Tax advice: Changes to venture capital reliefs, new rules for termination payments and increases to diesel supplement

    Every year our tax and VAT helplines receive over 55,000 calls. Each month we provide a round up of topical news and below is a short summary of the key points our team has been discussing with accountants in March.

    Changes to venture capital reliefs

    There have been some important changes to EIS and SEIS, that are included in the Finance Act 2018.

    The first of these demonstrate the importance attached to venture capital reliefs in relation to high tech industries with high growth potential. The term “knowledge-intensive company” (KIC) was introduced in November 2015 giving such companies a longer window within which EIS funds can be raised.

    A company is knowledge-intensive if it meets two sets of conditions:

    (a)    One or both of the operating costs conditions, and 
    (b)    One or both of the innovation condition and the skilled employee condition.

    The first operating cost condition is that in one of the three preceding years at least 15% of the company’s relevant operating costs are in relation to research and development or innovation; the second operating cost condition is that in each of the relevant three preceding years at least 10% of the relevant operating costs are in relation to such expenditure.

    The innovation condition is that the company is engaged in the creation of intellectual property at the time the shares are issued, and it is reasonable to assume that within 10 years of the issue of the shares the greater part of the company’s business will be the exploitation or use of the IP.

    The skilled employee condition is that 20% of the company’s employees are qualified in the field and are engaged in R&D activities.

    Further enhancements to the relief have been introduced for knowledge-intensive companies in the Finance Act 2018, which increase the investment limits, as follows:
     
    • An individual can invest up to £2m in EIS so long as at least £1m is invested in KICs;
    • A KIC can raise up to £10m a year, with a lifetime limit of £20m; and
    • A KIC can elect that the 10 year maximum age test starts from when the annual turnover exceeds £200,000.

    The second major change to the venture capital rules is the risk to capital condition, which will have a significant impact on the type of company that will be able to raise money under venture capital schemes.

    These new rules have been introduced to target growth companies, and will exclude companies and arrangements that are intended to provide capital preservation for investors.

    The growth requirement is likely to prevent many Special Purpose Vehicles from being able to raise capital under venture capital schemes as the objective is to fulfil a specific project. Companies will need to demonstrate their growth potential, for example by increasing the number of employees or turnover, in order to be able to issue shares under EIS.

    Furthermore, the activities of the company must be such that the money raised is genuinely at risk. This provision is designed to prevent companies from raising money under venture capital schemes where there is a mechanism in place whereby the capital is protected. This might be by ensuring that the company has a regular customer and regular supplier such that the company can predict with reasonable certainty that it will make a profit.

    As can be seen with other aspects of the changes to the relief, and the results of the “patient capital” review, HMRC’s aim is to target the reliefs for innovative companies with significant growth potential.


    New rules for termination payments made on or after 6 April 2018

    In the February 2018 edition of HMRC’s Employer Bulletin guidance was published on the new rules for the taxation of termination payments made on or after 6 April 2018.

    The legislation can be found at Finance (No 2) Act 2017, s5.

    The changes fall under three headings:

    (a)    Foreign service relief (where tax on compensation is reduced to reflect overseas periods of employment) will be abolished. Currently foreign service relief allows termination payments for certain qualifying individuals to be completely exempt from income tax.
    (b)    The exemption from tax for payments for injury and disability will not apply to injury to feelings, whether on or before termination of employment, except where the injury amounts to a psychiatric injury or other recognised medical condition.
    (c)    All payments in lieu of notice will be treated as earnings and therefore subject to tax and class 1 NICs. This is irrespective of whether there is a PILON clause in the contract of employment, and this point is discussed below.

    For employments which are terminated on or after 6 April 2018, where payments and benefits are made and received which relate to the termination of employment, these will be chargeable to income tax and Class 1 NICs as general earnings, and will not benefit from the £30,000 threshold for redundancy payments.

    Payments made on or after 6 April will be split into two elements:
     
    • post-employment notice pay (PENP), representing basic pay the employee will not receive because their employment was terminated without full or proper notice being given, is taxable as general earnings; and
    • the remaining balance of the termination payment, taxable as specific employment income to the extent that it exceeds £30,000.

    PENP is calculated by applying a formula, as set out in the legislation to the total amount of relevant termination payments or benefits.

    HMRC intend to publish full guidance on the application of the PENP formula in the Employment Income manual in due course.


    Company vehicles - increases to diesel supplement

    As a result of the Autumn Budget 2017 the government has amended legislation under Section 141 of ITEPA, increasing the existing company car tax diesel supplement by 1%, from 3% to 4% from 6 April 2018 and this will apply to all diesel cars registered on or after 1 January 1998.

    However, it should be noted that cars which are certified as meeting the Real Driving Emissions 2 (RDE2) standard under Annex IIIA of Commission Regulation (EU) 2017/1151 will be exempt from the diesel supplement provided that the vehicle has a NOx (nitrogen oxide) value of no greater than 80mg/km.

    The maximum level of the appropriate percentage for cars including any diesel supplement will remain at 37%. The amended legislation also includes consequential amendments to sections 139(7)(a) and 140(5)(a) of ITEPA to reflect that the diesel supplement applies only to certain diesel cars.

    For further information regarding any of these hot topics, please contact the investigations team on 0345 223 2727 or email marketing@abbeytax.co.uk.