PwC human resource services

creating Value for your Business through People

IAS Global Watch

April 29, 2004

over the previous year corporation tax relief is

UNITED KINGDOM
In Brief
The 2004 Finance Bill was published on April
8, 2004. This year, the Finance Bill is
dominated by the new pensions law and the
rules on disclosure for tax planning
arrangements. However there is also good
news for some employee shareholders. In a
surprising development, employees who
acquire shares through the tax favored SIP
and SAYE plans will, from April 6, 2006, be
able to transfer those shares to registered
(formerly approved) pensions plans in a tax
effective way – good news for the
beneficiaries of such plans
Pension Reforms Registered schemes
The new simplified tax regime for pension
schemes takes up 160 pages of the Finance Bill
published today. Despite this volume the bill
does not cover a number of important areas
(including many international aspects) and there
will also be further regulations to expand on this
simplicity.
The main structure of the regime remains as
announced in the December 2003 consultation
document updated by the recent Budget.
However, although it is too early to analyse the
detail of the bill some interesting points emerge.
The individual member and the scheme
administrator will both be jointly and severally
liable for the recovery charge (now renamed the
lifetime allowance charge) on benefits above the
£1.5 million limit. This allows the Inland Revenue
to collect the tax from the scheme if the member
is not available, particularly if the member has
retired overseas and might claim tax relief under
a double tax-treaty.
The rules for spreading tax relief on employer
contributions to pension schemes are changed.
Where an employer contributes significantly
higher amounts (more than 210%) in one year
spread over a number of years.
Individuals will now also be able to transfer
shares from SAYE option schemes and share
incentive plans (“SIPs”) into registered pension
schemes within 90 days of acquiring the shares
and obtain tax relief, within the annual allowance,
for the amount transferred – see below. However,
the rules limiting self-investment by company
pension schemes to 5% of the scheme’s assets
appear to remain.
Non registered schemes
Although it was suggested there would be no
special regime for non-registered pension
schemes post A-day (no “son of FURBS”), the
Revenue has found the need to create Employer-
Financed Retirement Benefit Schemes
(“EFRBS”), which will have their own place in the
employee benefit scheme legislation. In principle,
the tax position of an EFRBS is as expected and
deceptively simple – no income tax on the way in
(whether funded or unfunded) and income tax
and a corporation tax deduction on the way out.
We await the National Insurance (“NIC”)
regulations to determine how NIC relief will be
available when EFRBS (but presumably not other
employee benefit schemes) pay out benefits in
the form equivalent to that of a registered scheme
(maximum 25% lump sum and balance as a
pension for life).
As expected, the cost of an employer “insuring”
against the risk of its insolvency in providing
EFRBS will be a taxable benefit on the employee.
There appears to be no detail on how that charge
should be apportioned over groups of employees.
In addition, there is uncertainty regarding what
constitutes insurance: whether insurance implies
a payment to a third-party to secure cover or
could include a prior charge over say, a factory.
There is no detail yet on how FURBS are to be
grandfathered so the decision on how best to
provide pension benefits both pre and post A-day
outside a registered scheme will require further
detail and analysis so as to maximize the benefit

PricewaterhouseCoopers International Assignment Solutions (IAS) is a special practice unit of tax professionals who
spend 100% of their time with consulting and compliance issues for international assignees. If you have any questions
concerning this Global Watch, or would like further information concerning our IAS capabilities, please contact Michael
Budnick, IAS Global Leader at (646) 394-3156.
pwc
Page 2
for the employee at minimum cost for the
employer.
International aspects
The Finance Bill generally ducks most of the
difficult pension issues for an internationally
mobile workforce. For UK nationals working
overseas it may be possible to remain in a
registered scheme without contributions made
whilst the employee is non resident counting
towards the lifetime allowance. The details are
extremely complex. However, §615 schemes for
UK nationals working overseas appear to have
won a stay of execution and would often still be
the more attractive option compared with
continued membership of a registered scheme.
For foreign nationals working in the UK there are
no details on how the proposed new migrant relief
will apply or indeed whether the existing
corresponding acceptance regime will continue
after April 6, 2006. However, we understand that
the Revenue continues to consider this highly
complex area (including the impact for
International Pension Plans) and we await further
developments.
Provision to transfer SAYE and SIP shares to
registered pension schemes
One of the welcome developments in the draft
legislation on pension reform is a provision
allowing employees to transfer shares acquired
through a Save As You Earn (SAYE) option plan
or a Share Incentive Plan (SIP) to a registered
pension plan and claim income tax relief for the
market value of the shares. This opportunity will
be available from April 6, 2006.
For shares acquired on the exercise of an option
issued under an SAYE option plan, the normal tax
treatment is that the employee is not subject to
tax on exercise but pays capital gains tax on the
eventual sale of the shares. Similarly, shares
acquired under a SIP (if held in the plan for 5
years) are not subject to income tax when
withdrawn from the plan. This, in effect, is likely to
amount to some double income tax relief;
employees pay no income tax on the acquisition
of the shares but obtain income tax relief for the
contribution. The shares will then benefit from the
tax advantages afforded to other contributions to
the pension plan, eg tax-free growth.
PricewaterhouseCoopers International Assignment Solutions (IAS) is a special practice unit of tax professionals who
spend 100% of their time with consulting and compliance issues for international assignees. If you have any questions
concerning this Global Watch, or would like further information concerning our IAS capabilities, please contact Michael
Budnick, IAS Global Leader at (646) 394-3156.
IAS Global Watch
April 29, 2004
In order to obtain relief, shares must be
transferred to a registered pension plan within 90
days of the SAYE option exercise or the date an
employee instructs the SIP trustees to transfer
the shares out of the SIP. Shares transferred in
this way will count towards the overall limit on
contributions.
Previously, such transfers were only permitted
into approved personal pension plans. This will
now extend to all registered plans, providing
employees with greater flexibility in relation to the
way they use the various wealth creation vehicles
offered by their employer.
Early disclosure of arrangements involving a
tax advantage that is the main, or one of the
main, benefits to be expected to arise from the
arrangements
In his Budget Speech, the Chancellor announced
the introduction of proposals for the disclosure
and registration of certain arrangements involving
a tax advantage.
At first glance, that part of the Finance Bill headed
“Disclosure of Tax Avoidance Schemes” appears
short. This is because the rules on the scope of
the new law will be introduced by regulation. For
example, arrangements that enable a tax
advantage to be obtained are not covered by the
early disclosure requirement unless they are of a
particular type that will be prescribed by
regulation.
Hopefully, the draft regulations will be available
shortly. In the meantime, the Inland Revenue’s
regulatory impact assessment (RIA), that was
also published today, notes that there is a
preference for narrowly targeted disclosure
requirements and that, as a first step, the two
targeted areas will be arrangements involving an
Employment Product or a Financial Product. We
do not yet know how each of these is to be
defined and therefore the extent to which either of
them may have an impact on employee reward.
The RIA also emphasizes that whether or not an
arrangement achieves its intended tax effect
remains a matter of tax law. Broadly, the
objective of the early disclosure rules is to enable
the Inland Revenue to act more quickly than in
pwc
Page 3
the past to counteract arrangements that are
perceived to be inconsistent with Government tax
policy objectives or produce a result that
Parliament did not intend.
Income tax relief for Employer’s NIC on
restricted and convertible securities
Since 2000, employers have been able to agree
or jointly elect with employee option-holders that
the secondary Class I NIC liability arising on
option exercise will be paid by the employee. This
facility is being extended to cover restricted and
convertible employment related securities by the
National Insurance Contributions and Statutory
Payments Bill 2004, currently going through
Parliament. Once that Bill becomes law,
employers will be able to agree or jointly elect
with their employees that they will bear the
employer’s NIC liability arising on post-acquisition
income tax charges.
The Finance Bill provides income tax relief by
allowing employees to deduct the amount of any
Employees Class I NIC they paid.
Enterprise Management Incentive schemes
Enterprise Management Incentive (“EMI”)
schemes are a tax-favored employee share
option arrangement introduced by the
Government in 2000. It is aimed at smaller,
higher risk companies, to help them recruit and
retain key workers. It allows qualifying
companies to grant options over shares worth up
to £100,000 per employee, up to an overall
maximum of £3m for each company.
As expected, legislation is being introduced to
relax the qualifying subsidiary rules. Since EMI
was first introduced, the parent company of a
corporate group could only grant EMI options if all
of its subsidiaries were at least 75% owned by
that parent. Under the new legislation, for options
granted on or after March 17, 2004, options will
be able to be granted by a parent of a group,
provided all subsidiaries are more than 50%
owned by that parent.
There is an exception to this rule for subsidiaries
that are property management companies, which
will need to be 90% owned and controlled.
PricewaterhouseCoopers International Assignment Solutions (IAS) is a special practice unit of tax professionals who
spend 100% of their time with consulting and compliance issues for international assignees. If you have any questions
concerning this Global Watch, or would like further information concerning our IAS capabilities, please contact Michael
Budnick, IAS Global Leader at (646) 394-3156.
IAS Global Watch
April 29, 2004
This relaxation will widen the availability of EMI to
more groups of companies.
Discretionary trusts
The rates of tax paid by trustees are to be
changed with effect from the 2004/2005 tax year
and this will affect employee benefit trusts that
are tax resident in the UK or receive UK source
income. The rate of tax for dividends will change
from 25% to 32.5% and the general rate of tax for
discretionary trusts will increase from 34% to
40%.
Other employee tax changes
Changes are being introduced to provide tax
exemptions from benefit-in-kind charges for
employer-provided childcare.
In addition, there will be a relaxation in the
taxation of computers loaned to employees by
their employers.
Finally, the rules for employer provided vans are
being changed, including an increase in the
charge when an employee enjoys unrestricted
private use of a van.
Conclusion
Although much of what we see in the 2004
Finance Bill was announced in the Chancellor’s
Budget speech on 17 March 2004, and
subsequent press releases, there is
approximately 300 pages of detailed legislation to
plough through. It does help with getting more
clarity around the pension issues and what is
envisaged with regard to the new disclosure rules
for tax planning arrangements. However the
practical issues around how these changes will
operate will only become clear over time. Allowing
employees to transfer SIP and SAYE shares to
registered pension schemes is likely to give these
plans a boost, particularly when some companies
have been re-considering their future use in the
light of the introduction of the new accounting
rules.
pwc IAS Global Watch
Page 4 April 29, 2004

Should you require further information please

contact one of the following or your usual
PwC contact.

Michael Rendell +44 (0) 20 7212 4945

e-mail: michael.g.rendell@uk.pwc.com

Jon Terry +44 (0) 20 7212 4370

e-mail: jon.p.terry@uk.pwc.com

Carol Dempsey +44 (0) 20 7212 4641

e-mail: carol.dempsey@uk.pwc.com

Graham Ward-Thompson +44 (0) 113 289 4919

e-mail: graham.l.ward-thompson@uk.pwc.com

Claire Wesley +44 (0) 20 7213 1624

e-mail: claire.e.wesley@uk.pwc.com

Richard Hutchinson +44 (0) 20 7212 8403

e-mail: richard.hutchinson@uk.pwc.com

Paul Scarborough +44 (0) 1895 275045

e-mail: paul.scarborough@uk.pwc.com

Trevor Llanwarne +44 (0) 20 7804 2762

e-mail: trevor.llanwarne@uk.pwc.com

John Shuttleworth +44 (0) 20 7212 4812

e-mail: john.l.shuttleworth@uk.pwc.com

George Yeandle +44 (0) 20 7212 4638

e-mail: george.r.yeandle@uk.pwc.com

Note: This bulletin is designed for the

information of readers. Whilst every effort has
been made to ensure accuracy, information
contained in this bulletin may not be
comprehensive or may not yet be passed into
law. Recipients should not act upon it without
seeking professional advice.

PricewaterhouseCoopers International Assignment Solutions (IAS) is a special practice unit of tax professionals who
spend 100% of their time with consulting and compliance issues for international assignees. If you have any questions
concerning this Global Watch, or would like further information concerning our IAS capabilities, please contact Michael
Budnick, IAS Global Leader at (646) 394-3156.