Welcome to our Employee Incentives Update for summer 2018.
This edition covers:
- Corporate governance developments – including CEO pay ratios.
- Updates for companies operating EMI plans.
- A reminder about growth shares for companies that do not qualify for EMI.
- SAYE plans – postponement of contributions.
- The Ownership Dividend report.
- Some employment law developments.
- Recent international developments in Belgium.
Corporate governance reform | CEO pay ratios and more
The government’s corporate governance agenda – fuelled by a series of high profile corporate failures – has taken a significant step forward. On 11 June 2018, draft legislation was published to implement a number of the proposals previously announced by the government for the reform of corporate governance, including CEO pay ratio disclosures.
The new legislation is expected to come into force in January 2019, with companies needing to consider how they are meeting the new requirements and be ready to report on them from January 2020.
In addition, on 13 June 2018, the Financial Reporting Council published a consultation draft of The Wates Corporate Principles for Large Private Companies, which is expected to become the default corporate governance code applied by the very large unlisted companies that will be subject to new governance reporting requirements. Principle five relates to remuneration and provides that “A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company“.
Read more > about the executive pay and wider corporate governance proposals.
Corporate governance reform | The direction of travel for AIM companies
From 28 September 2018, every AIM company will be required, as part of its Rule 26 disclosures, to state on its website which recognised corporate governance code the board of directors has decided to apply and to explain how the AIM company complies with that code.
Read more >, including a look at the new QCA code.
EMI | EU State aid approval
As reported in our recent Insight, the European Commission approved the renewal of EU State aid for the enterprise management incentive (EMI) regime on 15 May 2018. HMRC confirmed that the decision means that the EMI scheme continues to operate in the same way as described in HMRC’s current guidance and practice.
A condition of the European Commission’s decision to renew the approval of EMI was that HMRC must comply with the EU requirement to share information on beneficiaries of EU State aid in excess of €500,000. Amending Regulations come into force on 11 July 2018, enabling additional information to be collected and published by HMRC on EMI options.
The good news is that, after a short period of uncertainty earlier this year, EMI options remain available as a valuable tax-advantaged arrangement which qualifying companies can offer to incentivise their qualifying employees.
EMI | Working time declarations
On 22 June 2018, HMRC published the latest edition of its Employment Related Securities Bulletin.
Companies operating EMI plans must obtain a written declaration by the option holder that he or she satisfies the working time commitment (broadly, 25 hours a week, or if less 75% of working time). The employer must provide a copy of the declaration to the employee within 7 days of signature. In practice, the working time declaration is typically included in the option agreement which is signed by the option holder and company.
The Bulletin confirms that option holders must make a new working time declaration for each new grant of EMI options – declarations made under a previous grant of EMI options cannot be carried forward, and they cannot be backdated.
This is not a change of practice, merely an update from HMRC based on what it has seen. Companies are reminded that these important administrative requirements must be observed – otherwise EMI tax relief may not be available.
Growth shares | An alternative for companies that do not qualify for EMI
Where unlisted companies or individuals do not qualify for EMI options (for example, because the trading activities or working time requirements are not satisfied), an award of growth shares may be an appropriate incentive arrangement. Growth shares are very flexible and are more tax efficient than unapproved options.
SAYE plans | Postponement of contributions
The government announced in the 2017 Autumn Statement that there would be an extension to the save-as-you-earn (SAYE) savings holiday for participants on maternity and parental leave, from 6 to 12 months. The introduction of the change has been slightly delayed. However, the increased flexibility is to be extended to all participants (rather than just those on maternity and parental leave).
The Ownership Effect Inquiry | The Ownership Dividend report published
The Ownership Effect Inquiry published the Ownership Dividend report on 27 June 2018, setting out the findings and recommendations following its year-long inquiry into the UK’s employee ownership sector.
Employment law developments | UK Supreme Court holds plumber engaged on self-employed basis is a ‘worker’
Capturing media attention, on 13 June 2018, the Supreme Court handed down a significant decision, holding that a plumber, Mr Smith, VAT registered and paying tax as a self-employed contractor, was a ‘worker’ and therefore entitled to certain employment rights, such as minimum wage, holiday and sick pay.
The Court’s finding on substitution is of most significance. The Employment Tribunal had found that in practice Mr Smith had a ‘limited facility’ to appoint another Pimlico operative to do a job but the Supreme Court found that this was in reality ‘a means of work distribution between the operatives and akin to the swapping of shifts within the workforce’.
In many ways the decision is not surprising on the facts. However, given the Supreme Court’s comments on substitution, it may well have a big impact on the tax status of contactors (including those engaged via personal service companies affected by IR35) where such rights are relied on as a ‘get out’, perhaps pointing to how tax tribunals will look at IR35 status claims in the next few years.
Belgium | Stock options regime: tax-free compensation of the employee’s losses
Under Belgian law, when options are offered and accepted in writing within 60 days following the day of the offer, the participant receives a “benefit in kind”, taxable on grant and payable whether the options are exercised or not. If the options are “underwater” (the exercise price is higher than the value of the underlying shares), the employee would typically not exercise the options and would suffer a loss, equal to the taxes paid on grant.
A recent ruling by the Belgian Tax authority accepts that in the case of underwater options, the employer is allowed to compensate the employee with an amount equal to the loss (generally equal to the income tax paid on grant), without any additional income tax consequences for the employee.
With this new possibility for the employer to cover the employee’s risk, the Belgian stock options regime is more attractive than ever.
On the horizon
In the UK, we await publication of draft legislation which will subject termination payments above the £30,000 statutory threshold to employer’s NICs. Significant changes to the taxation of termination payments were introduced on 6 April 2018. These include taxing the basic pay the employee would have received during the notice period as earnings (subject to income tax, employer’s and employee’s NICs). However, the previously announced introduction of class 1A employer’s NICs on other termination payments above the £30,000 limit has been postponed until 6 April 2019.