QCA submits proposals for taxation reform – Budget 2018

With the support of our Tax and Share Schemes Expert Groups, we have submitted proposals for taxation reform to the Chancellor of the Exchequer before he delivers his Budget this autumn.

As Britain adjusts to its new economic relationship with the European Union, small and mid-size quoted companies – which comprise 79% of all UK quoted companies – need a government that maintains its commitment to support them in generating the growth required to provide economic stability, and to create jobs and wealth. Our proposed measures are designed to help drive private sector growth and generate job creation; they are underpinned by a belief that the government should build a tax system that is: competitive; simple; and certain.

You can download the proposals in full here.

I. Creating a competitive system

Once the UK has left the European Union in March 2019, a competitive tax regime must both incentivise and enable smaller, growing companies to raise sustainable, long-term capital cheaply and efficiently. This will be crucial to supporting long-term economic stability and demonstrating that the UK is an attractive place to do business.

The government should therefore:

1. Follow the 18 European countries which support a level playing field for capital raising by permitting all costs associated with raising equity to be tax deductible. Placing a £1.5 million upper limit to target the relief at smaller companies and enabling the relief to be applied to IPO and secondary fundraisings would cost just £76 million;
2. Allow funds to invest in unlisted companies, such as those on AIM and NEX Exchange, which qualify for Business Property Relief, so that individual investors are able to fully utilise this tax relief, while spreading their investment risk;
3. Encourage employee share ownership in smaller companies through Company Share Option Plans (CSOPs) by allowing the exercise price to be at a discount or at nil cost, while retaining income tax relief only for any increase over the market value at grant; removing the three year holding period before options can be exercised with income tax relief; relaxing the leaver and other early exercise requirements; and increasing the £30,000 limit;
4. Permit non-executive directors taking shares as part of their remuneration to pay income tax only after the sale of the shares;
5. Either remove the condition that officers and employees of a company must have at least 5% of the voting rights and ordinary share capital to qualify for Capital Gains Tax Entrepreneurs’ Relief or, if that is not possible, amend the 5% test so that it only needs to be met for a continuous 12 month period during the five year period ending with the date of sale, as with the Substantial Shareholdings Exemption;
6. Ensure that Entrepreneurs’ Relief applies to the whole gain, regardless of whether the selling shareholder receives consideration in the form of a cash earn-out, shares or loan notes; and
7. Exempt or zero-rate from VAT any small-cap investment research that has been paid for by an institution to a broker.

II. Simplifying the UK’s tax system

With new tax legislation continuing to add length and complexity to the existing framework, the UK has one of the world’s most complex tax systems. Additional rules are raising the cost of compliance for the smallest companies and create a barrier to them building their business and generating growth.

The government should therefore:

1. Strengthen the Office of Tax Simplification (OTS) by increasing its resources, so that it can play a more active role in assessing the impact of government policy on the simplicity of the taxation system; establishing a formal relationship between the OTS and Parliament (perhaps through a Committee), so that Parliament is able to better scrutinise the formulation and implementation of tax policy; and reviewing how the OTS could support tax policy formulation to ensure that simplification is at the heart of the policymaking process;
2. Introduce a Tax Gateway which would allow small and mid-size quoted groups with a turnover of less than £200 million to be exempt from certain, burdensome reporting requirements;
3. Increase the Small Companies Enterprise Centre’s resources to reduce the complexity and improve timescales when using Enterprise Investment Schemes and Venture Capital Trusts;
4. Allow agents to register and de-register companies’ employee share plans;
5. Remove the requirement to obtain HMRC approval of the form of joint NIC elections used for employee share schemes;
6. Introduce new rules to allow UK persons to make interest payments gross or at treaty rates where the person reasonably believes, at the time the payment is made, that the payee is entitled to relief in respect of the payment under double taxation arrangement; and
7. Extend degrouping charge reform to provisions relating to the intangible fixed assets, loan relationships and derivative contracts regimes.

III. Building certainty into the UK’s tax system

For small and mid-size quoted companies to effectively plan for their future development with confidence, they require a tax system underpinned by certainty. This will give companies the confidence to make long-term investment decisions which will help drive sustained economic growth.

The government should therefore:

1. Introduce a bespoke binding ruling process that can consider queries on all aspects of UK tax law; and
2. Confirm that medium-sized groups are not required to compile contemporaneous evidence to support transfer pricing policies, unless they wish to do so (if no Tax Gateway is introduced).

For more information, please contact Callum Anderson at callum.anderson@theqca.com.