Meer & Co, Author at Meer & Co. Chartered Accountants

Incentivizing employees with shares or options

Meer & Co — Thu, 15 Jun 2023 13:22:40 +0000

Incentivizing employees with shares or options

This article focuses mostly on the tax repercussions of giving employees restricted shares, sometimes known as employment-related securities. In contrast to disposal limits, which prevent employees from transferring their shares, forfeiture restrictions prevent employees from claiming their shares if they leave their jobs early or for any other reason.

Let us first think about the different ways an employee can acquire shares, though.

The employee may receive a gift or transfer of shares from a different shareholder. Whether the transferor gives the employee shares as a gift or sells them to them for a discount, CGT will still apply. The gain on a gift of a business asset may be qualified for holding over by the transferor.

The company may grant share options to the employees. Options are initially granted or awarded to the employee, and they can be exercised at the time of vesting. The grant establishes the terms of the option whereas vesting confers rights to exercise. There is never any income tax on the grant of the options. However, there is an income tax charge on exercise (i.e., when the employee purchases the shares by exercising the option), on the amount of the value of the shares at the time of exercise less any amount paid to acquire the shares (the intrinsic value). This amount is treated as employment income.

For approved or tax-advantaged options such as CSOPs or EMIs, there is generally no income tax at the time of exercise.

When shares are sold, there will be a capital gain, calculated as the difference between the sale proceeds less the’ CGT base cost’ which is effectively the market value of the shares at the time of exercise. So, for example, if at the time of exercise, the share price was £1.80 and later the shares are sold for £2.20 then the gain will be 40p per share.

The Company may issue new shares to the employee at a discount in which case the discount will be treated as employment income. Income is reported through the payroll or directly on the self-assessment return of the employee depending on if the shares are ‘readily convertible assets’ which generally refers to listed shares or if there is a pre-sale arrangement in place. If the shares are restricted, the initial chargeable amount will be on the restricted MV.

Shares given to employees or directors are called ‘Employment Related Securities’ (ERS) governed by specific legislation Part 7 of ITEPA 2003, Chapters 2, 3 and 4. Shares granted to, or options which have been granted to or exercised by, employees must be reported to the HMRC no later than the 6th of July following the end of the fiscal year.

There are three main reasons why companies may want to incentivise employees with shares or options: remuneration for services, as a performance incentive or retention of staff. Usually, employees are not allowed to acquire share options (i.e., the granted options become vested) unless they have been with the company for a minimum of three years.

Shares or options granted to employees must be reported to the HMRC no later than the 6th of July following the end of the fiscal year.

If shares are readily convertible assets (RCA), they will be treated as cash and taxed through the payroll as employment income and PAYE/NIC is deducted at source from the employee’s gross pay.

The employer can agree to pass on the employer’s Class 1 NIC liability to the employee. The employer recovers the NIC which is a cost to the employee similar to the cost of acquiring shares and therefore reduces the employee’s employment income subject to PAYE.

If the shares are not readily convertible, then it is reportable as income directly on the employee’s Self-Assessment return and not through the payroll. Under the ‘general principles’ shares are RCA if they are quoted shares or there is an arrangement to have the shares sold.

As a general rule shares in unlisted companies will not be readily convertible. However, if the unlisted company is a controlled subsidiary and the shares are non-tax advantaged, shares will be treated as readily convertible subject to income tax and NIC at source though the company will not get a tax deduction. For this reason, employees are usually awarded shares in the parent company which ensures a corporation tax deduction and no PAYE/NICs as the employee will declare the whole amount on his self-assessment.

As well as an initial income tax charge on first receiving the shares or on exercising an option, the employee may incur a further charge when any forfeiture or disposal restriction on shares is later lifted.

If the terms are that the forfeiture restrictions are to be lifted within five years, income tax charge will only apply when the restriction is lifted i.e., there is no initial charge. Assuming the employee loses the shares either they are cancelled, or the company buys back at a low value then there will be no initial charge however, if for example, the employee remains in employment beyond three years (i.e. restrictions lifted within 5 years) there will be a charge based on the percentage initially untaxed i.e. 100% always multiplied by the market value of the shares at the time when the forfeiture restrictions are lifted unless there is a s425 (3) election for initial and second charge.

With a s425 (3) election there is no ability to claim any capital loss on the shares which are cancelled or sold back to the company. Note, a section 425(3) election has the effect of increasing the tax liability where the shares are forfeited (just the first charge) or the shares fall in value when the restrictions are lifted (both initial and later charges).

If the restrictions are subject to forfeiture five or more years after the award of the shares there will be two income tax charges, initially at the time of receiving the restricted shares based on the restricted value and a further charge when that restriction is removed based on an initial untaxed percentage multiplied by the value of the shares at the time when the restriction is removed.

If the restriction is a disposal restriction, there is no such pre or post-5-year rule and there will be both an initial charge and a later charge when the employee becomes free to dispose of the shares.

The effect of a S431 election is to ignore all restrictions completely. The initial chargeable amount will be based on the full market value of the shares, there will be no second charge even after the lifting of restrictions.

Finally, there are several special rules.

The granting of preference shares to be converted at a prescribed time in the future. The initial charge is based on the value of the shares without the conversion option (‘depressed value’) and a second income tax charge upon conversion is based on the market value of ordinary shares received less the current ‘depressed value’. For CGT purposes, the base cost of the ordinary shares is equal to the amount of income chargeable to tax.

The payment of uncommercially high dividends to an employee-given share which is effectively disguising remuneration.

The granting of options on the same shares to artificially depress the value of shares given to employees is a ‘depreciatory’ transaction and 446B ITEPA 2003 will impose a tax charge equal to the depreciatory amount.

The award of unpaid shares issued at a discount which are later sold without ever paying for the shares. The amount unpaid is treated as a notional loan that is written off. Therefore, the charges to income are the initial discount, the notional interest on the loan, and the amount written off.

We have discussed various scenarios for employment-related securities, these are grouped under several Chapters in Part 7 of ITEPA 2003. Chapter 2 relates to restricted securities (e.g., forfeiture or disposal restrictions). Chapter 3 relates to securities with artificial high/low values (e.g., Convertible Preference/ Shares with artificially high dividend rates). Chapter 4 relates to ‘post-acquisition benefit’ which is a sweeping up charge where income tax is not caught under Chapter 2 or Chapter 3.

There are a couple of exemptions, there is no income tax charge if the chargeable event occurs after death e.g., lifting of restrictions or conversion, or seven years after cessation of employment but the latter rule does not apply to share options.

The key takeaway is that there are two key elections which disapply rules on employment-related securities, s425 elects to tax the shares with forfeiture with pre-5 year restrictions early and s431 is to treat the shares as if they were unrestricted. The value of the shares can be taxed through the payroll as employment income incurring both PAYE/NIC costs or directly on the employee as his income through his return. If there is an NIC liability, the employee can be made liable to the employer’s NIC too and this will be treated as part of the cost of the shares.

These rules generally apply to non-tax-advantaged shares acquired by employees at a discount irrespective of any restrictions. The lifting of restrictions is a further chargeable event. Tax-advantaged shares e.g., CSOPs or EMI avoid these problems but they are not as flexible as they come with many qualifying conditions and so may not be suitable in all conditions. Non-tax-advantaged schemes are usually used for highly paid executives. There is no chargeable event where restricted securities are wholly exchanged for new restricted securities following a takeover.

Disclaimer

The information and materials provided here are for general informational purposes only and do not constitute professional advice. The author makes no representations or warranties of any kind, express or implied and disclaims any liability for loss or damages, direct or indirect, arising from the information herein. Any reliance you place on such information is strictly at your own risk. Professional advice should always be sought and obtained before making any decisions or taking any action based on any information provided.

Haroon Rafique

[email protected]

Haroon, actively contributes to the field of accountancy, tax, finance, and economy through his articles, he leverages his expertise to provide valuable insights and analysis to readers. By sharing his expertise, Haroon aims to educate and empower individuals, businesses, and organizations to make informed decisions in these complex and ever-evolving areas.

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Tax Aspects When An Individual Sells His Company Through An Earnout Deal

Meer & Co — Thu, 15 Jun 2023 12:46:53 +0000

Tax Aspects When An Individual Sells His Company Through An Earnout Deal

Earnouts are frequently payments based on a formula connected to the company’s future profits, typically spread over three years based on EBITDA or other recognized indicators. The question of how these future sums should be taxed on the person selling shares after the contract for sale is finalized arises since the amounts that be paid out are unpredictable. We are more concerned with the timing of the unconditional contract for sale than payment dates, which are mostly irrelevant when determining the tax point for CGT.

If all of the deferred consideration was known at the time of the contract, then the sale consideration is just the total value of the transaction, regardless of when those future payments are made. If the additional payments are made for a longer period than 18 months from the date of disposal, HMRC permits the CGT liability to be paid in instalments.

How, then, do you handle earnouts whose future amounts are uncertain? This was taken into account in the Marren v. Ingles case before the House of Lords, where a future payment was conditional upon the company going public on the Stock Exchange within a certain period. It was impossible to predict the stock’s future price or, consequently, the earnout sum.

The problem was resolved by treating the uncertain right to the earnout as a “chose in action”—a legal asset whose estimated value was treated as part of the consideration at the time of sale—and disposing of the right in exchange for the listed shares when the company did list.

While the subsequent disposal of the “asset” is not eligible for the same relief, the initial selling of the shares may qualify for business asset disposal relief (BADR). However, any extra loss will be wasted if a carry back is chosen; therefore, it could be preferable to forego one altogether. Any loss on the sale of the asset can be carried back and offset against prior gains on the shares.

When the earnout “asset” is entirely future cash, a capital gain on the value of the earnout results in a “dry” CGT charge, meaning the vendor has no cash on hand to pay the tax. The solution to this issue is to make sure that the earnout is entirely satisfied by shares or loan notes, in which case the ‘asset’ is viewed as a deemed non-QCB instrument and gain is postponed due to the application of paper-paper rules. If there is a chance of losing BADR relief on the ensuing sale or redemption of the new securities, an option to disapply rules and consider it as a chargeable disposal may be made.

The loan notes may be corporate bonds that qualify or do not qualify (QCB or Non-QCB). When loan notes are exchanged for non-QCBs, they are classified as shares and the gain is postponed until the non-QCB loan note is sold or redeemed. Loan notes are non-QCBs if they are convertible or redeemable in a foreign currency and are handled as shares.

Since QCBs are not considered shares, a gain will result from the exchange of the earnout ‘asset’ for QCBs; however, this gain will not materialize until the QCBs are sold or redeemed.

As it is doubtful that the acquiring company will be the seller’s own company, BADR would typically not be an option when the loan notes are redeemed.

HMRC provides the option to spread the CGT payment over eight years or the actual deal term, whichever is shorter when the entire transaction is anticipated to take longer than 18 months. Legal paperwork is crucial since HMRC views this type of transaction as an employment-related securities transaction; if the earn-out shares or loan notes are obtained due to employment or potential employment, the earn-out right is chargeable to income tax.

Disclaimer

Haroon Rafique

[email protected]

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Abolishment of basis periods for self-employed

Meer & Co — Mon, 12 Jun 2023 14:14:39 +0000

Abolishment of basis periods for self-employed

The current system of taxing the self-employed that uses basis periods for allocating profits to fiscal years will be abolished from 6th April 2024 and replaced with the Tax Year Basis (TYB).

The new system will now allocate daily profits for all self-employed businesses across the fiscal year, from 6th April to 5th April. The complete alignment will occur in 2024/25, as 2023/24 will be the transition period.

The transition will take place from 6th April 2023. Most affected will be high earners who are self-employed with accounting years ending shortly after 6th April 2023 because, during this transition period, a chunk of profits will be taxed upfront to convert to the new system.

Typical businesses affected by advance tax charges on these ‘transitional profits’ include dentists, doctors, lawyers, accountants, consultants, architects, creatives, and brokers.

It’s not all bad news, as the government will allow taxpayers to spread the extra tax bill on the transition profits after deducting any previous overlap profits over five years. However, any remaining untaxed amounts will be taxed immediately if your business ceases within five years. You can also elect to accelerate the tax on transitional profits.

There are some odd quirks to the rules for new businesses starting just before 6th April 2023 and existing businesses whose accounting year is 31st March 2023. The portion of profits falling in 2023-24 is ignored and taxed the following year.

Disclaimer

Haroon Rafique

[email protected]

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Registration of overseas entities holding UK property

Meer & Co — Wed, 07 Jun 2023 12:30:58 +0000

Registration of overseas entities holding UK property

Following the Russian invasion of Ukraine, the government accelerated the passing of the Economic Crime (Transparency and Enforcement) Act 2022 (EC(TE)A 2022).

EC(TE)A 2022 requires overseas entities to register with and provide details of their beneficial owners to, the UK Companies House before the overseas entity can be registered as the legal owner of UK land.

The legislation establishes civil and criminal penalties for various offences, broadens the existing regime for unexplained wealth orders (UWOs) (to include trustees, partners, directors, and others who operate entities holding property in the UK), and establishes a strict civil liability test for sanctions violations.

Overseas entities (OE) are legal entities that are governed by the law of a country or territory outside the UK, legal entities being corporate partnerships or other entities that are legal persons under that law. Those OE’s that already own land had six months from the 1st of August 2022 i.e., 31st January 2023 to register with Companies House and provide details of their beneficial owners or managing officers. New purchasers must obtain the OE ID number from Companies House to register their title with the Land Registry.

Once an entity is registered with the Companies House, it is referred to as a ‘Registered Overseas Entity’ (ROE).

The act could use a revision, some further guidance, and plenty of use cases tying back to the pieces of legislation, particularly Schedule 2.

The act defines a ‘Beneficial Owner’ (BO) (para 6) and a ‘Registrable Beneficial Owner’ (RBO).

A ‘Beneficial Owner’ (para 6) is a person that meets at least one of the five control conditions. The tests for determining beneficial ownership are shown in the blue shaded box in Figure 1 and apply to the three types of beneficial owners.

An (RBO) is either a non-exempt individual, a legal entity that is subject to ‘Own Disclosure Requirements’ (ODR), or government and public authorities.

Legal Entities are subject to ODR if their shares are admitted to trading on one of the prescribed stock exchanges, they are a regulated trustee in the overseas country/territory, or they are registered as an ROE in their own right. Notably, only stock exchanges in the USA, Israel Japan, Switzerland and the EEA are on this list.

Therefore, an RBO may be an individual (non-exempt and meeting one of the five control conditions), a legal entity (non-exempt and meeting one of the five control conditions and subject to ODR), or a government or public authority. Refer to Para 2,3 and 4 of Schedule 2 of the Act.

Figure 1 shows the various types of RBOs that may be interested in the UK land-owning ROE. In the case of an incorporated trust, partnerships, or associations, we should look through the individuals to determine beneficial ownership.

Individuals and legal entities (persons) may be exempt from RBO under Para 8 if they hold an indirect interest in an ROE through one or a chain of several legal entities connected by ‘majority stakes’ and where the legal entity closest to the ROE has beneficial ownership (i.e., meets at least one of the five control conditions) and at least one of the legal entities is subject to ODR.

Disclaimer

Haroon Rafique

[email protected]

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How to become a Non-UK Resident

Meer & Co — Wed, 31 May 2023 14:40:16 +0000

Navigating UK Residency: Understanding Criteria, Tests, and Tax Implications for Non-UK Residents

To become a non-resident of the United Kingdom, you must meet certain criteria that are defined by the UK tax authorities.

Here are some of the key points to consider:

Residence status: Your residence status is determined by a number of factors, including the amount of time you spend in the UK, the purpose of your visits, and the nature of any ties you have to the UK (such as a home, family, or business). If you spend 183 days or more in the UK in a tax year (6 April to 5 April), you will generally be considered a UK resident for that tax year. If you spend less than 183 days in the UK, you may still be considered a UK resident if you have a “sufficient presence” in the UK, meaning that you have a home in the UK, work in the UK, or have other close ties to the country.

Automatic overseas tests: There are two automatic overseas tests that can determine your residence status: the automatic overseas test for the first year of absence and the automatic overseas test for subsequent years of absence. If you pass one of these tests, you will be considered a non-resident for tax purposes.

Statutory residence test: If you do not meet the criteria for automatic non-residence, you can apply for a determination of your residence status using the statutory residence test. This test takes into account various factors, including the amount of time you spend in the UK, the purpose of your visits, and your ties to the UK.

It is important to note that your residence status can have significant tax implications, as non-residents are generally subject to different tax rules than UK residents. If you are unsure about your residence status or have any specific questions about becoming a non-resident of the UK, you should seek professional advice.

Disclaimer

Haroon Rafique

[email protected]

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Chancellor Rishi Sunak, Autumn Budget speech 2021

Meer & Co — Mon, 15 Nov 2021 11:07:27 +0000

Chancellor Rishi Sunak, Autumn Budget speech 2021

Chancellor Rishi Sunak made his Autumn Budget 2021 speech on 27 October 2021, the highlights of the speech are as follows:

The minimum wage will rise from £8.91 to £9.50 per hour from April 2022.
Universal Credit taper to be reduced by 8% by 1 December 2021.
Creative tax reliefs to be extended to April 2024 and doubled until April 2023.
Scope of R&D relief to be expanded to include cloud computing and data costs with additional relief for UK only R&D from April 2023.
£1m Annual Investment Allowance (AIA) extended to March 2023.
Bank levy to reduce to 3% meaning the rate of Corporation Tax on banks will increase from 27% to 28% in 2023.
New Small Producer Relief as an extension of Small Brewers relief, and new ‘Draft relief’ to apply to draft beer and cider from February 2023.

Inflation has hit 3.1%. Growth predictions are revised up from 4% to 6.5%. It is forecast that the economy will return to pre-COVID levels by the turn of the year.

Unemployment to peak at 5.2% which means there will be over 2 million less unemployed than expected. Wages have grown by 3.5% since 2020.

A budget for a new economy post COVID.

The Office of Budget Responsibility (OBR) is to have a New Charter going forward:

Net debt to be a % of GDP.
In normal times the government to only borrow to invest with other financial needs being met through taxation.

HGV driver shortages

New funding for lorry park facilities.
HGV levy to be suspended until 2023 and VED frozen for HGV’s.

Government spending: levelling up public services

Healthcare spending to be increased by £44bn to £177bn.
Grant funding being provided to local government of £4.8bn.
£4.7bn to go to schools by 2024/25, £1,500 per pupil.
Additional funding from £1.7bn levelling up fund for projects in Scotland, Wales, NI as well as all regions in England.
£560m on youth services.
£5bn for road maintenance and £5bn for buses, cycling and walking.
£20bn on R&D by the end of this parliament, on top of the cost of R&D tax relief.
£560m for new numeracy programme for children, ‘Multiply’.

Businesses

Creative tax reliefs

Extended by two years to March 2024 and doubled until March 2023.
£800m of additional funding for museums, galleries etc.

R&D tax relief

Scope to be expanded to include cloud computing and data costs.
From April 2023 additional relief for UK only R&D activities.

Tonnage tax

To reward companies for adopting the UK merchant shipping flag for the first time ever.

Air Passenger Duty (APD)

The return leg exemption be brought back for UK domestic flights from April 2023 with a lower rate of APD. Higher rates for long haul flights.

Corporation Tax (CT)

Increase in rate to 25% from April 2023 already announced.
Bank levy reducing to 3% from April 2023. Overall rate of CT on banks to increase from 27% to 28% in April 2023.

Capital allowances

£1m Annual Investment Allowance (AIA) extended to March 2023.

Review of business rates

More frequent revaluations every three years.
New investment relief for green technology.
New business rates improvement relief.
Additional 50% discount for 2022 for the hospitality and leisure sector.

Individuals

The national living/minimum wage will rise from £8.91 to £9.50 per hour from April 2022.
Universal credit taper to be cut by 8% by 1 December 2021.

Misc duties

Alcohol duty simplification, 6 rates instead of 15. ‘The stronger the drink the higher the rate’.
There will be a new ‘Small producer relief’, an extension of small brewers relief.
New relief, ‘Draft relief’ to apply to draft beer and cider. Will cut duty by 5%.
Planned duty increases on spirits cancelled and sparkling wine duty reduced to match that for non-sparkling wines.
Planned rises to fuel duty scrapped.

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CRYPTO ASSETS & FINTECH REGULATION & TAX ISSUES

Meer & Co — Tue, 05 Oct 2021 10:25:57 +0000

CRYPTO ASSETS & FINTECH REGULATION & TAX ISSUES

Excerpt from a talk delivered by Haroon Rafique, Global strategy director

UK Regulation of Crypto Assets

UK’s support for FinTech

The UK has been at the forefront of innovation and ranks at the top of the list of European countries in attracting the most deals. The FCA and Bank of England have introduced various initiatives, fintech hubs, sandboxes, to support fintech firms. There is some overlap but FCA and the PRA regulate this sector.

Regulations governing blockchain technology and crypto assets

UK stance on regulating technology applications is neutral rather it focuses on the use and output of technology applications. Therefore, there is no direct regulation over technology however, some rules such as Article 13 of the GDPR which require the erasure of data, or the Centralised Securities Depositary Regulation which requires dematerialized securities to be held centrally causes difficulties in the context of blockchain technology which works as an immutable and de-centralized system. Crypto businesses, those that provide exchange services, digital wallets (e-money), and ICO’s are required to register with the FCA before operating. There are various classes of crypto assets and if regulated may fall within regulation either as RAO specified investments, MiFID financial instruments, or e-money or Payment Service Regulations (PSR). Exchange tokens, sometimes known as ‘cryptocurrencies’, ‘crypto coins or ‘payment tokens’, function as fiat money is not regulated. Security tokens are akin to share or debt securities. Utility tokens are not specified investments and are generally unregulated but just as other tokens may meet the definition of e-money. Stablecoins are used to manage volatility either as derivatives of securities such as CIS or commodities, backed by fiat funds, a basket of crypto assets, or algorithms that regulate supply. Stable coins may be classed as e-money or security tokens.

Digital currency exchanges and ICO offerings

Digital exchanges or brokerages must be registered with the FCA and also authorized to trade if it involves any regulated crypto assets. All ICO’s launching their business after 10 January 2020 must be registered with the FCA.

Recruiting overseas fintech staff

Individuals can work in the UK and can apply under the Tier 1 or 2 route. Tier 1 supports entrepreneurs and Tier 2 is for skilled workers who are sponsored to the UK by licensed employers.

UK licensing requirements and Regulators

Generally, activities that involve accepting deposits, dealing, facilitating, arranging, or advising on investments, setting up of collectives, payment gateways, and e-money issuance are regulated activities and are covered by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 4 (RAO). Consumer lending is regulated by the FCA, the Consumer Credit Act, and other secondary legislation although there are some exemptions where credit is given for business purposes or made to high-net-worth borrowers.

FinTech activities regulated by Collective Investment Schemes (CIS) activities

CIS activities usually involve the pooling of funds that are managed by an operator therefore, the fund/ operator must be authorized or regulated by the FCA. An Unregulated CIS (UCIS) cannot be promoted to the general public. A UCIS can be open-ended or closed-ended. There are no restrictions on the legal form of a UCIS so it can be structured as, for example, a partnership, a trust, or a company. However, as a closed-ended company cannot be a CIS, a non-corporate structure is required for all closed-ended CISs. This is why an investment trust (which, despite the name, is a listed closed-ended company) is not a CIS (and hence not a UCIS). Unauthorized persons may only promote UCIS to a certain exempt group of investors covered by the Financial Promotions Order. Authorized Persons can promote to that covered under the CIS Order, permitted under the FCA rules COBS 4.12 or Single Property Schemes s239 FSMA. A Fintech company that pools investor funds will be caught by the CIS rules unless it just provides advice or payment services.

Regulation of P2P, crowdfunding platforms, and payment services

The FCA regulates P2P activity, and if the platform is facilitating small individual loans will require permissions to enter into regulated credit agreements. Equity-based crowdfunding is not regulated in the same way as loan-based crowdfunding through equity-based crowdfunding platforms must not market to retail clients unless an appropriate exemption applies. Payment Service Providers are regulated by the Payment Services Regulations 2017 which implemented the PSD2 Directive and firms must apply for authorization. Non-bank payment providers, electronic money institutions (EMI’s), Authorised Payment Institutions (API’s) must be authorized by the FCA, and money held under these entities is not covered Financial Services Compensation Scheme. The PSD2 directives require banks to allow 3rd party providers to initiate payments whilst the Competition and Markets Authority (CMA) introduced measures that required banks to implement open banking APIs to provide access to data and stimulate competition

Provision of Robo advice services

The same rules that apply to investment advisers apply here also.

Selling or marketing insurance products

Contracting or dealing in insurance are regulated activities. Promoting, arranging, and providing insurance are regulated activities, which means firms providing these services, or insurance products must be authorized by the FCA.

Providing credit information services

These are regulated activities and firms must be authorized.

Can non-UK Fintech companies providing financial services operate in the UK?

An EEA firm that is undertaking passport-able activity may operate in the UK without local presence otherwise it must establish a local presence and obtain a license. The rules on sales and marketing of financial services are set out in Chapter 4 of the FCA’s COBS handbook. Promotion of lending and mortgages are covered in the FCA’s Consumer Credit Sourcebook 3.3 and chapter 3A of the Mortgages and Home Finance: COBS.

Taxation of Crypto Assets

Tax incentives and tax costs for Fintech companies

There are several tax incentives for Fintech companies, the most common ones are EIS/SEIS and VCT relief for investors of FinTech entities that are not directly involved in financial services. A 10% tax rate on the disposal of shares. R&D tax credits for relief on qualifying expenditure. Reduced 10% company rate on profits from exploiting patents and other IP rights. The 2% digital services tax (DST) from 1 April 2020, taxes the revenue of very large enterprises which are search engines, social media, or e-commerce platforms deriving benefit from UK users.

How are crypto-assets taxed in the UK?

HMRC defines crypto-assets as intangible assets ‘cryptographically secured digital representations of value or contractual rights that can be transferred, stored, or traded electronically. There are no specific statutory provisions other than HMRC guidance. For direct tax purposes, HMRC does not consider Crypto as everyday currency which seems counter-intuitive when we speak of Bitcoins or e-money? The position is different with VAT. Although HMRC guidance does not address the question of whether crypto assets are ‘property as a matter of law, the UK Jurisdiction Taskforce (UKJT) does. HMRC’s position is that crypto-assets, while digital and therefore intangible, count as ‘chargeable assets’ for capital gains purposes.

Conversion to fiat money

If a Bitcoin is converted to Ethereum say, taxpayers should keep a record of the fiat conversion rate at the time of the transaction.

Individuals

Individuals’ profits will generally be taxed as capital gains unless there is clear evidence of trading such as mining or dealing activities.

For CGT purposes, the location of the crypto is wherever the underlying asset is located or if there is no underlying then where the beneficial owner is resident. For IHT purposes, the location of the asset follows ‘general principles applicable to private property This is an important factor for UK residents who are non-domiciled both for CGT and inheritance tax purposes. For CGT purposes, each crypto asset is treated separately and gains and losses on the same day or within a 30 days window are separated into special pools for matching of costs and disposal proceeds in calculating gains.

Companies

Profits from crypto activities may be taxed as trading income, investments, or intangible assets, or under loan relationship rules if the crypto asset is used as collateral for loans.

Stamp Duty

Stamp Duty tax will apply if tokens are given for the purchase of shares or land.

VAT

No VAT on the supply of token itself. VAT is due on the supply of services or goods in exchange for tokens. Mining activities are outside the scope of VAT. Token Exchange activities are exempt from Vat just as transactions concerning currency under group 5 of Schedule 9 VAT 1994. The treatment of other types of crypto-asset will depend on their precise nature. Transactions in or involving security tokens may, depending on their characteristics, be treated in the same way as transactions in or involving shares or securities.

Employment taxes

Exchange tokens will generally be readily convertible assets and are subject to PAYE deductions.

I have a large amount of Crypto which I would like to convert?

The ability to cash crypto successfully depends on five factors; proof of the funds to acquire the crypto, full traceability of the crypto transactions, KYC documentation on the owner, declaration of taxes through the appointment of professionals, and pre-notification to 3rd parties in the transaction which would be the Exchange/OTC and the client’s bank. If these steps can be achieved then, it should be possible to cash out.

It is advisable for security reasons, that the owner stores their cryptocurrency on their personal hot or hard wallets and off-exchange.

Crypto OTC’s will deal with large institutional volume transactions and it may be possible to consolidate several client’s crypto balances under single execution.

Haroon Rafique, FCA

Contact-Details:

www.linkedin.com/in/haroon-rafique

[email protected]

Haroon has a construction, engineering, tech, and finance background and strong and wide working knowledge of financial and non-financial disciplines, familiarity with the UK, IFRS, and US GAAP Standards and Corporate Governance guidelines.

Graduated in Electronic and Electrical Engineering from University College London before going on to become a Chartered Accountant, auditor, and now a Fellow of the Institute Chartered Accountants England & Wales.

He is a director in two tax and audit boutique consultancies providing specialist advice in audit, tax, tech, and finance. Chief Finance Officer of a leading UK company that provides the temporary site and logistical services to blue-chip contractors and adviser to several FinTech companies. Member of the Personal Finance Society, The Society of Mortgage Professionals, The Chartered Insurance Institute, and Chartered Institute for Securities and Investment. He has a diploma in Islamic Finance, a Certificate in Financial Planning, a grade point A certificate in Mergers and Acquisitions from Harvard Extension School, and an RICS accredited certificate in construction Project Management and academic interests in project finance techniques.

Knowledge of key project management techniques and Lean Six Sigma Green Belt certified. Understanding of project lifecycle from start to finish and the critical steps within each stage, including how to plan, organize, and control operations. Use of problem-solving tools in a system of management employing the framework of DMA- IC, Six Sigma, Value Stream Maps, SIPOC, X-Y Matrix, Multi-Variate Charts, Six Sigma Tools, Designing Six-Sigma Processes, Control Charts, Alpha and Beta Errors, Risk Mitigation, Hypothesis Testing, Regression Analysis. A well-rounded view of managing projects with a focus on local contract practice, project finance control and reporting, project process and procedures, and risk management. Grade point A in Mergers Acquisitions and Management from Harvard University Faculty of Arts and Sciences. Knowledge of the impact of federal and international laws on M&A, common takeover tactics and defenses, M&A process, relative valuation methodologies, deal structuring; payment and legal considerations, tax and Accounting, financing transaction: private equity, hedge funds and LBOs, joint ventures, partnerships and strategic alliances, alternative exit and restructuring Strategies, Cross Border Mergers.

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The information contained in this article is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included here without seeking legal or other professional advice. The contents contain general information and may not reflect current legal or tax developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content here

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Registering as a CIC

Meer & Co — Sat, 27 Jun 2020 05:23:18 +0000

What is a CIC?

A community interest company (CIC) is a type of Limited Liability Company formed specifically for the purpose of carrying on business for social purposes or to benefit a community. Any company may decide to carry out work for the public benefit if the directors decide it should, but funding bodies are rarely willing to support such activities unless it is obvious that the company’s activities are clearly for the benefit of the public. For this reason, many organisations opt for the CIC corporate structure; a structure that has various protection measures in place to ensure that funds are used solely for the advancement of its community purpose. This is a social profit-making enterprise that is required to generate profit to remain solvent, but its profits (or surplus) will be applied to its community purpose rather than for private gain. An already registered limited company is able to re-register as a CIC.

What are the different types of CIC?

A CIC can be either limited by shares or limited by guarantee, most CICs take the latter form. A CIC limited by guarantee is a company which has no share capital and can therefore not pay any dividends. The owners agree to be liable to the company’s debts up to a specific limit in the event that the company is to be dissolved. Beyond that, they have no further liability for the company’s debts.

In a CIC limited by shares, the company will have a stated amount of capital which is divided into a number of shares. Once a shareholder has paid the full nominal value of his or her shares to the company, he or she has no other liability.

If you already have a company and you are re-registering as a CIC, you have already determined which type you will have. If the existing company has Shareholders and Share Capital then it will convert into a Community Interest Company Limited by Shares. If your existing company has Trustees, who put up a cash Guarantee instead of owning Shares, then it will convert into a Community Interest Company Limited by Guarantee.

What are the restrictions for CICs?

The main feature of the CIC structure that ensures the protection of funds within the company is the ‘Asset Lock’. This covers all of the provisions that apply to CICs to ensure that the assets, including profits generated by the CIC, are used for the benefit of the community rather than for private gain. The ‘Asset Lock’ is generally divided into three sections, each detailed below.

1. - It is made for full consideration at market value so that the CIC retains thevalue of the assets transferred.
  - It is made to another asset-locked body as specified in the CIC’s articles of association.
  - It is made to another asset-locked body with the consent of the CIC Regulator.
  - It is otherwise made for the benefit of the community.

Dividend cap – One advantage of CICs limited by shares is that dividends can be paid to shareholders. This can make a CIC an attractive investment proposition. However, given the social mission of a CIC, the amount of profits paid out to shareholders is capped at 35 per cent by law. The remaining 65 per cent of distributable profits must be reinvested back into the company or used for the community it serves.

Redemption or repurchase of shares – a CIC is subject to the following restrictions set out in the CIC Regulations

- A CIC can only carry out the repurchase of shares if the amount to be paid by the company does not exceed the paid up value of the share.
- A CIC may not reduce its share capital unless the reduction is made by also reducing the liability of any of the members on any of the company’s shares in respect of share capital not paid up.
- It is made to another asset-locked body with the consent of the CIC Regulator.
- It is otherwise made for the benefit of the community.

What are the benefits of converting to a CIC?

As mentioned before, some donors will only give to charities or community interest companies, because of the protections these vehicles provide that funds will be used for stated purposes. Therefore, easier access to finance; through donors, grants or community development finance, is a big factor when considering registering as a CIC.

The CIC has corporate structure. This means that, like a limited company, the CIC has a limited liability, an important element of security for those who own and manage the business.

With regards to the registration process, registering a CIC is generally much quicker than registering a charity. A CIC can be registered with a single form sent to Companies House which is also reviewed by the CIC regulator, whereas a charity application may take up to months to complete.

How to become a CIC?

When it comes to registering as a CIC, you can either re-register an existing company as a CIC, or you can start an application to register a new CIC.

In order to re-register a limited company as a CIC, a CIC37 form would need to be completed. The constitutional documents for your CIC (called Memorandum & Articles of Association) must state the aims of the organisation. The existing memorandum & Articles of your Private limited Company will have to be replaced.

If you are registering a new CIC from scratch, there are 3 steps before your CIO is registered. You will need to register your company name with Companies House, register with HMRC for Corporation Tax and gain approval from the CIC Regulator to form a CIC. You can use gov.uk’s online service to complete all these three steps at the same time. You will need to have your CIC’s memorandum and articles of association prepared before you start the registration process.

Compliance as a CIC

With regard to accounting requirements, they are the same as limited companies with the addition of a CIC report (CIC34). This outlines the CIC’s activities and impact, consultation with stakeholders, directors’ remuneration and detail of transfers of assets other than for full consideration.

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Less is indeed more!

Meer & Co — Wed, 03 Jun 2020 11:25:56 +0000

This article is based on a report from one of our company managers on the ground in Peshawar, Pakistan. We have never witnessed a collective reaction on a global scale such as the fight to control the spread of this deadly coronavirus. When the lockdown was announced in Q1 of 2020, the advanced economies instantly flexed their muscles and leaped into action announcing various support and stimulus packages for small businesses and many young people who had been working in the hospitality sector. If these governments hadn’t done this, it would have caused insurmountable public unrest. Contrast this with the reaction in some of the ‘developing’ and ‘advanced developing’ countries in South Asia. For instance, Pakistan survives on thin financial reserves and binding international constraints, making it impossible to effect similar stimulus packages such as loans and government fiscal intervention. You could say, their hands are tied. Unlike the western economies, the developing countries do not have the luxury of international reserve currency status whilst they are still reliant on imports of raw materials, intermediate goods, and know-how for export, and this against a backdrop of sharp currency devaluations and rising spreads on country bonds. Latin America saw the largest percentage of movement in currency devaluations against the dollar. The net portfolio outflows of debt and equity, in selected developing countries, in one month of March 2020 was $69bn, compared to $25bn over 3 months during the global financial crisis of 2008.

HUMANITY AND ECONOMICS

“What is most important is to be around our families, have food on the table, shelter, and essential medicine.”

In the case of Pakistan, our man on the ground tells us that government assistance per family is around 4,000 PKR or £23 per month. He shared his experience of meeting a self-employed taxi driver and a fruit vendor working in the locality of Hayatabd, an upscale suburb on the western outskirt of Peshawar. The taxi driver is an elderly man, aged 60, caring for four daughters and he hires a Suzuki Alto for £2 each day and yet he earns. £4. This averages to about £75 per month. From this, he has to pay for food, rent, and essential medicine. But after the lockdown in Peshawar, his earnings have all but disappeared which meant that he would also lose his taxi, his only means of earning. It is easy to see how little amount could make such a huge difference to this man. The story of the second individual, the fruit cart vendor, is even is more astonishing. The fruit vendor is a migrant from Afghanistan and was pushing his fruit cart every day during Ramadan, the Muslim holy month of fasting. His earnings are the same as the taxi driver. The vendor was reflecting that as summer was soon approaching, his daughter wished to buy a ceiling fan for her room as the room becomes unbearably hot. The ceiling fan would cost £20. He had waited a year to buy this and now because of the lockdown his hopes were dashed. The point is that such people can do without much and only ask for a little to survive. For them, less is truly more.

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After Coronavirus, we now have to deal with Debt Contagion

Meer & Co — Wed, 27 May 2020 08:44:23 +0000

How are the OECD countries, Australia, UK, Europe, and North America, going to deal with trillions of dollars of private and government debt amid very long term low or negative interest rates and severe economic stagnation?

Japanese Central Bank is close to monetizing its government’s external debt, essentially the JCB will print money and bail out the Japanese Government. The intergovernmental debts will be canceled or mutually written off in a big accounting consolidation exercise. This will lead to a further depreciation of the yen which has gradually halved since the ‘80s.

Europe would like to emulate Japan but unless there is both political and monetary union this is unlikely to happen. The next best thing is for the EU to have another massive bond bailout and kick the proverbial can down the road. The danger is as EU buys more time, it is giving rise to the ascent of nationalist and fascist fervor as evident in the success of various right-wing parties throughout Europe who are winning the populist votes. This then could lead to the breakup of the Union. Maybe the UK just got out in the nick of time, so as not to be around to be picking up the mess that it knew it will ensue from such a lesion.

The UK having parachuted is reliant on a service economy and net exports to the USA, Net exports of food, pharma, and works of art! Its best chance is to become the next Switzerland with a highly skilled and educated workforce and look for trade deals further afield in the old colonies of Africa, Asia, and even Iran which is a goldmine begging to be explored.

The US prides itself as a reserve trading currency and so its only choice, for now, is to resign itself to a very long period of low or negative interest rates, some restructuring and shedding of ‘zombie companies’ some 15% of the companies on the US stock market. The level of private corporate debt of non-financial US business has reached 50% of GDP and over two-thirds of that is of junk or BBB investment grade. The OECD has alerted its members to the dangerous widening credit spreads as a symptom of irresponsible lending and poor quality of loans a good chunk of which will be maturing in 2020 and 2021 amidst the global pandemic when there is no cash around.

Steam train grinding to a snail's pace

The SARS COVID 2 has brought the financial and economic steam train to a snail’s pace and affected supply chains ahead and it will be a painful task to heat the coal engines and climb out of the inflection curve. There will be a further deepening of the well of fiscal debts and cuts in social spending leading to a dangerous and further layer of the underclass and a police state style control of violence.

The global financial system collapsed in September 2008 at the time when Lehman collapsed which was gouged by the hungry liquidators. There was some stabilization by the fall of 2009 when the G20 and Basil Committee hastily issued several measures to reign in bank lending and derivative exposures to avoid a repeat of 2008 as if this wasn’t obvious before. The progress since 2008 has been painful and disappointingly slow and the IMF recently put out a report not to expect any sort of growth anywhere on the globe and we must get used to long periods of low real and nominal interest rates which are already at historical lows.

The invisible hand

Interest rates and inflation rates are below target. The ECB has a 2% inflation target, but the economy is going backward and even into negative rate territory. The French economy will lose 6 % of its GDP in Q1 2020, this against a net overproduction of 20 Mn barrels of oil even after OPEC + cut back 10M barrels. Even before the COVID 19 outbreak in January 2020, the IMF in its 2016 WEO update, was very pessimistic about economic forecasts. Before that, forecasts had been mysteriously optimistic, and each time been subsequently downgraded which begs the question, is there an invisible hand guiding the forecasters? Well, the cat is truly out of the bag now and some might say, it has run off with the bag!

If we were to examine the levels of private domestic credit of the 35 advanced OECD economies, that is corporates and household debt, we will find that that it has grown to 170% of GDP as compared to 70% in 1980 and 50% just after the second world war. This growth of debt has been taken up, not by productive business, but rather in the form of real estate lending and then a large part of that in existing real estate assets, so no new creation of property either. Property assets are an inelastic supply so fueled by expectant demand, it creates price ramping and a corresponding increase in credit an unearthly upward cycle which continues until optimism is replaced by lack of confidence from which point we begin a rapid downward spiral. Claudio Borio’s work, Head of BIS, shows that this is the sole reason for financial instability and economic crashes. This explains the crash in the ‘80s in Japan, in the ‘90s in Scandinavia and then in 2008 in the US, UK, Spain, and Ireland.

A Moving Target

What we discover is that debt never goes away, it simply migrates to other parts of the economy and also impacts other countries who rely on exports. This phenomenon is evident in the case of Japan, a most advanced economy, during the ‘80s to the ‘90s where heady opulence had replaced traditional frugality with stories of people being served coffee with gold dust, the largest real estate boom ever seen. The Nikkei 225 dived from 39,000 in January 1990 to 18,000 in June 1992. Even though there was cheap credit at zero interest rates on offer, the corporates who were overleveraged, decided to repay their debts eating into their reserves and cut back on investment spending. This behavior continued for two decades which pushed the Japanese economy over the cliff into recession. Public finances took a hammering as tax revenues fell and public expenditure and unemployment costs went up. Thus, the corporate debt simply mutated into the public sector which over the two decades increased from 60% to a whopping 240% of GDP. This was the same pattern for all emerging economies, corporate debt deleveraging followed by recession followed by ballooning fiscal debt.

The most dramatic increase has been in China which was a direct result of deleveraging in US household debt. Chinese debt ballooned from 140% of GDP in 2007 to 200% in 2016. And then China started pouring concrete into making bridges and roads funded by credit. Other emerging economies were also impacted by the deleveraging from private non-financial debt including Thailand, Indonesia, Malaysia, and Singapore where public debt ballooned to compensate for the effect on exports.

Sugar Rush

The problem with fiscal stimulus financed by debt is akin to an insulin injection to a diabetic, the efficacy wears out very quickly. This is what the G20 did in the Spring of 2009 when they agreed to support a large fiscal deficit with credit. However, once the sugar rush had subsidized, the economies started to worry about how to reduce the deficit and instituted austerity measures and so we ended up in a situation where we learned to accept the worst of both worlds, private debt deleveraging and austerity. The hands of the G20 were firmly tied, they could only go forward with tightening of fiscal policy, and ultra-loose monetary policy with 0% short term interest rates and long-term quantitative easing.

Squeezing the toothpaste

Companies and households already have high debt levels so they are insensitive to quantitative easing. There is a debate on which levers to apply which would have a transmissive effect on the economy. We have mentioned QE already. Other levers are reduction of interest rates to increase asset prices and encourage spending but after discussing Japan’s woes doesn’t this story sound familiar? Such a move would create more inequality and push more people out of homes. Then, how about reducing interest rates to maintain an export competitive economy? This is fine at a country level but just pushes the problem to another country and does nothing for the global economy which is a zero-sum equation. It is a bit like pushing down on one side of a tube of toothpaste with the lid firmly on, nothing will come out of the other end.

Socialist Samaritans

Although debt write off and debt restructuring is possible, many believe that this will deepen the recession and just create more debt and so will not work. Those same people argue that we are stuck with this debt forever unless we adopt alternative measures. The solution being proposed is Milton’s and Bernanke’s idea of getting the central banks to print money and give it to the governments to offset tax cuts and expenditure or to monetize existing government bonds. The banks then simply print money and give it to the government to pay off their IOUs. Simple as that. The major banks of the five largest economies are BoE, BoJ, The Fed, ECB, and PBOC Peoples Bank of China.
Consider the recent decision of the Bank of Japan, BoJ. on 16/3/2020, though stopping fiendishly close to monetization, announced monetary easing through the purchase of JGB’s, US dollar liquidity operations through swap line agreements, the taking over of 8 tn Yen of corporate debt (strictly loans against corporate debt), purchase of 2 tn of corporate bonds and just over 12 tn of Yen set aside to buy ETF’s and JREITS. In other words, wholesale nationalization.

So, when the capitalist screws up, the socialists become the Samaritans.

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