpossibly EU State Aid approval. This step wouldinvolve removing some of the limitations that apply tonon-EMI qualifying companies, including removing the3 year exercise period and leaver requirements andsimplifying the way in which the £120,000 and £30,000limits apply. However, to use the £120,000 limit, thekey current EMI requirements would remain the same: ieall subsidiaries must be “qualifying”; the group musthave fewer than 250 employees; the group must havegross assets not exceeding £30m and only "qualifying"trades .

There were also a number of other recommendations forimproving individual schemes. Key proposals include:

■ have a single definition of "retirement" across allschemes;

■ across all schemes, have a single presumption that allleavers are good leavers (and consequently retain thebeneficial tax treatment) unless they leave voluntarily orare dismissed for cause;

■ across all schemes, allow tax free early exercise for cashtakeovers;

■ remove entirely the requirement for shares under SIP,SAYE and CSOP schemes to have only permittedrestrictions;

■ permit companies with more than one class of share tooperate SAYE and CSOP schemes;

■ reduce the tax free holding period for all shares under aSIP to a standard three years;

■ when shares leave a SIP on a takeover, if an income taxand NICs charge is to be retained, allow it to becalculated on the basis of the lower of the value of theshares at award and the value at the time of the takeover;

■ for SAYE schemes, undertake a review of whether thereis a need for an approved savings carrier, and whetherschemes could be self-administered;

■ for EMI options, restrict the working time requirement todirectors only, and reduce the list of excluded activities(suggests removing, inter alia, the provision of legal andaccountancy services, operating and managing hotels;operating or managing nursing homes and residentialcare homes).

PENSION SCHEMES

There was much talk before the Budget of furtherrestrictions on higher rate tax relief for contributions toregistered pension schemes. In the event, no furtherrestrictions were announced in the Budget. This was nodoubt in response to pressure from various quarters,including trade bodies such as the ABI and IOD who urgedthat further restricting tax relief would further damage theUK's savings culture and should not be undertaken for shortterm political gain. The Chancellor did, however, announce:

■ a new measure (for Finance Bill 2013) to ensure thatarrangements under which an employer pays a pensioncontribution into a registered pension scheme for an

02 | 12972760

employee's spouse or family member as part of theemployee's remuneration package will not attract tax andNIC advantages; and

■ that it will monitor the use of unfunded pensionarrangements and will be "ready to act as necessary" toprevent new and extensive use of unfundedarrangements from creating a significant fiscal risk. TheGovernment no doubt feels this warning necessary giventhat certain unfunded arrangements fall outside thedisguised remuneration legislation introduced in FinanceAct 2011 and many employers are now looking at thosetypes of arrangement.

Further changes were also awarded to the anti-avoidancemeasures relating to asset-backed pension contributions.

INTERNATIONALLY MOBILE EMPLOYEES

Update on the proposed statutory residence test

The long awaited consultation paper on a statutory residencetest ("SRT") was published in June 2011. This wasexpected to lead to an SRT with effect from 6 April 2012.However, the Government announced in December 2011that introduction of the test would be deferred to 6 April2013 to allow time for consideration of detailed issuesraised in response to the consultation. A furtherannouncement was expected "around" Budget 2012 but sofar the Government has merely reaffirmed its commitmentto implementing the SRT in Finance Bill 2013 to take effectfrom 6 April 2013, but has given no further details on itsthinking. It is understood, however, that draft legislationwill be published shortly.

Ordinary residence and overseas workday relief

The SRT consultation paper also contained proposals forreforming the concept of ordinary residence. TheChancellor confirmed in the Budget that the concept is to beabolished for tax purposes generally, but retained for thepurposes of overseas workday relief. This relief allowsemployees who are not ordinarily resident in the UK to betaxed only on a remittance basis in respect of earnings foroverseas duties. The relief is to be put on a statutoryfooting.

The statutory provision will also include the enactment ofSP1/09. This provides for apportionment of the earnings ofa single contract of employment which covers both UK andoverseas duties where the individual is resident but notordinarily resident in the UK. Under SP1/09, HMRC willonly treat overseas earnings as remitted to the UK once theaggregate of earnings remitted exceeds the amount of UK

earnings, rather than each remittance being treated as, inpart, UK earnings and in part, overseas earnings.

For a copy of our briefing on the June 2011 consultationpaper, including proposals relating to the reform ofordinary residence, http://www.dlapiper.com/uk/publications/detail.aspx?pub=6199

Dual contracts and the meaning of "incidental duties"

HMRC has recently published guidance on:

■ the records which it expects to be kept to support aclaim for overseas earnings to be taxable only on theremittance basis where the overseas earnings relate to aseparate overseas employment; and

■ on the meaning of "incidental duties" in relation tooverseas employment (incidental duties in the UK can beignored but not substantive duties).

This guidance affects both employees and employers.

Dual contract arrangements

Individuals who are resident and ordinarily resident in theUK but not domiciled are eligible to claim the remittancebasis in respect of overseas earnings such that those earningswill not be taxable in the UK unless remitted. However,certain conditions have to be satisfied in order to claim theremittance basis in these circumstances, including:

■ the overseas earnings derive from an employment withan overseas employer which is separate from any UKemployment; and

■ the duties of that overseas employment have to beperformed wholly outside the UK. Duties performed inthe UK which are "merely incidental" to overseas dutiesare regarded as performed outside the UK, but theperformance of any substantive UK duties would meanthat the remittance relief is not available.

HMRC have previously produced guidance on what isrequired before they will accept that there are two separateemployments - one in the UK and one overseas. In essence,there must be two genuinely distinct employments withdifferent roles and responsibilities and remunerationpackages. An enquiry is likely to be raised if the onlydistinction between the two roles is a geographical one.

Where there are genuinely two separate employments,HMRC's focus will be on checking whether the employeehas in fact performed any substantive duties of an overseasemployment whilst in the UK.

Records

In its recent guidance, HMRC states that it considers itreasonable for some or all of the following documents(which includes computer and other digitised records) to beavailable for review - diaries, emails, expenses claims andsupporting receipts, telephone records and client files.

Whilst the employee is expected to keep these records if inhis possession, where the employee does not have power orpossession of the documents, HMRC will considerapproaching the employer for any records which it holds.

EVERYTHING MATTERS | 03

NB For copyright and/ortechnological reasons, any internetaddresses in the electronic versionof this publication may not beactive links.

www.dlapiper.com

DLA Piper UK LLP is authorised and regulated by the Solicitors Regulation Authority. DLA Piper SCOTLAND LLP is regulated by the Law Society

of Scotland. Both are part of DLA Piper, a global law firm operating through various separate and distinct legal entities. For further information

please refer to www.dlapiper.com

UK switchboard: +44 (0) 8700 111 111

Copyright ©2012 DLA Piper. All rights reserved. | MARCH 12 | LDSDP: UKG\TAX\12972760

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for takinglegal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis ofthis publication.

Incidental v substantive duties

The recent guidance expands on the guidance alreadypublished in HMRC's Employment Income Manual andgives additional examples of the types of activity whichHMRC regards as incidental and those which it does not.Types of activity which are generally regarded asincidental include:

■ arranging meetings and travel;

■ feedback on performance or results as long as this doesnot involve preparation or analysis whilst in the UK andas long as responsibility for these matters is not core tothe employees' duties;

■ reading generic business emails not relating directlyto the employee's roles and responsibilities;

■ reporting on trade conditions or results overseas but onlyif the employee is merely passing on a report from hisoverseas employer and remitting instructions back andhas no control over the overseas activities on which he isreporting.

The following would not be regarded as merelyincidental:

■ giving instructions or guidance to team members;

■ preparation work carried out prior to discussions,meetings or presentations and follow-up work;

■ reading emails documenting global results if theemployee has any role or responsibility in producing theresults or was involved in feedback or confirming theresults; and

■ applying generally any expertise in any role or functionwhich forms part of the employee's duties.

Clearly, HMRC's interpretation of what is "merelyincidental" is very narrow and many difficulties are likely toarise in practice. For example, an email will often have tobe read to determine its content and whether it is "generic"or not. It should not be the case that the mere reading of anon-generic email constitutes a non-incidental duty as longas the employee does not provide any substantive responseto it whilst in the UK.

Since the guidance paper has a response address forcomments and feedback, HMRC may be prepared to amendits position in response to comment. We will be providingcomments and if you have any particular questions orconcerns which you would like us to raise with HMRC,please let us know.

Practical points confirmed in recent HMRC/ICAEWdiscussions

The ICAEW has recently published its latest memorandumof bilateral meetings and correspondence with HMRC (TAXGUIDE 2/12). This contains information on a number ofpractical matters relating to PAYE and NICs. The followingpoints are of particular interest in relation to internationallymobile employees:

■ for cross border workers moving within the EC, FormA1 (which confirms that social security insuranceremains in the home Member State) is required for anylength of business trip, even just one day. Despite theICAEW protestations that in practice this is impracticaland employers will simply ignore it, HMRC appear firmin their view. The HMRC position follows a Q&Apublished by the European Parliament in January 2012on this point which confirms the line HMRC are taking,but which went on to say that that the matter should bedealt with by national institutions "in a flexible mannerand with common sense and does not normally require aposting certificate if the posting takes just a few days andno incident such as an accident at work occurs".HMRC’s published position certainly does not reflectsuch a common sense approach;

■ HMRC regard a worker who is and has always been UKbased but who is employed by a company in another ECmember as a "cross-border" worker for the purposes ofthe EC Regulations. This means that despite a non-UKbased employer having no taxable presence or place ofbusiness in the UK, its obligations to account fornational insurance contributions in the UK (includingemployer contributions) could be enforced under the EUmutual enforcement procedures. It is not clear thatHMRC is correct in its interpretation but it will bedangerous for employers to ignore it.

For further information about the matters in thispublication, please contact Lynda Finan(lynda.finan@dlapiper.com; 0113 369 2459), LuigiFalivene (luigi.falivene@dlapiper.com; 0113 3692457), Graham Roe (graham.roe@dlapiper.com; 0161235 4329), Nick Hinton (nick.hinton@dlapiper.com;0121 262 5805) or your usual DLA Piper contact on08700 111 111.