This Update contains a round-up of key developments in this area during July 2015.
- The Government has issued a consultation document on the simplification of the income tax and national insurance treatment of termination payments
- "Reasonable excuse" for late filing of annual share scheme returns
- CORPORATE GOVERNANCE
- Proposed amendments to the Shareholders' Rights Directive (Directive) – summary of the remuneration issues
- FINANCIAL SERVICES
- Prudential Regulatory Authority (PRA) makes changes to its remuneration webpage
- European Securities and Market Authority (ESMA) issues consultation paper on remuneration principles under the UCTIS V Directive and revisions to the guidelines on sound remuneration policies under the AIFM Directive
Simplification of the income tax and national insurance treatment of termination payments
The Government has launched a consultation on reforming the income tax and national insurance exemptions for termination payments. The consultation has the stated aim of giving employees certainty about the amount of money they will receive when they lose their jobs whilst, at the same time, simplifying the current position making it easier for employers and HM Revenue & Customs to administer.
Current position: When an employer makes a termination payment to an individual, broadly speaking, the elements of the payment that are from the employment (for example, payments in respect of accrued but untaken holiday) or that the individual is contractually entitled to (for example, a payment in lieu of notice (PILONs) under the terms of the employment contract), are subject to income tax and national insurance contributions (NICs).
In contrast, the elements that are not from the employment are only liable to income tax in respect of any amount exceeding £30,000. No employer's or employee's NICs are payable on these elements whatever the amount.
In addition, there are various other exemptions which apply to termination payments. These include payments made on termination of employment due to death, injury or disability, payments made under a tax exempt pension scheme, payments made to a registered pension scheme, payments made where the employee has a certain type of foreign service and payments by the employer of certain legal costs incurred by the employee.
Proposed changes: In summary:
- The distinction between the income tax and NICs treatment of contractual and non-contractual payments should be removed.
- A new exemption from income tax and NICs should be introduced. This will increase proportionately with the number of years' service with the exemption applying only once the employee had completed 2 years of service (Termination Exemption).
- The Government is also considering that, rather than the Termination Exemption applying to all termination payments, it should only apply to termination payments made where the employee is made redundant.
- In respect of the existing exemptions, the Government intends to retain the exemption in respect of payments made on termination of employment due to injury or disability (although it does not specifically refer to retaining the exemption in respect of payments made on termination of employment due to death) but to remove the foreign service exemption. It is seeking stakeholders' views on whether any of the other exemptions should be retained.
- If the Government proceeds with the proposal to link the exemption from income tax and NICs to payments made where the employee is made redundant, it intends to introduce two new exemptions in respect of payments made in connection with wrongful or unfair dismissal and in respect of compensatory payments made in cases of discrimination. It is consulting on whether these exemptions should be subject to a financial cap and whether payments that have been settled by a tribunal should be treated differently to those made under a settlement agreement between an employer and the employee.
Comment: There will certainly be both winners and losers under the proposed changes. Employees with less than 2 years' service will not benefit from the Termination Exemption and, potentially, payments made to those who lose their jobs for reasons other than redundancy will be taxed in full. The consultation gives no clue as to the rate at which the Termination Exemption will apply or the amounts by which it will increase depending on service – much will depend on the actual rates set in determining the extent to which the proposed changes are merely a cost saving measure by the Exchequer.
The proposal to exempt payments made in connection with wrongful or unfair dismissal is helpful but much will depend on the amount of any financial cap and whether this will include payments made under a settlement agreement as well as those settled by a tribunal.
In our experience, the current position is relatively straight forward and readily understood by clients. The only areas of uncertainty tend to be those where HMRC policy or practice is unclear or has been subject to change; policy in respect of PILONs being a good example of this. We are therefore cautious about changing this area of law for a number of exemptions which, at best, do not appear to lead to greater tax simplification.
The consultation is open for comments until 16 October 2015. A copy of the consultation paper can be found here.
"Reasonable excuse" for late filing of annual share scheme returns
As we have stated in previous Employee Incentives Updates, the deadline for submitting annaul returns in respect of employee share schemes for the tax year 2014/15 was 7 July 2015. However, this is the first year where all such returns had to be submitted online and, due to technical errors in the online system, HMRC extended the deadline to Tuesday 4 August.
Whilst this extended deadline has now past, HMRC has stated that it will not impose penalties on taxpayers who miss the deadline if they have a reasonable excuse (provided they submit the returns at their earliest opportunity). HMRC sent an email to advisers and professional bodies stating that they will regard holiday commitments as a reasonable excuse.
Proposed amendments to the Shareholders' Rights Directive – remuneration issues
On 8 July 2015, the European Parliament resolved to adopt amendments to the Commission's proposal to alter the provisions of the Directive. By way of background, the Directive aims to improve corporate governance in EU companies traded on regulated markets by enabling shareholders to exercise their voting rights and their rights to information across EU borders
The Commission's original proposal to alter the Directive (published in April 2015) included, amongst other things, a requirement that companies must disclose their remuneration policy and set out in their remuneration report the remuneration of individual directors, with shareholders having the right to approve the remuneration policy and to vote on the remuneration report. Subject to a limited exception in case of new board members, companies may only pay directors in accordance with the policy approved by shareholders.
The European Parliament's amendments to the Commission's proposal are summarised below and, although many of the amendments mirror those already required under UK law for UK listed companies, they do go further in a number of respects:
- The definition of directors has been expanded for the purposes of the Directive and includes chief executive officers and deputy chief executive officers, where they are not members of administrative, management or supervisory bodies (in addition to any member of the administrative, management or supervisory bodies of a company).
- Member states must ensure that the value of shares does not play a dominant role in the financial performance criteria.
- Member states must ensure that share based remuneration does not represent the most significant part of directors' variable remuneration, although there may be exceptions on the condition that the remuneration policy includes a clear and reasoned explanation as to how such an exception contributes to the long-term interests and sustainability of the company. If this were to become law in the UK, UK plcs may need to rely on this exception.
- Where shareholders reject the draft policy submitted to them, the company may, while reworking the draft and for a period of no longer than one year before the draft is adopted, pay remuneration to its directors in accordance with existing practices (where there was no previous remuneration policy) or with its existing policy (where there was one).
The alterations to the Directive must be adopted under the ordinary legislative procedure. The Parliament, Council and Commission are expected to shortly enter into discussions to try to reach an agreement, so that the amended Directive can be formally adopted at first reading by both the Parliament and Council.
PRA makes changes to its remuneration webpage
On 1 July 2015, the PRA updated its dedicated remuneration rules webpage as follows:
- New information is provided relating to the data on high earners that firms are required to submit. A set of instructions has been published to assist firms with completion of the high earners report.
- A statement has been added regarding a new requirement for firms with an accounting reference date on or after 30 June 2015 to submit their high earners' data through GABRIEL, the regulatory reporting system.
- A new remuneration policy statement (RPS) table has been added - "RPS Table 8: material risk taker exclusions". The table relates to Delegated Regulation 604/2014 setting out regulatory technical standards (RTS) on criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile (material risk takers or MRTs). Under Article 4(4) and (5) of the Delegated Regulation, firms are required to apply to their prudential regulator for approval to exclude staff earning EUR750,000 or more in the last financial year and to notify their decision to exclude staff earning between EUR500,000 and EUR750,000. The table contains two templates (together with their respective supplementary worksheets) - Table 8a deals with application for prior approvals of MRT exclusions for staff members earning EUR750,000 or more and Table 8b deals with the notification of MRT exclusions for staff members earning between EUR500,000 and EUR750,000. Firms are required to complete the templates for all submissions to the PRA under Article 4(4) and (5) of the Delegated Regulation.
ESMA issues consultation paper on remuneration principles under the UCTIS V Directive
The UCITS V Directive provides that ESMA must issue guidelines addressed to competent authorities or financial market participants concerning the application of the remuneration principles set out under Article 14b of the UCITS Directive.
ESMA has now issued a consultation paper which represents the first step in the development of the guidelines on remuneration policies required by the UCITS V Directive and sets out ESMA’s formal proposals for the guidelines.
The consultation paper also proposes a targeted revision of the guidelines on sound remuneration policies under the AIFM Directive which were originally published on 3 July 2013.
A copy of the consultation paper can be found here. The closing date for comments is 23 October 2015.
ESMA aims to publish the final version of the UCITS remuneration guidelines together with a final report by the first quarter of 2016. The UCITS V transposition deadline is 18 March 2016. The final report is expected to include the final revised AIFMD remuneration guidelines.