Incentives Bulletin - 18 May 2018

Welcome to the May edition of our Incentives Bulletin, updating you on the latest developments in remuneration and shares schemes. This month, we look at the EBA’s report on remuneration trends across the EU and consider the decision of the Upper Tribunal on CGT treatment of options capable of alternative settlement. We provide an update on the approval of state aid for EMI options and the latest guidance on the use of consent under GDPR, and conclude with a timeline of key dates in employee incentives coming up in the near future. EBA report on remuneration practices across EU Summary and key practice point: The European Banking Authority (EBA) has published a report 'Benchmarking of remuneration practices at the European Union level and data on high earners’. The report covers remuneration practices in EU banks for the financial years 2015 and 2016 and high earners data for 2016. More detailed analysis/commentary: The report shows that in 2016 (by comparison with 2015):  The number of high earners in EU banks receiving a remuneration of more than EUR 1 million decreased by 10.6% (from 5,142 to 4,597). However, the report notes that the change was mainly driven by changes in the exchange rate between EUR and GBP, which led to a reduction of staff income paid in GBP when expressed in EUR. (This also reflects the fact that the largest number of these earners are in the UK.)  For high earners, the average ratio between the variable and fixed remuneration continued to decrease from 118% to 104%. This reflects the continuing effect of the bonus cap limiting the ratio between variable and fixed remuneration to 100% (or 200% with shareholder approval). Contents  EBA report on remuneration practices across EU  Tax treatment of share options capable of alternative settlement  State aid approval for EMI options  GDPR: guidance from the ICO on use of consent  Horizon scanning Incentives Bulletin Incentives Bulletin 3  The same holds true for the ratio between the variable and fixed remuneration of all other identified staff, which decreased from 62.2% to 57.1%.  As in previous years, remuneration practices within institutions were not sufficiently harmonised. In particular, the application of deferral and pay out in instruments differed significantly across Member States and institutions. The report found this was mainly due to differences in the national implementation of CRD IV, which in many cases allows for waivers of these provisions when certain criteria are met.  The number of individuals whose professional activities have a material impact on an institution's risk profile (‘identified staff') and who are identified in accordance with the criteria set out in the EBA's regulatory technical standards (RTS), decreased by over 21%, from 67,802 to 53,382. The EBA will continue to benchmark remuneration trends every two years. For the performance years 2017 and 2018, the EBA will publish a benchmarking report at the beginning of 2019. The EBA will continue to publish data on high earners annually to monitor and evaluate developments in this area. In addition, the EBA will review the application of the RTS on identified staff. Tax treatment of share options capable of alternative settlement Summary and key practice point: What is the base cost for capital gains tax (CGT) purposes of shares acquired on exercise of an option, where the terms allow exercise of the option to be satisfied in a number of different ways (including cash settlement)? The Upper Tribunal held that section 144ZA of the Taxation of Capital Gains Act 1992 (TCGA) will apply to employee share options, even where the terms do not strictly ‘bind the grantor to sell’ as required by section 144ZA(2), e.g. where the grantor has a choice whether to satisfy the exercise of the option by delivery of shares or payment of cash. As a result, the base cost for CGT purposes will be the exercise price and the amount charged to income tax on exercise, and not the market value of the shares on acquisition. (Davies v Commissioners for HMRC) Facts and decision: Mr Davies was employed by Goldman Sachs (GS) and was granted a number of non taxadvantaged share options. Under the terms of the options, GS had discretion either to satisfy the exercise of the options by delivering shares or by making a cash payment equal to the fair value of the shares less the exercise price. When Mr Davies exercised the options, he opted to use a cashless exercise facility, under which a sufficient number of shares acquired on exercised were sold immediately to cover the exercise price and tax liability on his behalf. The shares were issued to Mr Davies’ custody account. Mr Davies claimed that, as GS had a discretion to satisfy the exercise of his options either by delivery of shares (potentially in a number of different ways) or payment of cash, it was not ‘bound to sell’, meaning that section 144ZA of the TCGA did not apply and, therefore, section 17 of TCGA did apply. As a result, he argued that the shares should be treated as having been acquired with a base cost equal to market value plus the amount on which tax was paid, meaning that the sale of the resulting shares gave rise to an allowable loss for CGT purposes. Incentives Bulletin 4 The Upper Tribunal upheld the First-tier Tax Tribunal’s decision, holding that section 144ZA should be interpreted as including options which bind the grantor to enter into another transaction that is not a sale. Section 17 of TCGA therefore did not apply, and the base cost for CGT purposes was the exercise price and the amount charged to income tax on exercise. As the sum of these amounts is equal to the market value of the shares on exercise, if any shares are sold immediately, there will be no gain or loss for CGT purposes. More detailed analysis/commentary: Under section 17 of TCGA, if a taxpayer acquires an asset ‘otherwise by way of a bargain made at arm’s length’ or ‘in consideration for or recognition of his … services or past services in any office or employment’, he is treated in certain circumstances, for CGT purposes, as having acquired the asset for its market value. Section 144ZA of TCGA disapplies section 17 in relation to options which ‘bind the grantor to sell’ or ‘bind the grantor to buy’, so that the CGT base cost of the resulting shares is the exercise price and the amount charged to income tax on exercise. It is perhaps not surprising that the Upper Tribunal decided to give section 144ZA a broad interpretation – had it not done so, this would have given rise to inconsistent tax treatment of options over existing shares and options which can, perhaps only in theory, be satisfied in a number of different ways (as in this case). State aid approval for EMI options Summary: On 15 May 2018, the European Commission announced that it had granted state aid approval for the continuance of the UK’s Enterprise Management Incentive (EMI) scheme. More detailed analysis/commentary: The Commission originally authorised the EMI scheme in 2009, allowing small and medium sized enterprises (SMEs) in the UK to grant EMI options to employees with the potential for reduced liability for income tax and national insurance contributions. This authority expired on 6 April 2018, giving rise to a risk that any options granted after that date would not be eligible for the favourable tax treatment offered by the EMI regime. The UK authorities notified the Commission in March 2018 of its plans to prolong the scheme. The Commission has now found that prolongation is necessary to help UK SMEs attract and retain talented and skilled personnel, and contains a number of safeguards (e.g. a cap on the value of share options that can be subject to the favourable tax treatment both at the employee and employer level), ensuring that potential distortions to competition are limited. On this basis, the Commission granted state aid approval for the continuance of the EMI scheme until the UK ceases to be a member of the European Union. If the UK is subject to restrictions on state aid after that date, approval for the EMI scheme would need to be revisited at that point. Incentives Bulletin 5 GDPR: guidance from the ICO on use of consent In advance of the General Data Protection Regulation (GDPR) coming into force on 25 May 2018, the Information Commissioner’s Office (ICO) has published final detailed guidance on consent under the GDPR – in particular when consent can be relied upon for processing and when alternative grounds should be identified. The GDPR sets a high standard for consent, and employers will need to be particularly cautious of relying on employee consent to the processing of data, including in the operation of its share plans. Often, employers will be able to identify an alternative ground for processing – for example, processing might be necessary, whether for the performance of a contract with the data subject, compliance with a legal obligation to which the controller is subject, or the purposes of legitimate interests pursued by the employer or a third party. Before processing sensitive personal data, such as information relating to an individual’s health, the employer must identify not only a ‘lawful’ condition of the kind mentioned above, but also a ‘specific’ condition for processing this special category of data. Express consent is one such specific condition. In the context of operating a share plan, it might be necessary to process information about the ill health of a share plan participant in order to provide good leaver treatment. In order to legitimise the use of this type of data, an employer would be well-advised to secure the employee’s explicit specific consent. The ICO’s guidance sets out useful recommendations on compliance and good practice in obtaining consent. Horizon scanning What key dates and developments in employee incentives should be on your radar? 25th May 2018 GDPR comes into force 31st May 2018 Deadline for registering with HM Revenue & Customs for disguised remuneration settlement opportunity Summer 2018 FRC to publish revisions to UK Corporate Governance Code Associated legislation due to come into force 4 th July 2018 Deadline for HM Revenue & Customs to issue follower notices based on the Supreme Court decision in the Rangers case 6 th July 2018 Deadline for submission of share schemes annual returns using the ERS online filing system 28th September 2018 AIM listed companies to specify which corporate governance code they comply with, and provide ‘comply or explain’ information 30th September 2018 Deadline for submitting information to HM Revenue & Customs under disguised remuneration settlement opportunity Incentives Bulletin 6 29th March 2019 European Union (Withdrawal) Bill due to take effect 4 th April 2019 Gender pay gap reporting deadline