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VAT reverse charges – are you exposed despite being an FS business?

The 2018 Autumn Budget retained Entrepreneurs’ Relief (ER), which gives a reduced rate of Capital Gains Tax of 10% when certain conditions are met. However, we did see the Chancellor announce two changes to ER relating to share rights and the required ownership period aimed at restricting the availability of ER on shares. The announced changes can be viewed in our article “The top 3 personal finance implications: Autumn Budget”.

In a welcome pre-Christmas announcement the government released amendments following consultation with professional bodies which appear to improve the position where a company has different of shares classes but the different classes have essentially the same rights except for the ability to pay different dividends, often referred to as alphabet shares.

Based on the most recent amendments, the ER shareholding conditions (effective from 29 October 2018) are:-

  1. A holding of at least 5% of the ordinary share capital measured by nominal value;
  2. A beneficial entitlement to 5% voting rights by reason of those shares; and
  3. A beneficial entitlement to either:
    (i) 5% assets on winding up and entitlement to 5% distributable profits, or
    (ii) in the event of a disposal of the whole of the ordinary share capital of the company, beneficial entitlement to at least 5% of the proceeds.

The new third condition looks to tighten the rules so that eligible shareholders have entitlement to 5% of the “economic value” of the company. However, by introducing the proceeds test at 3(ii) in the most recent amendments the new conditions should now be less of a problem for share structures with multiple shares classes to allow dividend planning, provided those shareholders are entitled to at least 5% of the proceeds on sale of the company.

What could the changes mean to you?

The changes announced could mean that if your company has multiple share classes you may no longer qualify for ER when you dispose of your shares.

In particular, if you have ‘growth’ shares (where you only receive a proportion of the value over and threshold level) you may well not be entitled to 5% of the proceeds on a sale, and so under the new amended rules would not qualify for ER.

If you have ‘alphabet’ shares where the only difference between the shares is the ability to pay different dividends then you should continue to qualify for ER if you will be entitled to receive at least 5% of the proceeds in the event of a sale.

As the draft legislation will also extend the qualifying period for ER conditions from 12 months to 24 months for disposals made on or after 6 April 2019 if any changes do need to be made to share rights it will be two years before a disposal of affected shares could qualify for ER.

What now?

We will need to wait for further detailed guidance and amendments to the draft legislation from government before we can confirm whether and to what extent individuals will be impacted.

If you are concerned this may impact you or your business please do contact your adviser or speak to one of our tax specialists to discuss further.

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