There were two items of relevance to Enterprise Management Incentive (EMI) share option schemes in the Budget.
First, at last year’s Budget, the Government announced a review of the EMI scheme with particular focus on whether access should be broadened to help support high growth companies to attract and retain talent. The Government has now announced a call for evidence to look at whether and how to expand the scheme.
EMI schemes are currently only available to companies and groups with less than £30m of assets and fewer than 250 employees (on a full-time equivalent basis). In addition, there is a cap on the value of shares under option of £250,000 per person. These restrictions, which have been place for many years, significantly limit the use of EMI schemes, including many start-up and fast-growing businesses. Given the importance of attracting, incentivising and retaining talent for businesses that may not have available cash to pay large bonuses or top of the range salaries, the expansion of the EMI schemes seems ever more acute.
Secondly, provisions were included in Finance Act 2020 and draft Finance Bill 2021 to protect the interests of eligible employees and EMI option holders who cease to meet the EMI working time requirements because of the Covid-19 pandemic. Without this protection, employees whose working hours were reduced because of Covid-19 would not be eligible to be granted EMI options, and a disqualifying event would occur in relation to their existing EMI options. These provisions were initially intended to last until 5 April 2021 but have now be extended to 5 April 2022.
Off-payroll working rules/IR35 came into force on 6 April 2021
As generally expected, there has been no further delay to the off-payroll working (IR35) rules that finally came into force on 6 April 2021. Some contractors had been hopeful that the Government would provide a last-minute reprieve, however, it would have been surprising if the rules had been delayed any further.
In response to feedback, the Government has announced some minor changes to the wording of the underlying legislation. For example, to prevent end-users of contractors from facing liabilities when they reasonably relied on information provided to them (by UK-based parties) which later turned out to be fraudulent. None of these changes are, however, expected to have any significant impact on the majority of businesses.
We comment on the new rules in more detail in our IR35 article later in this spring update.
Income tax: The personal allowance was frozen and the thresholds at which higher and additional rate tax are charged are remaining unchanged (until 2026). Rates are also unchanged.
National Insurance contributions (NICs): The earnings threshold for NICs will remain at £9,500 for the 21/22 tax year. These contributions are normally payable alongside income tax by employers and employees when share awards vest or are exercised.
Capital gains tax: The personal allowance of £12,300 is also not changing for the 21/22 tax year.
Corporation tax: Corporation tax for the 21/22 tax year will remain at 19%. However, the top rate of corporation tax for larger companies will be increased to 25% by 2023 with a new small company rate of 19% applying to smaller businesses. ‘Super deductions’ will be available for certain types of growth generating investments.
Benefit in kind rate: On 4 March 2021, regulations were made to reduce the official rate of interest used to determine the taxable benefit of certain employment-related loans from 2.25% to 2.00% with effect from 6 April 2021. To the extent that interest charged on an employment-related loan is less that this official rate, a notional benefit arises, which is chargeable to income tax and NICs.
The UK trust register
Under the UK’s anti-money laundering obligations, there is a requirement for certain trusts - which can include employee benefit trusts (EBTs) - to register themselves on the UK trust register (the Register). The obligation to register applies to "relevant trusts" and "taxable relevant trusts", of which an EBT may be either or both:
- a “relevant trust” is one which is either UK resident, or non-UK resident but with UK source assets or income on which it is liable to UK tax; and/or
- a “taxable relevant trust” is one where the trustees are liable to pay UK taxes in relation to trust assets or income.
While the trustee of a non-UK resident employee benefit trust which is not liable to UK tax is not obliged to register, the trustee may want to do so voluntarily so as to avoid unintentionally failing to do so, if a liability should arise.
Currently, trustees of trusts which fall within the registration scope must notify HMRC through the online trust registration system (the TRS) when they are established and are required to retain and provide specified information to HMRC. This information may include up-to-date records of all beneficial owners of the EBT (including the settlor, the trustees, the beneficiaries, the class of persons in whose main interest the EBT is set up or any individual who has control over the EBT) and any potential beneficiaries. Such trusts will also be required to notify HMRC of any changes to the trust register information.
The UK government is now planning to implement the Fifth Money Laundering Directive (the MLD5) which would significantly broaden the scope of trusts that will be required to comply. Registration obligations will no longer be limited simply to trusts subject to UK tax, and may also include non-EU resident trusts. It is likely that many trusts which do not constitute “relevant taxable trusts” may need to register under the new rules.
What are the changes?
Aside from broadening the scope of the trusts which will fall within the requirement to register, the MLD5 will impose several additional compliance requirements on trustees:
- trusts which are already registered on the TRS may be required to provide supplementary information regarding their beneficial owners;
- the information on the Register will now be made publicly available (where a legitimate interest for accessing that information can be shown). Previously all information was only accessible to government authorities and law enforcement agencies;
- trustees must now meet a new deadline of 30 days from the establishment of a trust or from the date of any changes to the trust register information for notifying HMRC; and
- trustees must provide details of the trust’s beneficial ownership to any service provider with whom they enter into a business relationship.
It is envisaged that the new legislation will come into force on 10 March 2022. At this point, any trusts which fall within the broadened scope will be required to register through the TRS and any trusts already registered may be obliged to provide additional information. HMRC is expected to provide further guidance in due course.
Businesses hoping for a second delay to the reform of the IR35 rules will have been disappointed by the Chancellor’s budget day confirmation that the changes would go ahead as planned. Minor tweaks to the rule changes have been made, but these were limited to clarifications to the law and a tightening of the anti-avoidance provisions.
Under the reform, as of 6 April 2021, businesses classified as “medium and large” are required to assess all engagements with contractors, to determine whether that contractor is effectively performing services as a “deemed employee”. Payments made to any such deemed employee should be subject to PAYE and National Insurance withholding (as well as employer National Insurance).
As well as the potential additional National Insurance costs (and the economic impact for the contractors), this adds administrative burden to businesses who are required to demonstrate they have taken “reasonable care”, by assessing all contractor arrangements and issuing “status determination statements” to all contractors, informing them of their employment status for tax purposes.
They may also face the prospect of contractors, who are now “deemed employees” for tax purposes, requesting benefit entitlements on par with other employees of the business (including holiday pay and sick pay). While the recent Supreme Court decision in Uber has not aligned employment status for tax law and employment law purposes, we expect this to be an area subject to further reform in years to come. More information about the Uber decision can be found here.
Companies should be aware of certain tax risks that arise as a result of employees working from outside of the UK, even if on a limited basis.
Payroll taxes and employee liabilities
An employee may face an additional income tax liability on their earnings. In the absence of an applicable tax treaty exemption, the second jurisdiction may have the right to tax income earned while the employee is located in that jurisdiction.
Additionally, social security liabilities generally arise in the jurisdiction in which the employee performs work duties. This liability may be an employer cost as well as one for an employee. Where an employee works in more than one jurisdiction or is based in a jurisdiction for a temporary period, the social security position can be more complex.
With employment tax liabilities, employer reporting obligations, such as the operation of payroll and withholding, may also arise, and tax authorities have shown little appetite for coronavirus-related relaxation in this area.
Accidental foreign branches
Where there is a tax treaty in place between the company’s jurisdiction of residence and the second jurisdiction, the income arising to the company from the employee’s activities should not generally be subject to tax in the second jurisdiction unless the employee’s activities constitute a “permanent establishment” (PE) of the company.
What constitutes a PE depends on the relevant treaty, but generally a PE risk arises if an employee’s activities involve any of the following, particularly if such activities are habitual rather than temporary:
- working in a fixed place of business. This generally means a place through which the business is wholly or partly carried on and requires a certain degree of permanency;
- acting as a dependent agent, for example if the employee is habitually contracting on behalf of the company; or
- performing services for over 183 days in a 12-month period.
Where the employee’s activities do constitute a PE, the company will gain a taxable presence in an unintended jurisdiction. The company will then have to register for tax purposes in the second jurisdiction, file tax returns and pay corporation tax on profits attributable to that PE.
Companies can become resident in the “wrong” jurisdiction
A further issue can arise for a company if an employee’s activities affect its jurisdiction of tax residence, which is dependent on where the company’s central management and control is exercised. Virtual board meetings can be a source of risk where directors dial in from the “wrong” jurisdiction, especially if this is done repeatedly over a significant period of time.
Such a change in tax residency exposes a company to the risk of losing access to a specific tax treaty and a potential exit charge when the company ceases to be resident in the original jurisdiction.
Companies may wish to consider implementing certain practice points for monitoring and recording employees’ working arrangements (particularly for those employees who have strategic roles), obtaining local tax advice and updating company policies in relation to overseas working arrangements.
The new Investment Firm Prudential Regime (IFPR) is due to come into effect on 1 January 2022 and will apply to all firms authorised by the FCA under the Markets in Financial Instruments Directive (MiFID) as well as regulated and unregulated holding companies of groups that contain one or more of these firms. The purpose of the IFPR is to replace the 11 regimes currently applicable to these firms with a single harm focused (rather than risk focused) regime which, for many in-scope firms, will simplify their current prudential obligations.
On 19 April 2021, the FCA issued its second consultation paper on the IFPR (CP 21/7). The second consultation paper follows the FCA’s discussion paper (DP20/2) (in June 2020) and the first consultation paper (CP 20/24) (in December 2020). The third, and final, consultation paper is scheduled for early Q3 of this year and will cover disclosure and consequential amendments.
The recently issued second consultation paper is more comprehensive and introduces draft text to the new prudential sourcebook, MIFIDPRU and changes to other parts of the FCA handbook and – importantly - the new proposed remuneration code (to be called the MIFIPRU Remuneration Code).
Under the new rules, firms will have to apply remuneration requirements that fall into three categories:
- “basic” remuneration requirements for small investment firms (i.e. the small and non-interconnected firms or SNI firms). The rules comprise the least onerous remuneration requirements such as having a clearly documented gender-neutral remuneration policy and complying with certain governance and oversight requirements;
- non-SNI firms that fall below certain thresholds will have to apply the “standard” remuneration requirements which include identifying material risk takers (MRTs), setting an appropriate ratio between variable and fixed remuneration and applying appropriate risk adjustment (malus and clawback) terms to awards of variable remuneration; and
- for large non-SNI firms, “extended” remuneration rules will apply, including more stringent requirements in respect of deferral, payment in instruments, retention and treatment of discretionary pension benefits. Large non-SNI firms will also need to establish a remuneration committee.
The new remuneration rules will apply from 1 January 2022 or the first performance year beginning after that date, if later. We are producing a detailed client note on all the requirements and how they should be implemented. Please do get in touch with us now if you would like a copy of this.
The Hampton-Alexander review, led by Sir Philip Hampton, has published its fifth annual report on gender balance on the boards of FTSE companies. The report provides a summary of improvements FTSE companies have made over the last five years.
The review had originally established a target of 33% female representation on FTSE 350 boards by 2020. The report reflects on that target and sets some ambitious new recommendations for further improving gender balance on FTSE boards.
The key points coming out of the report are as follows:
- as a mark of progress made, women now make up around 40% in aggregate of non-executive directors on FTSE 350 boards, and there are no longer any all-male boards;
- despite this, 32 FTSE 100 companies and 139 FTSE 250 companies had yet to achieve the target of 33%, and so the challenge of compliance remains;
- women account for only 14% of executive directors, highlighting a continuing underrepresentation of women among senior executives; and
- women also made up only 39 chairs, 89 senior independent directors (SIDs) and 17 CEOs across the FTSE 100, again suggesting that work is required to promote women in leadership positions.
The review steering group has made the following recommendations moving forward into 2021:
- as a matter of best practice, a company should have a woman in at least one of the four roles of chair, CEO, SID and CFO;
- companies should publish a gender pay-gap for their board and their executive committee in order to “shine a light” on the structural subordination of women on most boards and excoms; and
- the Government should conduct an annual review with the Investment Association and other investor groups of any voting sanctions applied to listed companies that fail to meet the gender targets they have set.
Some members of the steering group also support raising the existing target of 33% to a new target of 40%. The group stops short of making a formal recommendation along these lines, but Sir Philip notes that a goal of 40% may well be the right target for any successor review over the next three years.
The fifth report marks the end of the formal Hampton-Alexander review. Sir Philip notes that whether another review is established will be a matter for ministers, and that, if there is to be a successor review, it should focus strongly on the executive level.
On 24 February 2021, the Investment Association (IA) issued an addendum to its guidance on “shareholder expectations during the Covid-19 pandemic”, clarifying the IA’s guidelines relating to long term performance targets.
The first iteration of this guidance was released in April 2020, with a further update in November 2020. The new addendum published in February acknowledges that the ongoing economic effects of the pandemic continue to hinder the selection of appropriate performance targets in long term incentive plans.
In light of this, the IA have reinstated the ability of remuneration committees to delay setting performance conditions in their long-term plans “for a reasonable period of time” (but no more than six months), until they have greater clarity as to the continuing impact of the pandemic. Remuneration committees also have the option to delay LTIP grants, and to shorten the usual three-year performance period by up to six months (as long as they provide an explanation for doing so, reduce grant sizes accordingly, and have adequate post-vesting holding provisions in place).
Similar provisions were included in the IA’s original guidance released in April 2020, but not in its updated guidance in November. The reinstatement of this flexibility for remuneration committees represents an acknowledgement from the IA that there is still enough uncertainty to make it difficult to set appropriate long-term requirements.
However, unlike the April 2020 guidance, the recent statement is now limited to those companies who have been “significantly impacted” by the pandemic, and it includes a new requirement for companies to publish the applicable performance conditions via an RNS as soon as possible after they have been determined. These additional requirements reflect the fact that, although some uncertainty remains, the situation is vastly different to what it was a year ago.
The message from the IA is clear. These options are available to companies that are still in need of them, but long-term incentive plans should be operated normally as far as it is possible to do so.
In March, the department for business, energy and industrial strategy (BEIS) launched a new consultation on proposals to strengthen UK corporate governance, audit and reporting.
Amongst the proposals were recommendations to toughen malus and clawback provisions within executive directors’ remuneration arrangements. In particular, the proposed changes include:
- introducing a minimum two-year “application period” for clawback and malus provisions; and
- identifying a list of triggers that must be applied in all cases as a minimum.
The consultation mentions certain triggers which should be featured in the proposed list, namely: material misstatement of results or an error in performance calculations; material failure of risk management and internal controls; misconduct; conduct leading to financial loss; reputational damage; and unreasonable failure to protect the interests of employees and customers.
Observers will note that the proposed list bears resemblance to the malus and clawback triggers required for banks and credit institutions under the existing regulatory remuneration code requirements under the PRA’s rulebook and the FCA handbook.
BEIS proposes inviting the FRC to implement these through an update to the UK Corporate Governance Code. The practical effect of this is that the new rules, like other corporate governance code requirements, will operated on a “comply or explain basis” for premium listed companies.
The BEIS consultation closes on 8 July 2021.