Newsletter - Page 3 - Tapestry - Global Legal Compliance Partners

Tapestry's Certificate in Employee Share Plans. New year, new possibilities!

16 January 2023

Are you looking for ways to develop your career in 2023? Do you want to turn to a new share plans chapter? Does your current role focus on just one or two aspects of share plans? Tapestry’s Certificate in Employee Share Plans, accredited by the CGIUKI, will help you broaden your share plans knowledge, teach you new skills and demonstrate how you can use the skills you already have to target more areas of share plans. Learn all the key components of designing and operating executive and employee share plans as well as:

gaining up to date information on regulatory issues
learning practical tips for adding value to your company
developing knowledge through best practice
obtaining insight from leading experts

How will the course be structured?
The course is split into 2 parts and each part will be taught over 5 short days on Zoom, finishing around lunchtime each day. These session timings make it easier and more practical for on-screen learning and to fit around other commitments.

The course will combine larger group teaching with participatory learning through smaller breakout sessions, each hosted by a Tapestry lawyer. These sessions ensure an interactive experience and the opportunity to learn from each other, with fun exercises and practical examples to help consolidate your knowledge.

Are there in-person networking opportunities?
Yes. One of the most valuable added benefits of the course is the networking opportunities that you get from being with your classmates outside of the office. So although the teaching will be virtual, we will be hosting optional in-person networking sessions in London. Dinner and drinks are on us!

How will the course be examined?
Exams will be held virtually for the 2023 course. The examination dates are set out below.

What are the dates for the course?
Each part of the course will run over 5 short days. 9.30am to lunchtime. Times are UK times.

Part 1: 15-19 May 2023 / Exam: 3 July 2023

Part 2: 18-22 September 2023 / Exam: 6 November 2023

Do I need to book time off work to attend the course?
Course participants should plan to attend the course teaching in an uninterrupted virtual learning environment. We know this can be challenging at times, however we do find a strong connection between active course participation and exam success. We therefore recommend that you and your employer treat the time you are attending the tuition (i.e until around lunchtime each day) as being ‘out of the office’, just like you would if the course was in-person. There is time to work in the afternoons, if needed, though.

Note that you should plan to attend all of the course tuition (and minimum attendance requirements apply). Course participants will also need to commit to self-study time to prepare for the exams.

How much will the course cost?
Our 2023 course price is £4,250 plus VAT.

What our 2022 course participants say...

“I thought the course was brilliant! The speakers are all experts in their areas and are all really approachable and accommodating when any additional training is required. I would highly recommend Tapestry as a training provider!”
Vicky Noble, Intertrust

“All of the speakers have been amazing, I feel so privileged to be able to learn from such experienced people!”
Amber Clifton, The RM2 Partnership Limited

“I found the course to be very beneficial, everyone has a wealth of knowledge and are more than happy to share”
James Couchman, FARFETCH

“The course is very well structured and the support from the Tapestry Team is great”
Matt Tudball, Computershare

If you have any queries regarding the course, please do contact us. More information can also be found on our course website.

Best wishes
Team Tapestry

Worldwide Wrap-Up - Tap-in to our global knowledge!

6 January 2023

Happy New Year and we hope that you had a relaxing break over the Holidays.

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies. To help you keep on top of recent developments, here is our first quarterly Worldwide Wrap-Up of 2023, with some of the most recent changes that should be on your radar. We have summarised these topics briefly in this alert, however they will be covered in more detail along with other recent developments on our 11 January webinar, which you can register for here.

Australia - employee share scheme reforms tweaked
We have covered the reforms to the Australian share plan securities rules, which took effect on 1 October 2022, in previous World Wide Wrap-Ups. Following a consultation with industry stakeholders, the regulator, ASIC, issued a new legislative instrument at the end of 2022 to address some technical issues raised by advisers. These include:

A broader exemption for secondary sales of quoted financial products.
More options for the financial information that foreign companies can provide to ESS participants.
Clarification that financial products offered outside Australia do not need to be included when calculating the issue cap.

The new ESS regime is intended to replace ASIC’s existing Class Order relief for employee incentive schemes. Offers under the Class Order relief can continue to be made until 1 March 2023, so long as the offer can be accepted before 1 April 2024 (previously the cut off dates were 31 December 2022 and 31 January 2024, respectively).

Tapestry comment
Advisers continue to dig into the details and companies are still considering how the new rules apply to their current and future share plans. We would always advise obtaining specific advice for share plan offers in Australia, but this is particularly important while the new rules settle in.

Canada - trust reporting delayed - again

In our World Wide Wrap-Up in May last year (here), we reported that the much delayed implementation of additional reporting for trusts in Canada was firmly back on the agenda and due to come into force at the end of 2022. Under Bill C-32, Fall Economic Statement Implementation Act 2022, which received Royal Assent on 15 December 2022, the new trust reporting rules will now apply to taxation years ending after 30 December 2023 (rather than after 30 December 2022). This means that, for trusts with a calendar year-end, the new reporting rules will apply one year later, beginning with the 2023 taxation year.

Tapestry comment

This is clearly a useful breathing space given the additional detail to be reported (including details of all trustees, beneficiaries and settlors of the trust, as well as any person able to exert control over trust decision making). The additional reporting will capture trusts that will be reporting for the first time and it is crucial to make use of this delay, either to ensure that that the trust will be able to comply or to restructure the plan to remove the trust arrangement.

India - new foreign exchange rules
In August 2022, India introduced new foreign investment rules, aiming to liberalise India’s regulatory framework and replace the existing regulations facilitating overseas investment by Indian residents. The new rules (the OI Regime) are wide ranging and the impact on employee share plans (ESOPs) is covered in detail in our alert (here).
Specific points to note are:

Exemption: For an Indian resident to participate in an ESOP, the individual must obtain Reserve Bank of India (RBI) approval or come within an exemption. Under the OI Regime, all ESOPs must come within the General Permission. There are no other exemptions.
Cashless ESOP: The previous exemption for a cashless ESOP no longer applies.
Liberalised Remittance Scheme (LRS): Under the LRS, Indian residents are permitted to send up to USD250,000 offshore each year without seeking RBI consent. Any amounts invested in foreign shares under an ESOP must come within an individual’s LRS limit.
ESOP reporting by employer: Employers are required to make semi-annual filings on Form OPI within 60 days of each of 31 March and 30 September and late filing fees apply. This filing replaces the previous annual filing requirement.
Repatriation of funds: Strict repatriation requirements for proceeds of sale and dividends will not apply under the OI Regime so long as the funds are reinvested under the terms of the General Permission within 180 days of receipt.

Tapestry comment
Foreign exchange rules in India continue to be complex. To some extent, the OI Regime appears not to have made significant changes to the operation of global employee share plans in India, but there are important updates that companies will need be aware of - in particular, the new twice yearly reporting system (and the first report is already due). Other changes are more subtle and companies will need to review their share plans to ensure that they comply with the revised General Permission.

Russia - update on the impact of counter-sanctions regime
The practicalities of offering shares to Russian resident employees continue to be challenging. In our webinar, we will address some of the common concerns that companies have when considering whether and how to include Russian employees in their global share plans. We will provide our latest updates on the following questions:

Can we grant awards to our Russian resident employees?
Are Russian employees able to receive shares in foreign companies?
Is it possible for a Russian employee to send funds outside Russia to purchase shares in an ESPP?
What is the position if a Russian employee wants (or needs) to sell the shares?
Can the employee receive income from the shares?
What other practical issues do we need to consider?

Tapestry comment
Under the circumstances, there are no simple or straight forward answers and we continue to proceed with caution. However, there are alternatives available for companies that still wish to include Russian employees in their share plans. Whether those alternatives will apply to a particular company and a specific plan will need to be considered on a case-by-case basis.

USA - SEC adopts rules on clawback
On 26 October 2022, the SEC adopted final rules on clawback, as required by the Dodd-Frank Wall Street Reform Act 2010. Under the new rules, US securities exchanges are required to adopt listing standards that require all listed companies (including foreign issuers) to implement a clawback policy, providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers, based on certain financial information in the event of an accounting restatement. US securities exchanges have until 26 February 2023 to propose listing standards that implement the final rules and the new listing standards must become effective by 28 November 2023.

Tapestry comment
To comply with the SEC clawback rules, companies will need to review their existing clawback policies or put in place new policies. Companies should also review relevant employment contracts and remuneration arrangements (including equity and other types of incentive plans) to ensure that they comply with the amended/new clawback policies.

Global tax rates
For many countries, revised tax rates start on New Year’s Day. Often, the rates are only announced in the last days of December, and in some cases the final figures are not available until well into January, sometimes later. Our international advisors provide us with new rates to update OnTap as quickly as they become available. Recent announced changes include:

Croatia: Croatia adopted the Euro on 1 January, so tax and social security rates are now expressed in EUR.
Finland: The split between national and municipal tax has changed, with the state taking over health care from the municipalities. The top combined rate of tax has increased slightly from 57.06% to 57.36%.
Russia: Under the new Social Fund of Russia, employers contribute at a flat rate of 30% (capped) and 15.1% above the cap.
Scotland: The higher rate is due to increase from 41% to 42% and the top rate from 46% to 47%. The new rates will take effect on 6 April.

Tapestry comment
The above list is not exhaustive and we will discuss the detail of these changes in our 11 January webinar. Many countries have made adjustments to tax bands and to social security caps. If you need specific advice for any jurisdiction, please let us know.

If you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch - we would be delighted to help!

Sally Blanchflower, Rebecca Perry and Olivia Rodrigo

Global updates / News / Newsletter / Press Releases - 01/09/2023

Tapestry Alert: Financial Services - UK PRA and FCA consult on removing the bonus cap

20 December 2022

The UK’s Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have launched a joint consultation on the removal of the bonus cap requirements that apply to UK banks, building societies, PRA-designated investment firms and third-country branches that are subject to the Remuneration Part of the PRA Rulebook and the FCA’s SYSC 19D Dual-regulated firms Remuneration Code. The deadline for consultation responses is 31 March 2023.

Background
Currently, UK banks, building societies, PRA-designated investment firms and third-country branches that are dual-regulated by the PRA and the FCA under the Remuneration Part of the PRA Rulebook and the FCA’s SYSC 19D Dual-regulated firms Remuneration Code, respectively, are subject to limits on the ratio between the fixed and variable components of total remuneration that can be paid to certain staff members. With limited exception, variable remuneration is limited to 100% of fixed remuneration or 200% of fixed remuneration where qualified shareholder approval is obtained. This is known as the ‘bonus cap’.

The bonus cap derived from the EU’s Capital Requirements Directive IV that was published in 2014 and transposed in the UK in line with the UK’s legal obligations as an EU member state at the time. The then UK Chancellor, George Osborne, unsuccessfully challenged the imposition of this requirement at the time, with the bonus cap being criticised for hindering the UK’s ability to compete for talent with other key financial centres, such as New York and Singapore.

The bonus cap has also been criticised for its role in driving up fixed remuneration, which is not ‘at risk’ or subject to deferral, payment in instruments, malus or clawback, thereby reducing a firm’s ability to adjust costs to absorb losses in a downturn. This is due to the fact that firms, to remain competitive on total remuneration, would need to pay higher fixed remuneration to permit higher variable remuneration to be awarded. The Bank of England explored this practice in a study that was published yesterday.

In September 2022, as part of the ‘mini-budget’ delivered by the then UK Chancellor, Kwasi Kwarteng, the government announced that it would remove the bonus cap to help the City of London to remain competitive with other key financial centres and to help boost productivity. Although most of the other aspects of the mini-budget have since been dropped, the decision to remove the bonus cap remained. The PRA and FCA have a statutory duty to consult when changing rules and that is the reason for the present joint consultation.

Key points

The key points raised in the consultation paper are as follows:

The initial rationale for the bonus cap was that it would limit risk-taking by capping the maximum bonus that a Material Risk Taker could receive. It is possible that removing the bonus cap could lead to higher total remuneration for some employees, which could, in turn, incentivise excessive risk-taking, although the PRA does not consider that the proposals create material risks in this regard. There is no apparent evidence that the bonus cap has had any positive impacts on limiting risk-taking and there are other remuneration and accountability rules in place to mitigate excessive risk-taking behaviours.
The proposed removal of the bonus cap aims to: (a) strengthen the effectiveness of the remuneration regime by increasing the proportion of compensation ‘at risk’ that can be subject to incentive setting tools, including deferral, payments in instruments, malus and clawback; and (b) remove unintended consequences of the bonus cap, namely the growth in the proportion of the fixed component of total remuneration.
The proposed changes will remove limits on the ratio between fixed and variable remuneration and related provisions on shareholder approval and discount rates from the Remuneration, Disclosure (CRR) and Disclosure (CRR) - Pillar 3 Templates and Instructions Parts of the PRA Rulebook, the PRA’s SS2/17 ‘Remuneration’ Supervisory Statement and the FCA’s SYSC 19D Dual-regulated firms Remuneration Code.
The proposed changes would not remove the requirement that a firm must set an appropriate ratio between the fixed and variable components of total remuneration and ensure that: (a) fixed and variable components of total remuneration are appropriately balanced; and (b) the level of the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.
Many of the adverse impacts of the bonus cap, namely the relative growth of fixed remuneration, have already occurred but the removal of the bonus cap would allow firms to restructure their pay over time by giving firms greater flexibility over remuneration structure design, allowing firms to rebalance towards the variable component.
The regulators considered alternatives to removing the bonus cap, including setting a higher limit, retaining the bonus cap only for certain people and/or having alternate mechanisms for setting the limits. The regulators determined, however, that a regulatory limit on the ratio between fixed and variable components of total remuneration is undesirable from the perspective of meeting their statutory objectives and removing it will help to enhance their objectives.
The proposed changes would come into force the next calendar day after the publication of the final policy, which is anticipated for Q2 2023, and would apply to a firm’s performance year starting after that. For most firms, that is likely to be the performance year starting in 2024. There would be a transitional provision for remuneration awarded for a performance year starting before the implementation date of the final policy with such remuneration still being subject to the current requirements.
The PRA considers that there may be scope to improve the alignment of, and interlinkages between, certain other remuneration requirements (i.e. other than the bonus cap) and the Senior Managers and Certification Regime to further support senior management accountability for risk-taking and the effectiveness of risk adjustment tools. The PRA indicates that they “will consider these issues further in due course”.

Next steps

The proposed changes are subject to consultation and so the final policy changes may differ to those set out in the consultation paper. The consultation closes on 31 March 2023. Comments or enquiries should be sent to CP15__22@bankofengland.co.uk or to: Governance Remuneration and Controls Policy Team, PPD, Prudential Regulation Authority, 20 Moorgate, London EC2R 6DA.

Tapestry comment
The proposed removal of the bonus cap will be welcomed by many firms. Many firms that we have spoken to consider the bonus cap to have had no positive impact on limiting risk-taking and have noted that it instead raises fixed costs, increases the cost and time burden of compliance and hinders the firm’s competitiveness with other UK businesses and overseas competitors.

It is important to note that the removal of the bonus cap will generate a range of practical challenges that firms should start to consider as soon as possible. The following are a few indicative examples:

The removal of the bonus cap will, in most cases, have no automatic impact on existing contractual arrangements. This means that any contractual terms that govern salary and role-based allowances will need to be considered. If a firm wishes to reduce either of these elements, there will be: (a) a contractual question – i.e. how can we lawfully reduce these elements, particularly as these should be permanent and non-recoverable remuneration components; and (b) a communication question – i.e. how can we communicate to / convince staff members with regard to the reduction of their fixed remuneration without this causing legal or retention issues. It will, therefore, likely be difficult to quickly restructure remuneration for existing employees. We have, on a few occasions, seen the terms of some role-based allowances that refer to the allowances only being payable when the staff member is subject to the bonus cap and so those terms would also need to be considered, where relevant.
The removal of the bonus cap may not allow a firm to immediately restructure the remuneration that it offers to new hires. For example: (a) in a market where a relatively high component of fixed remuneration is paid, it may be difficult to convince a well-informed new hire to accept lower (guaranteed) fixed remuneration initially, particularly if they are moving from a comparable role which currently pays high fixed remuneration; and (b) firms will need to carefully consider anti-discrimination and equal pay laws and policies to ensure that the firm does not inadvertently breach these laws and policies through the offer of a different (less beneficial) remuneration structure to someone with a protected characteristic compared to a suitable comparator.
Firms that are part of EU CRD-regulated groups will need to continue to apply any applicable bonus cap that would apply to UK-based staff members as a consequence of the applicable EU rules, if any.

Firms will also need to update any applicable documentation and policies which may refer to the bonus cap, such as the firm’s remuneration policy, directors’ remuneration policy (if applicable) and any Material Risk Taker letter or other communications. We would be happy to help with identifying and then making these updates, if helpful.

Firms should carefully consider the proposals and respond to the consultation paper with any comments or concerns that they may have. In particular, the regulators encourage firms that believe they may be disproportionately disadvantaged by the proposed timing of the final policy to respond on this point.

If you would like to discuss these changes, particularly how you may navigate the practical challenges that may arise due to the removal of the bonus cap, please do reach out to me or to your usual Tapestry contact.

Matthew Hunter

Financial Services updates / News / Newsletter / Press Releases - 12/21/2022

Tapestry Alert: India - Major reform of foreign investment rules

13 December 2022

As of 22 August 2022, India has a new set of foreign investment rules. The new rules were issued to liberalise India’s regulatory framework and replace the existing regulations facilitating overseas investment by Indian residents. The new rules are wide ranging and this alert will focus on how the new rules affect offers to Indian employees under global employee share plans (ESOPs).

Where are the new rules?
Overseas investment in India is regulated under the Foreign Exchange Management Act 1999 (FEMA) and is implemented by the Royal Bank of India (RBI). The new rules are contained in the Foreign Exchange Management (Overseas Investment) Rules 2022, the Foreign Exchange Management (Overseas Investment) Regulations 2022 and the Foreign Exchange Management (Overseas Investment) Directions 2022 (collectively, the OI Regime).

How do the new rules apply to share plans?
As a general rule, for Indian residents to participate in an ESOP, the individual has to obtain RBI approval or come within an exemption. This chart gives a high level overview of the key features under the old and new rules from a share plan perspective:

ESOP under the previous rules
Under the previous rules, the relevant exemptions for an ESOP were: the General Permission for offers to Indian employees and directors of a foreign entity; cashless employee share plans (i.e. plans with no outward remittances from India); and, the Liberalised Remittance Scheme (LRS). Each of these exemptions is discussed in more detail below. The local employer had to make an annual ESOP report in Annex IV to the RBI. The General Permission did not provide an exemption from the strict repatriation rules which require repatriation of the proceeds of sale of shares within 180 days and repatriation of dividends within 90 days of receipt. This meant that it was not possible to operate a DRIP (dividend reinvestment programme) for Indian employees without approval from the RBI.

ESOP under the new OI Regime
Under the OI Regime, Indian individuals who invest in foreign shares will be making either an Overseas Direct Investment (ODI) or an Overseas Portfolio Investment (OPI). In the case of a foreign ESOP, employees will usually be treated as making an OPI. The OI Regime sets out detailed descriptions of both ODIs and OPIs, but in brief (and for most ESOPs), an OPI is an investment where an individual acquires foreign securities that represent less than 10% of the foreign entity’s share capital.

General Permission: under the OI Regime, all ESOPs must come within the revised General Permission. There are no other exemptions. The main terms of the General Permission are unchanged, apart from a new semi-annual reporting obligation. To come within the General Permission, the ESOP must comply with the following:

The individual must be an employee or a director of:
- an Indian office, or branch of the foreign entity, or
- a subsidiary in India of the foreign entity, or
- an Indian company in which the foreign entity has direct or indirect equity holding.
The shares offered under the ESOP must be offered by the foreign entity globally on a uniform (i.e., non-discriminatory) basis.
Outward remittances must be made through an authorised bank.
The local employer must make prescribed semi-annual filings.

Cashless ESOP: The specific exemption for cashless ESOPs has been removed. Such plans must comply with the revised General Permission and must be reported in the semi-annual filing.

Liberalised Remittance Scheme (LRS): Under the LRS, Indian residents are permitted to send up to USD250,000 offshore each year without seeking RBI consent. Subject to compliance with strict rules and reporting obligations, the LRS allows flexibility in sending funds offshore. Previously, the LRS did not mention ESOPs, and local counsel generally advised against using the LRS for an ESOP, one reason being the need to ensure that the LRS limit was not exceeded. To align the LRS with the OI Regime, the LRS has been amended to state that the acquisition of foreign shares comes under the OI Regime. Any amounts invested in foreign shares under an OPI, including under an ESOP, must come within an individual’s LRS limit.

ESOP reporting by employer: Under the old rules, employers made an annual filing on Annex IV (ESOP Reporting Statement). Under the OI Regime, this single filing is replaced with semi-annual filings on Form OPI (here). The form includes details of share plan investments held abroad and any changes (investments and sales) since the last report, as well as any amounts remitted and repatriated in the previous six months. The local employer must declare the percentage interest and the shares allotted and repurchased and the number of employees who acquired and sold shares during the period. The forms are filed by the local employer with the RBI through an authorized dealer within 60 days of each of 31 March and 30 September and late filing fees apply. As the first filing was due on 28 November this year, many companies have been caught out and local counsel advise that the filing should be made as soon as possible. Reporting companies should discuss how to complete the report with their authorised dealer.

Repatriation of funds: One advantage of the OI Regime is that it appears to permit employees in India to participate in a DRIP. The strict repatriation requirements for share proceeds will not apply so long as the funds (proceeds of sale and dividends) are reinvested under the terms of the General Permission within 180 days. If this deadline cannot be met, the funds must be repatriated to India within180 days of receipt.

Date of implementation
The OI Regime took effect on 22 August 2022. Due to the extent of the changes, local advisers have been working with the regulators to clarify the application of the changes to ESOPs. This has a caused a delay in news of the OI Regime being circulated, although, frustratingly, no delay in the implementation of the new reporting requirement.

Application of the OI Regime to previous overseas investments
Any overseas investments made prior to 22 August are deemed to have been made under the OI Regime. As a result, any plans that were offered on the basis of the previous rules or which have received RBI approval, must now comply with the OI Regime.

Tapestry comment
Foreign exchange rules in India continue to be complex. To some extent, the OI Regime appears not to have made significant changes to the operation of global employee share plans in India, but there are important updates that companies will need be aware of - in particular, the new twice yearly reporting system. Other changes are more subtle and companies will need to review their share plans to ensure that they comply with the revised General Permission. If your plan does not currently permit employees in India to participate in a DRIP, this may be something to investigate in more detail. The key takeaway is that the OI Regime is a major overhaul of the FX rules and it will take a bit of time for advisers, local teams and employees to adjust to these changes.

We would like to thank our local counsel Roshnek Dhalla at Khaitan & Co for her assistance with the information for this alert.

If you want to discuss any of the points above or want help with your share plans or other incentive arrangements, please do contact us.

Sally Blanchflower, Rebecca Perry, Sharon Thwaites

Executive Remuneration updates / Financial Services updates / Global updates / Newsletter - 12/14/2022

UK: The Government's Autumn Statement - Ironing out the U-turns?

18 November 2022

In our last alert, we noted the government’s U-turn in which key tax measures announced in September’s controversial mini-budget were reversed. Since then, Rishi Sunak has become Prime Minister and, whilst previous market turbulence has calmed a little, economic challenges remain, with inflation continuing to rise and the Office for Budget Responsibility (OBR) confirming that the UK is now in recession. In yesterday’s Autumn Statement, Jeremy Hunt, the Chancellor of the Exchequer, has announced a number of tax rises and spending cuts in the aims of reducing inflation and stimulating growth.

Below are the main issues relevant to the operation of share incentive plans and our thoughts on their likely impact.

Income tax: the top 45% additional rate of income tax will be paid on earnings over £125,140 instead of £150,000. A freeze for the personal allowance and higher rate income tax thresholds until April 2028 was announced, which means as wages rise, millions of people will pay more in tax.

Tapestry comment
A reduction in the income tax additional rate threshold had been widely reported ahead of the Autumn Statement, with some commentators pointing out the potential interaction between this threshold and the tapering of the personal allowance on earnings over £100,000. It has now been confirmed that the threshold will be aligned with the point at which the personal allowance is lost in full. The cost of the change for current additional rate payers will be £1,243. The freezing of the higher rate threshold, with the result that more people will be brought into the 40% band as salaries increase, may have a greater impact for the individuals affected.

Capital gains tax and dividend allowance: the individual capital gains tax annual allowance will be cut from £12,300 in 2022 to £6,000 in 2023. This will fall again to £3,000 in April 2024. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024.

Tapestry comment

Again, reductions in these allowances had been expected. Looking ahead to further cuts in April 2024, many more taxpayers are likely to be within the scope of tax on capital gains and dividends. From a share plans perspective, employers should be aware of the potential for reasonably modest dividend income and gains from shares acquired through share plans giving rise to these additional tax liabilities. A renewed focus on informative communications as well as appropriate levels of financial education may come onto the agenda in light of these changes.

National Insurance: following the abolition of the Health & Social care levy under Liz Truss’s administration there is no further change to rates of National Insurance Contributions (NICs). The main upper thresholds are frozen until April 2028. The secondary threshold (at which employers start to pay secondary contributions) will also be frozen for the same period. The Government points out, however, that the Employment Allowance will be retained at the new higher level of £5,000 which means 40% of all businesses will still pay no NICs at all.

Tapestry comment
After a number of changes in relation to national insurance contributions over the last few months, it is helpful that there are no further significant developments. The impact of the threshold being frozen will need to be budgeted for – however, there is still the potential for further change in the interim, in particular given there will be a General Election ahead of 2028.

Company Share Option Plan (CSOP): the Autumn Statement includes confirmation that, as previously announced, “the government is increasing the generosity and availability of the Company Share Option Plan”. It is assumed at this stage, that the proposed changes will remain as set out in ERS Bulletin 45, with a doubling of the CSOP limit to £60,000 and removal of some of the share class restrictions which have previously made it harder for some, mainly unlisted, companies to qualify.

Tapestry comment
This is a welcome change to the CSOP regime. The government also notes that it remains supportive of the Enterprise Investment Scheme and Venture Capital Trusts and sees the value of extending them in the future. There is no mention of the Enterprise Management Incentive plan, however, which suggests that the government sees its changes to the CSOP regime as addressing certain issues raised on the restrictive nature of qualifying conditions which have made it difficult for some companies to offer tax-advantaged employee share options.

We have picked out just a few key changes which may be relevant to share incentives. The Autumn Statement also contained many more announcements of relevance to individuals and business as the government works to establish fiscal stability in a period of economic challenge. As the impact of the tax announcements mentioned above takes hold, companies may wish to revisit their share plans to make sure not just the plans themselves, but also the communications and education around the plans, remain effective in the current context.

If you want to discuss any of the points above or want help with your share plans or other incentive arrangements, please do contact us.

Suzannah Crookes and Sally Blanchflower

Financial Services updates / Newsletter / Press Releases - 11/19/2022

UK: The IA Principles of Remuneration 2023

10 November 2022

The Investment Association (IA) yesterday released its updated Principles of Remuneration, with the usual accompanying letter to Remuneration Committee Chairs setting out member expectations for the 2023 AGM season.

Full copies can be found here: 2023 Principles and Remco Chair letter.

Whilst the IA notes it has not made significant changes to its Principles, there are specific areas with notable updates as set out below. The IA’s previous guidance for addressing the impact of the Covid-19 pandemic has also now been withdrawn.

Windfall gains
The guidance continues to provide that companies should scale back the quantum of awards at grant, following a substantial fall in share price, to reduce the risk of windfall gains. Further guidance has now been added, stating that shareholders expect remuneration committees to consider adjusting vesting outcomes where awards were not scaled back at grant. In the Remco Chair letter, the IA indicates that remuneration committees should clearly articulate to shareholders how they have considered the impact of potential windfall gains when determining vesting outcomes and why any reduction is appropriate. If no reduction is made, they should explain and disclose the rationale.

Pay restraint
Companies are warned to be mindful of widening inequality and making excessive awards to executives at a time when many lower-paid employees are forced to make significant sacrifices due to cost-of-living constraints. In the Remco Chair letter, the IA points out that most companies exercised good levels of restraint in relation to executive pay through the pandemic and should continue to be mindful of this in the current economic context. In particular:

Remuneration outcomes should be commensurate with company performance and not excessive – the guidance now states outcomes should also be commensurate with the experience of key stakeholders.
Remuneration committees should consider the overall quantum paid to executives in the context of pay levels and conditions across the entire workforce.
Remuneration committees should generally not increase executives’ salaries at a level greater than inflation or the increase awarded to the wider workforce. In the Remco Chair letter, the IA indicates a need to consider the impact of inflationary salary increases on overall remuneration (given that variable pay is often linked to a salary multiple) and encourages any increases to be below those given to the rest of the workforce.

Discretion
The guidance on remuneration committee use of discretion remains. The changes this year add a focus on ensuring remuneration outcomes reflect the performance of the executives and their contribution to overall corporate performance – as well as the experience of shareholders, wider stakeholders and general market environment.

The Remco Chair letter states that the IA encourages remuneration committees to be clear on disclosing issues and the different drivers they have considered when judging overall performance, and to put outcomes in the context of wider stakeholder experience.

Performance measures
The guidance continues to suggest the inclusion of strategic or non-financial performance measures, but now clarifies that this should be in addition to financial performance measures and should promote long-term value creation.

Remuneration committees should consider the collective impact of performance targets to ensure they lead to a balanced assessment of the company’s performance and that there is ‘appropriate natural tension’ between the metrics chosen.

Where ESG measures are used, there is now express guidance to state that they should be suitably stretching. In particular, they should not provide reward for ‘business as usual’ activity or be used as essentially a ‘soft target’ to increase overall quantum. Remuneration committees should explain how progress against the targets will be measured and how performance against them will be disclosed.

The Remco Chair letter provides some potentially helpful flexibility, suggesting that given wider economic uncertainties, it may be appropriate to consider wider performance ranges and discretion may be needed to ensure appropriate outcomes are achieved.

Non-executive directors (NEDs)
Recognising the increased complexity and time commitment associated with the NED role, the guidance now states that NEDs should receive fees commensurate with their duties, but that any increases in fees should be properly explained. Guidance on encouraging ownership by NEDs of shares in the company is retained, with a new acknowledgement that the number of companies introducing a minimum shareholding guideline for NEDs is increasing.

Pensions
The Remco Chair letter includes a statement that IVIS will red top any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce, reflecting the previous guidance that such alignment should be achieved by the end of 2022.

Tapestry Comment
The annual update to the IA Principles provides a useful barometer of investor views and key focus areas in relation to executive pay, and the changes are unsurprising given the wider economic outlook. These focus areas will be an important factor for companies in considering their executive pay structures for the year ahead. Whilst much of the guidance remains unchanged, the changes made will potentially be significant for those companies impacted, in a year where many will be renewing remuneration policies, managing the vesting of “Covid grants” under their LTIPs, and considering pay in the context of the current economic climate.

In addition to the IA’s update, LGIM has also published remuneration guidance, and the ISS has published its 2023 benchmark policy consultation. The FRC’s annual review of corporate governance reporting also contains some useful observations. We will be considering all of the updates in our Q1 webinar on Investor Expectations – look out for details to follow!

As always, if you have questions about any of the content of this alert, or there is any assistance you need in relation to your incentive plans, do not hesitate to contact us.

Hannah Needle, Suzannah Crookes and Sally Blanchflower

Executive Remuneration updates / Global updates / Newsletter - 11/11/2022

Tapestry Alert: The Philippines - No more Fringe Benefit tax on share plans!

28 November 2022

The Philippines Bureau of Internal Revenue (BIR) recently announced the proposed abolition of the distinction between the tax treatment of share plans for managerial/supervisory staff and ‘rank and file’ employees.

Background

Currently, the taxation treatment of share plan income in the Philippines depends on the position of the employee at vest/exercise. Income from share plan awards for employees at managerial and supervisory level is taxed as Fringe Benefits Tax (FBT). Income from share plan awards for other 'rank and file' employees is taxed as income. These terms are broadly defined and depend upon function rather than title.

FBT is a tax imposed on the employer rather than the employee, so it is the employer who is obliged to report and pay the FBT. If FBT is payable, the employee is no longer required to report or pay tax on the share plan income. The employer may only pass on the costs of FBT to an employee if this is agreed by the employee.

What has changed?

On 7 October 2022, the BIR released Revenue Regulation No. 13-2022 (RR13-2022) which removed the distinction between managerial/supervisory staff and ‘rank and file’ employees in terms of the tax treatment for employee share plans. The effect of this is that all share plan income will now usually be subject to income tax at vest/exercise, regardless of the employment status of the recipient of the award, who may be in a managerial/supervisory role or part of the ‘rank and file’ workforce.

When will the changes takes effect?

RR 13-2022 takes effect 15 days following publication in the Official Gazette or in a newspaper of general circulation. We are advised by our local counsel that RR 13-2022 was published in The Manila Times on 14 October, so is expected to take effect on 29 October 2022.

Tapestry comment
In simplifying the tax treatment of share plans, this will be a welcome development for companies offering equity plans in the Philippines. This change will also provide equality in the tax treatment of awards for local employees, which is a helpful result.

It is worth noting that employer tax withholding obligations vary in the Philippines, depending on whether or not the cost of the plan has been recharged to the local employing company or the local subsidiary records the plan as an expense in its local accounts. Our recommendation is that companies review their share plan tax processes in the Philippines to prepare for the new change to take effect.

We would like to thank our partner firm in the Philippines, Quasha Law, for their assistance with this alert.

As always, if you have questions about any of the content of this alert, or there is any assistance you need in relation to your share incentives, do not hesitate to contact us.

Sonia Taylor and Sharon Thwaites

Financial Services updates / News / Newsletter / Press Releases - 10/31/2022

Tapestry's Certificate in Employee Share Plans 2023 - Leaves are falling... Cert ESP is calling! 2023 registration now open!

October 2022

The world of share plans is challenging and complex, and the risks of non-compliance are high. Like the seasons of the year, legal and governance considerations are changing constantly, so let our industry experts help develop your understanding with up-to-date training.

Tapestry’s Certificate in Employee Share Plans is a professionally recognised qualification that provides up to date information on design, legal and regulatory considerations, operating share plans globally, executive and all-employee plans, tax, accounting, administration and much more.

Our industry-leading course combines technical know-how with practical experience of advising clients. With practical tips to add value to your company, sign up now and help your business:

be more cost effective - reduce your reliance on external advisors;
reduce risk - understand the rules and the importance of compliance; and
benefit from ongoing best practice - stay connected with others in our industry and continue to keep up to date through regular alumni events.

Following the positive feedback we received on both our 2021 and 2022 virtual courses, we are very pleased to confirm that the Certificate will be delivered virtually for 2023! The course will run with virtual interactive teaching sessions, so you can take it wherever you are.

How will the course be structured?
The course is split into 2 parts and each part will be taught over 5 short days on Zoom, finishing around lunchtime each day. These session timings make it easier and more practical for on-screen learning and to fit around other commitments.

The course will combine larger group teaching with participatory learning through smaller breakout sessions, each hosted by a Tapestry lawyer. These sessions ensure an interactive experience and the opportunity to learn from each other, with fun exercises and practical examples to help consolidate your knowledge.

Are there in-person networking opportunities?
Yes. One of the most valuable added benefits of the course is the networking opportunities that you get from being with your classmates outside of the office. So, although the teaching will be virtual, we will be hosting optional in-person networking sessions in London. Dinner and drinks are on us!

How will the course be examined?
Exams will be held virtually for the 2023 course. The examination dates are set out below.

What are the dates for the course?
Each part of the course will run over 5 short days. Times below are UK times.

Do I need to book time off work to attend the course?
Course participants should plan to attend the course teaching in an uninterrupted virtual learning environment. We know this can be challenging at times, however, we do find a strong connection between active course participation and exam success. We therefore recommend that you and your employer treat the time you are attending the tuition (i.e. until around lunchtime each day) as being ‘out of the office’, just like you would if the course was in-person. There is time to work in the afternoons, if needed, though.

Note that you should plan to attend all of the course tuition (and minimum attendance requirements apply). Course participants will also need to commit to self-study time to prepare for the exams.

How much will the course cost?
Our 2023 course price is £4,250 plus VAT.

Register and pay by 31 December 2022 to get our Early Bird rate of £3,950 plus VAT.

What our 2022 course participants say...
"Never have I been on such a well-run, informative course with very high-quality materials, speakers and attention to detail both for the course itself and the extras around it (box of treats and social events!) to make it as enjoyable as possible"
Kirstan Boynton, Spirax-Sarco Engineering

"The ESP course is really informative and engaging no matter what experience you have with share plans"
Julia Sherwin, Rentokil-initial

"Hitchhikers guide to share plans"
Peter Bagi, Global Shares

"This course is extremely helpful to understand the complex world of UK share plans. The course is well organised, the speakers really bring share plans to life and have shared some helpful best practice guidance on the operation of share plans for students to take away with them to implement into internal processes!"
Emma Jackman, Hammerson plc

If you have any queries regarding the course, please do contact us. More information can also be found on our course website.

Best wishes

Team Tapestry

Global updates / News / Newsletter / Press Releases - 10/27/2022

UK: The Government's "mini-budget" - a new broom sweeps clean

19 October 2022

As previously reported (see our alerts of 7 October and 14 October), the UK government’s “Special Fiscal Event” (or “mini-budget”) on 23 September sent major shockwaves through the UK economy. In an attempt to stabilise the continuing market turbulence, on Monday the newly appointed Chancellor of the Exchequer, Jeremy Hunt, scrapped most of the tax cutting measures remaining from the mini-budget.

A further statement is expected on 31 October, providing detail on some of the other (non-tax) proposals in the government’s Growth Plan, as well as a forecast from the Office for Budget Responsibility.

Where are we now on the key tax changes?

For reward and share plan professionals, the following points are of particular relevance:

Some changes are staying:

The cut in the rates of national insurance contributions (NICs) by 1.25% from 6 November, and the abolition of the proposed new Health & Social Care Levy, will proceed.
The proposed changes to the Company Share Option Plan (CSOP) also remain “on the table” at this stage (see HMRC’s Employment Related Securities Bulletin (45)).

And some are abandoned or amended:

The additional 45% rate of income tax is retained.
The recent 1.25% increase in the dividend rates will remain (even though this was originally introduced to align with the now cancelled increase in NICs).
The proposed reduction to the basic rate of income tax from 20% to 19% in April 2023 (bringing it forward from 2024) is now postponed "indefinitely".
The off payroll working rules (IR35) will remain unchanged, with the obligations around determining employment status and paying the appropriate PAYE and NICs will remain, as now, with the service recipient.
The previously planned and then cancelled corporation tax rise from 19% to 25% is back on track and will take effect on 6 April 2023.

What about the bankers’ bonus cap?

HM Treasury has confirmed that the proposal to remove the cap on bankers’ bonuses remains and it is expected that the Prudential Regulation Authority will be consulting on this in the autumn. A package of regulatory reforms is also expected on this timescale, which may give further insight into any other changes in the pipeline for remuneration regulation in the UK following Brexit.

Tapestry comment
The new Chancellor’s extensive tearing-up of the tax measures in the mini-budget has restored a degree of stability for UK plc. However, the government must clear more hurdles to restore confidence with the markets, businesses and the public. Generally, the messaging seems to be that the current administration will defer most tax cutting measures until the economy is in a better shape, but at this stage they still have the appetite to continue with reducing regulation.

From a share plans and reward perspective, it’s largely back to the “status quo” as far as tax rates are concerned, with some slight reduction in participant costs through the changes to NICs from 6 November. We are pleased to see that the increase in the CSOP limits has (so far) survived the bonfire.

However, this is a fast-moving situation, and we are now awaiting the release of the further fiscal statement on 31 October. Given it coincides with Hallowe’en, we hope that it will not present an opportunity for too many scary surprises!

As always, if you have questions about any of the content of this alert, or there is any assistance you need in relation to your share incentives, do not hesitate to contact us.

Suzannah Crookes and Sharon Thwaites

Executive Remuneration updates / Financial Services updates - 10/20/2022

UK: The Government's "mini-budget" - a new broom sweeps clean

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