Welcome to our Employee Incentives Update, we hope you find it useful.  This Update contains a round-up of key developments in remuneration during July 2017. 

In summary:


  • HMRC updates fact sheet on penalties for materially inaccurate tax returns for tax advantaged share plans
  • A reminder: HMRC has extended the deadline for the 2016/17 employment related securities tax returns from 7 July to 24 August 2017



The Supreme Court rules in favour of HMRC in the long running case of payments made to an employee benefit trust by Rangers Football Club



  •   Financial Stability Board publishes its fifth progress report on the implementation of its Principles for Sound Compensation Practices and their Implementation Standards
  •  The Financial Conduct Authority publishes proposals on how consumer credit firms should manage risks related to how they pay and manage the performance of their staff

In full:


HMRC updates fact sheet on penalties for material inaccurate tax returns for tax advantaged share plans

HMRC has updated its fact sheet on penalties for materially inaccurate tax returns for tax advantaged share plans.  The fact sheet states that HMRC may charge a penalty of up to £5,000 if, as a result of a compliance check, it decides that the return contains material inaccuracy and:

  • the company has not sent an amended return; and
  • the inaccuracy was careless, or deliberate.

A company must submit an amended return if:


  • it becomes aware that information was omitted from the return submitted;
  • it becomes aware that the return submitted includes something that should not have been included; or
  • it identifies any other error or inaccuracy in the return.

Once the company has identified an inaccuracy, it must submit the amended return without delay.

HMRC can reduce the amount of any penalty it charges depending on its view of how much assistance the company gives HMRC. The factsheet sets out the types of behaviours that will result in a reduced penalty and how HMRC calculates the amount of the penalty as well as what to do if a company disagrees with HMRC's position.

A copy of the fact sheet can be found here.


Deadline for 2016/17 employment related securities annual tax returns extended

As we mentioned in the June Update, HMRC has extended the deadline for the 2016/17 annual employment related securities (share schemes) tax returns from 6 July to 24 August 2017.

Penalties will now be charged if the return isn’t filed by the extended deadline of 24 August 2017, with the first late filing penalty of £100 being issued on 25 August 2017. Additional automatic penalties of £300 will be charged if the return is still outstanding 3 months after the original deadline of 6 July, and a further £300 if it’s still outstanding 6 months after that date. If a return is still outstanding 9 months after 6 July, daily penalties of £10 a day may be charged.



The Supreme Court rules in favour of HMRC in the long running case of payments made to an employee benefit trust by Ranger Football Club

Factual background: RFC 2012 Plc, formerly The Rangers Football Club Plc (RFC), was a member of a group of companies whose parent company was Murray International Holdings Ltd.  Murray Group Management Ltd, which was also a member of the group, set up a trust known as the Remuneration Trust (“the Principal Trust”). When a group company wished to benefit an employee it made a payment to the Principal Trust. On payment, the employing company asked the trustee of the Principal Trust to resettle the sum on to a sub-trust and requested that the sub-trust income and capital should be applied in accordance with the employee’s wishes. The trustee of the Principal Trust had a discretion whether to comply with those requests, but, in practice, the trustee without exception created the requested sub-trust. The employee was appointed as protector of the sub-trust with the power to change its beneficiaries.

When RFC negotiated the engagement of a footballer, RFC would explain the sub-trust mechanism, in particular, that the prospective employee could obtain a loan of the sum paid to the sub-trust from its trustee which would be greater than the payment net of tax deducted under PAYE if he were to be paid through RFC’s payroll. The trust fund would be held for the benefit of the beneficiaries of the sub-trust, being members of the footballer’s family whom he specified. On the footballer’s death, the loans and interest would be repayable out of his estate, thereby reducing its value for Inheritance Tax purposes. RFC used the same mechanisms in paying discretionary bonuses to its senior executives.

The journey through the Courts: The First-tier Tribunal (“the FTT”) held that the scheme was effective in avoiding liability to income tax and NICs because the employees had only received a loan of the moneys paid to the trusts. The Upper Tribunal (Tax and Chancery Chamber) upheld the FTT’s decision. The Inner House (part of the Scottish civil court system) allowed HMRC’s appeal. It held that income derived from an employee’s work is assessable to income tax, even if the employee agrees that it be redirected to a third party.

The appeal to the Supreme Court: The central issue in the appeal to the Supreme Court was whether it is necessary that the employee should himself or herself receive, or at least be entitled to receive, the remuneration for his or her work in order for that payment to amount to taxable earnings.

Supreme Court decision: The Supreme Court ruled in favour of HMRC finding that if an employee agrees or acquiesces to a payment to a third party of what would otherwise be his emoluments or earnings, he was in general taxable on it. The court was strongly influenced by the consideration that otherwise an employee could simply arrange for what would be his earnings to be paid to a third party.

Lord Hodge, who handed down the judgment on behalf of the Supreme Court, stated:

"I see nothing in the wider purpose of the legislation, which taxes remuneration from employment, which excludes from the tax charge or the PAYE regime remuneration which the employee is entitled to have paid to a third party…

The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party…"

Implications of the decision:  HMRC introduced Part 7A to the Income Tax (Earnings and Pensions) Act 2003 (Part 7A) (known as the "disguised remuneration" legislation) in response to these types of arrangements. From 9 December 2010, most loans from trustees and other third parties to employees (or their families and certain other associates) are subject to an immediate income tax and NICs charge under PAYE. However, in respect of arrangements that pre-date the disguised remuneration legislation, whilst many employers have already settled with HMRC, for those that have not it is likely that HMRC will now issue “follower notices” where they consider that the circumstances are similar to the Rangers case. These notices will require employers to pay up the tax or face a penalty if they fight on but lose in the courts, neither of which will be particularly appealing.

The Supreme Court took a more purposive approach to the legislation than the lower court that appeared to concentrate on the technical tax issues.  This is a trend that we have seen developing in a number of recent tax cases.

RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC 45



Financial Stability Board publishes its progress report on the implementation of its Principles for Sound Compensation Practices and their Implementation Standards

The Financial Stability Board (FSB) has published its fifth progress report on the implementation of its Principles for Sound Compensation Practices and their Implementation Standards (P&S). Prepared by the FSB’s compensation monitoring contact group, it focuses on the remaining implementation gaps, key challenges and evolving practices, as well as considering compensation practices in the securities sector and links between compensation and misconduct.

Key findings:

  • The P&S has been substantively implemented for banking organisations in almost all FSB member jurisdictions, excluding South Africa.
  • The oversight of compensation practices is now embedded in banking organisation supervisory practices, although differences still exist in the approaches that are taken on this.


Increased supervisory attention has been given to links between compensation and misconduct in banking organisations.


  • Supervisors’ and banking organisations’ increased use of back testing and validating practices are helping in moving toward ensuring the effective implementation of compensation systems.
  • In-year adjustments to compensation remains the preferred tool, although the application of malus is still rare in many jurisdictions, and clawback is subject to significant legal impediments or enforcement issues in many jurisdictions.
  • There continues to be notable differences in organisations’ approaches and regulatory and supervisory frameworks for the identification of material risk takers.
  • Progress on implementing and embedding the P&S for the insurance sector is significantly lagging behind.
  • Approaches to compensation practices vary across the securities sector, acknowledging the diversity of business models.
  •  Industry participants believe compensation could be used as a possible tool in managing misconduct risk.

Moving forward, the FSB’s focus will be on the extent to which compensation, together with other measures, can be used to address misconduct risk at financial institutions. It will finalise supplementary guidance by the end of the year addressing this, as well as developing recommendations on the consistent national reporting and data collection by national supervisors on the use of compensation tools to address misconduct risk in significant financial institutions.

Further information on the report can be found here.


The Financial Conduct Authority has published proposals on how consumer credit firms should manage risks related to how they pay and manage the performance of their staff

The FCA expects all consumer credit firms to consider the way they pay and incentivise staff, and ensure they manage any potential harm to consumers. The FCA is consulting on a package of rules and guidance to help consumer credit firms identify and manage their risks effectively.

The FCA has published the findings of a piece of thematic work carried out with 98 consumer credit firms.  The FCA found that out of this sample, some firms have inadequate systems and controls to manage the risks of staff incentives. Some firms had not recognised the potential harm to customers that their incentive schemes could pose. Examples of inappropriate features included the particular features of bonus calculations or where retailers paid bonuses on the sales of retail goods rather than the associated finance product.

A copy of the consultation document (that includes the findings of the thematic work referred to above) can be found here.  The consultation closes on 4 October 2017.