Author: Prashant Malde

MiFID II and VAT on Research – still in the dark!
31 October 2017

Although the MiFID II regulation has been published since 2014 (delayed implementation date – 3rd January 2018), it is surprising that H M Revenue & Customs has not yet provided any firm guidance on the VAT treatment of research work.

Recent press states that HMRC is now meeting with industry groups and is set to publish guidance on the VAT treatment of research work carried out from 3 January 2018 onward under MiFID II.

Commission sharing agreements (CSA)

Currently, any research work paid via a CSA is potentially an exempt supply for VAT purposes as it is normally bundled with a payment for execution services. Execution commissions are exempt supplies for VAT and if research is part and parcel of the execution services, then the bundled research services are also exempt from VAT. MiFID II seeks to separate research from commissions as part of a larger aim to reduce the research data being fed to fund managers.

Fund managers

Firms that manage funds are generally not eligible to register for VAT as they mainly deal in financial products, which are exempt from VAT.

MiFID II requires that the payment for research work is done separately and independently from the payment of commissions for execution services. Research Payment Accounts (RPA) are now going to be used by many fund managers.

VAT position after MiFID II?

If research is to be identified as a separate supply from that of execution services, HMRC rules could deem the supply of research services as VATable services at the standard rate of 20%.

The disadvantage here would be felt by research providers as:
- Fund managers will not be willing to increase their budgets for research given that they are unable to reclaim any VAT suffered on research costs,
- Research providers would be pricing themselves out of market (against providers outside Europe) should they try and increase their prices by 20% in order to accommodate the possible new VAT burden, and
- as a result, UK based research providers will be forced to absorb the 20% VAT burden and accept lower fees than what they are receiving now.
We are keenly following this issue for our clients. If you require any assistance with your company’s VAT or tax position in respect of work in the Financial Services industry, please contact us.

Also read…

VAT and financial services

Financial services
October 31, 2017
EMI Schemes (Enterprise Management Incentive)

EMI schemes (Enterprise Management Incentives) are tax advantaged schemes offered by H M Revenue & Customs to small and medium sized businesses (“SME”) for incentivising the SME’s employees.

EMI schemes are share option schemes which fundamentally provide tax savings for both the employee and the SME whilst also providing the facility for the SME to incentivise and reward its employees.

Current perception of EMI schemes

It is a common misconception that EMI schemes are complicated and EXPENSIVE! This is not the case.

Whilst the set-up of the scheme may cost a certain amount of money, the tax advantages achieved can far outweigh the scheme’s implementation costs.

It is true that the rules surrounding EMI schemes are detailed and may be viewed as complicated. However, the government has put in place such rules so that the maximum number of SMEs and employees can benefit from the available tax advantages and, in turn, incentivise SMEs and employees for commercial progression.

Advantages of using an EMI scheme

The employee will not be subject to any PAYE or NIC on acquisition of shares when he/she exercises the share options. The only times PAYE/NIC may be payable are if the share options were granted at a discounted value or if the share options are exercised after a disqualifying event.

In comparison to a simple reward of shares (which triggers a PAYE/NIC liability on acquisition or vesting), the EMI scheme provides a tax free environment of growth so that the employee can benefit from a tax free uplift in value of his/her shareholding.

The company also benefits from a Corporation tax saving on the value of the shares passed to the employee when the share options are exercised. It is therefore a win-win situation for both the employer and employee.

If the employee sells his/her shareholding then there may be a Capital Gains Tax liability that arises. However, being in an EMI scheme also enables the employee to take advantage of Entrepreneurs’ Relief. Entrepreneurs’ Relief means that the employee will only pay tax at 10% on the gains made from selling the shares.

Certain conditions of the EMI share option scheme

Employees: generally only those employees who work for 25 hours or more per week are eligible for EMI options.

Employee: the total market value of an employee’s unexercised share options cannot exceed £250,000 at any given time.

Company: the total market value of all unexercised EMI share options cannot exceed £3m at any given time.

Company: the SME must not be under the control of another company.

Company: the company must have Gross Assets of less that £30m.

Company: it must have fewer than 250 full time employees.

Company: it must be carrying out a qualifying trade as its main purpose.

Shares: the shares subject to the EMI option plan should be ordinary, non-redeemable, and fully paid up shares.

Grant: the options must be granted for bona-fide commercial reasons and not to avoid tax.

Process

The process to get an EMI scheme set up for an SME starts with understanding a client’s needs and what outcome is sought. Once this has been established, we can start structuring the EMI scheme which entails communicating with H M Revenue & Customs and putting in place required share option agreements with the relevant employees.

Communication with H M Revenue & Customs is for approval of scheme qualification as well as obtaining their agreement to the company’s share valuation. The most advantageous valuation is always sought for the client company.

Once the above are in place, the company is in a position to grant the share options to its employees. These grants should then be notified to H M Revenue & Customs within 92 days in order to preserve the related tax advantages.

Annual filings with HMRC are also required for an EMI scheme so that HMRC can be kept informed of the scheme’s activities.

Further information

HMRC’s website also provides brief details on the benefits of using an EMI scheme.

Where can MAH help?

We can provide you with a free, no obligation consultation for initial advice on the EMI scheme and can demonstrate how it may be beneficial for your company. There are both, financial and non-financial benefits for offering employee incentives under the EMI scheme.

To book your consultation with our tax specialist Prashant Malde, please contact us.

October 17, 2017
Overseas Workday Relief – OWR

Have you recently started to live and work in the UK but consider your “home” country to be elsewhere? If so, you are likely to be a UK resident but non-domiciled in the UK.

If prior to becoming UK resident, you were also non-UK resident for a continuous period of 3 tax years, you are likely to be eligible for a special Overseas Workday Relief (“OWR”) exemption.

Such individuals who earn income (either abroad or both in the UK & abroad) are able to benefit from the “remittance” basis of taxation which means that the UK revenue authority would not tax income which is earned abroad and kept abroad.

As always, the related tax rules are complex and somewhat confusing.

Overseas Workday Relief:

Individuals who become resident in the UK but continue to work abroad can benefit from the Overseas Workday Relief which is premised on the UK’s remittance basis rules of taxation. Under the OWR an individual’s income for work performed overseas is potentially not taxable in the UK.

OWR is available to an individual for the first 3 tax years when the individual becomes UK resident. A significant number of workers come to the UK for short or medium term placements and miss this tax saving opportunity. The OWR is not available after the first 3 tax years, therefore proactive planning on an individual’s circumstances would stand to benefit the most.

Remittance basis:

An individual in the above explained UK resident but non-domiciled position will be able to select the remittance basis of taxation in order to benefit from UK tax savings. There are various conditions to be met in order to claim the remittance basis such as not remitting your foreign income or capital gains into the UK, and forgoing your personal allowances in the year of the claim.

In addition, for the Overseas Workday Relief to apply, employment duties need to be performed wholly or partly abroad, accurate records of travel and the duties performed need to be kept, and income relating to the overseas proportion of employment duties need to be kept abroad.

The retention of income abroad for non-UK domiciled individuals can be tricky and needs to be planned carefully.

Cleansing of mixed fund accounts:

When foreign income and gains are kept abroad (most likely in one or more bank accounts) for more than one year, the accounts can end up becoming “mixed fund accounts”. A mixed fund account is one which contains any mixture of capital, capital gains, income etc.

The 2017/18 and 2018/19 tax years are golden years where the government is bringing in rules for helping remittance basis users and allowing them in segregating their mixed fund accounts to achieve a more tax efficient remittance strategy. This facility is not likely to be available after the 5^th April 2019. Until now the disadvantage was to the tax payer as any remittance from the mixed fund account would first favour H M Revenue & Customs’ position for taxing that remittance. Taxpayers will now have the ability to decide which funds to remit and will know beforehand whether that remittance is made out of capital or whether it is taxable income/gains.

We assist clients in arranging their UK tax affairs so that they are not paying excessive tax.

Where can MAH help?

We can provide you with a no obligation consultation in order to determine your exact circumstance. You may already be in the UK and have started working here in which case you should get some professional advice as fast as possible. You could be planning your move to the UK in which case you can proactively plan your tax affairs so that you can save as much UK tax as possible.

Book your free no obligation consultation

A free, initial, no obligation consultation is available, which should reveal to you whether there is any possibility of saving tax given your residence but non-domiciled status in the UK. To book your consultation with our tax specialist Prashant Malde, please contact us.

October 12, 2017