Incentives newsletter - October 2016

ESMA updates UCITS Q&A

The European Securities and Markets Authority (ESMA) updated its Q&A paper on the application of the UCITS Directive (2009/65/EC) on 12 October 2016 including in relation to translation requirements for remuneration disclosure.

HMRC updates DOTAS guidance

HMRC updated its Disclosure of Tax Avoidance Schemes (DOTAS) on 17 October 2016 to include:

• Amendments to the standardised tax products hallmarks (Hallmark 5).

The rules now require that an "informed observer", having considered all relevant circumstances, could reasonably be expected to conclude that pre-conditions for the hallmark are satisfied. The relevant circumstances include commercial factors, terms of the documentation and substance of the product, and HMRC guidance. A whitelist is provided by the guidance which states the following, in the absence of wider arrangements, will not fall within the hallmark (1) social investment tax relief, (2) seed enterprise investment scheme, (3) excluded indexed securities, and (4) Quoted Eurobonds.

• Updates to the loss schemes hallmark (Hallmark 6).

The updated guidance confirms that the condition that the provision of losses is one of the main benefits of the arrangement is an objective test which requires a comparison of the value of the tax advantage (which arises from the expected losses) with the value of any other benefits which arise from the scheme. An insignificant or insubstantial benefit cannot be a main benefit, it must be an important or significant aspect of the overall benefits. The updated guidance also confirms that the person with a duty to inform HMRC about a scheme must consider whether an informed observer could reasonably conclude that the arrangements include transactions that do not make commercial sense, for example solely loss-making transactions.

• Guidance relating to employment income hallmark (Hallmark 8).

New guidance sets out HMRC’s view of the meaning of "contrived or abnormal" step and emphasise that perceived narrow loopholes often require steps to be taken that would not otherwise have occurred.

• Introduction of the new financial products hallmark (Hallmark 9).

HMRC has provided a list of arrangements (plus circumstantial guidance) which it considers non-abusive and therefore will not be regarded as within the financial products hallmark: share schemes and entrepreneurs’ relief have been added.

Joint employer NICs elections to be retained

HMRC published a consultation response on employee share scheme employer NICs elections on 18 October 2016.

Employers are generally prohibited from transferring employer NICs to employees. However, where Class 1 NICs charges arise on employment-related securities or options, employer NICs can be transferred by:

• an employer NICs agreement, in which the employee indemnifies the employer for employer NICs liability, or
• a joint NICs election, through which liability is transferred to employees.

As part of its digital strategy, HMRC’s consultation considered abolishing joint NICs elections, which require HMRC approval, as compared to employer NICs agreements, which do not.

The consultation found that companies consider that joint NICs elections confer on employer protections that NICs agreements do not, particularly in the form of a standalone legally-binding document. HMRC therefore concluded that joint NICs elections should be retained.

ISS launches 2017 benchmark policy consultation

Following the release of its global policy survey results in September, Institutional Shareholder Services (ISS) launched its 2017 benchmark policy consultation on 27 October 2016 and has since published its final 2017 policies. The revised policies will apply to shareholder meetings held on or after 01 February 2017, with the exception of the policies for UK Smaller Companies which will apply from February 2018.

The following policies have been altered as follows:

Overboarding

• to clarify its views on the acceptable number of directorships an individual should hold, and
• to provide that, in relation to a chair, an adverse vote recommendation will not be generally applied at the company where said individual is the chair.

Remuneration

• an insertion of a direct reference to companies seeking to introduce pay structures atypical to the UK model, clarifying a greater level of certainty of reward should be matched by lower award levels
• applicable where a serious breach of good practice is identified, a reference to a potential recommendation against the chair (or if relevant other member) of the remuneration committee has been introduced, and
• for the remuneration report resolution (1) reference to the use of ISS’ Pay-for-Performance methodology (EP4P) with accompanying definitions has been introduced, (2) it has been made clear that concerning termination, appropriate pro-rating on outstanding share awards should be applied.

Board and committee composition - UK smaller companies

• to clarify that the policy for AIM companies may also applied to specified other companies, and
• requiring audit and remuneration committees to be fully independent, harmonising the policy with the QCA code.

IA updates 2017 remuneration principles

In response to the Executive Remuneration Working Group’s July 2016 report, the Investment Association has made significant changes to its remuneration principles on 31 October 2016. The changes include guidance that:

• companies have more flexibility to choose an appropriate structure for variable remuneration
• companies should justify decisions to pay different rates of pension contributions to executives and employees, and set out intentions to lessen the disparity if there is no justification
• companies should provide more details to shareholders about how performance is measured in determining annual bonuses
• companies should consider the effects of capital management decisions and share buybacks in assessing progress towards financial performance targets
• where companies use restricted share awards they should reduce award sizes to reflect the greater likelihood of vesting, adjust award vesting periods to three years followed by annual vesting over a further period, and require substantial shareholding requirements on participating executives
• directors should continue to hold shares after termination of their employment
• directors should roll over their awards into equivalent awards, if available, in the acquiring company on a change of control
• remuneration committees should engage with shareholders at an early stage if they receive more than 20% of votes against their proposals
• remuneration committees should carefully monitor the grant size of share awards, and
• remuneration committees should significantly reduce the size of awards for performance on grant schemes, which are more likely to pay out.

Case: contractual discretion in assessing bonus entitlements

The High Court, in a case involving bonuses in the financial services sector, found that a bank had not improperly exercised its discretion in assessing the appellants’ bonus entitlement as nil. The Court of Appeal upheld the High Court’s decision, but on different grounds. Rather than the exercise of discretion, the Court of Appeal found that the case turned on the construction of the bonus clause, which was properly exercised (ie an agreed formulaic bonus calculation produced a bonus of nil).