29 June 2021

There was an audible release of breath yesterday when the European Commission adopted the adequacy decision, ensuring the UK’s data protection rules are fit for EU purposes. The decision means the UK will not be treated as a third country for the purposes of the EU General Data Protection Regulations (GDPR), and allows the continued free flow of data between the EU and UK. 
 
As outlined in an earlier newsletter (here), the deadline for reaching an agreement was 30 June so (as we have come to expect) the decision really did come down to the wire.
 
Timing of the adequacy decision

The adequacy decision formalises an interim arrangement under the EU-UK Trade and Co-operation Agreement, which was signed on 24 December 2020.  Under this arrangement, it was agreed that the UK would not be treated as a third country under GDPR for 6 months from the Jan 1 “Brexit Day” to allow time for the adequacy decision.
 
Now that the adequacy decision has been formally adopted, UK data privacy rules (which are based almost entirely on EU law passed before Brexit Day) are treated as giving a similar level of protection as the GDPR which allows EU based companies to continue to transfer personal data the UK without the need for alternative safeguarding mechanisms. 
 
Achieving adequacy status
 
An early decision was hoped for as the UK has incorporated GDPR into domestic law and so the UK and EU rules are mostly aligned. History, however, suggested otherwise as the EU has adopted only 12 adequacy decisions since 1995 (and usually only after a  very  lengthy process).
 
Keeping it adequate

All adequacy decisions are subject to periodic review (every four years) and any move by the UK to change its data protection rules in a manner which is viewed as detrimental to the data protection rights of EU citizens could result in the adequacy decision being revoked.  The European Parliament and the Council may request the EC to amend or withdraw any adequacy decision.
 
Transfers of personal data from the UK to the EU

The UK has already declared GDPR as adequate for the purposes of UK data protection law. Now the EU adequacy decision has been formally adopted, the transfer of personal data between the UK and the EU will continue to carry on in much the same manner as before the UK’s departure from the EU.

Tapestry comment
“No change in the rules” should not be very big news but we are where we are. This is very positive news for companies transferring personal data from the EU to the UK. Doubtless there are a lot of people breathing a sigh of relief today given the troublesome alternatives to managing UK-EU data without an adequacy decision. We were hoping for an earlier announcement but there was a general feeling that common sense would prevail and, let’s not be churlish, this was agreed a whole 2 days ahead of deadline!

Chris Fallon, Sharon Thwaites & Tom Parker

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23 June 2021

We previously issued an alert to notify you that the Irish tax authority (the Revenue) had announced that it would be releasing a new electronic return for reporting share-based remuneration.

The Revenue has now released the new template Employer Share Award return (Form ESA). The template is available on the Revenue’s website and can be found here. The new form must be filed online and is intended to capture all share-based awards (restricted stock units, convertible shares, forfeitable shares, discounted shares including purchase plans, and any other award with cash-equivalent of shares) that are not currently reported on a separate share plan return.

Revenue guidance
The template Form ESA includes notes for assistance with its completion. The Revenue has also released eBrief No. 120/21, which notes that various chapters of the Share Schemes manual have been updated to include reference to the Form ESA reporting requirements.

Timing and reporting deadline
The new reporting requirement applies for the tax year 2020 onwards. The deadline for reporting for the 2020 tax year has been extended to 31 August 2021. For tax year 2021, and in subsequent years, the Form ESA will have the same 31 March filing deadline as the Revenue’s other share plan returns.

Registration for share plan reporting
Companies that are not already registered for online share plan reporting with the Revenue's Online Service (ROS) must arrange to register now. If companies have been filing Form RSS1 (in relation to share options) and/or Forms ESS1 and KEEP1 (in relation to qualified share plans), then it is likely that they will already be registered for online filing. Whilst registering is a straight forward process, it can take approximately 3 days to complete.

Continuing payroll reporting obligations
This new reporting requirement for share plans is in addition to normal payroll reporting and withholding obligations. For example, if a company makes a share-based award (e.g. a free share award) to an employee today, the taxable benefit must still be reported through payroll as normal. The employer must then additionally report the award, using Form ESA by 31 March 2022.

Tapestry comment
As with all share plan reporting, we recommend that you prepare well in advance so you don’t get caught having to rush to find the required information as the reporting deadline looms. The scope of the Form ESA means employers with larger scale and/or more complex share incentive arrangements in Ireland must be prepared for a more time-consuming reporting process in this and future years. If you are not already registered to make e-filings through the ROS – you should start this process in good time prior to the filing deadline to avoid issues.  

We would like to thank one of our relationship firms in Ireland, McCann Fitzgerald, for alerting us to this update.

Sally Blanchflower and Sonia Taylor

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17 June 2021

All employers operating employment related securities (ERS) plans in the UK, including share plans, must submit an ERS return with HM Revenue & Customs (HMRC) by 6 July following the end of the tax year. The deadline for filing the ERS return for the 2020/21 tax year, ending 5 April 2021, is Tuesday 6 July 2021. As the registration and reporting process can take some time, we recommend that employers prepare and file the returns with HMRC as soon as possible.

What do I need to do?

Register the plan

• Before you can submit your ERS return, all relevant share plans must have been registered online with HMRC via the registration services found here. To do this, you will need a Government Gateway user ID and password. Your UK payroll will typically have these details.
• UK tax advantaged Share Incentive Plans (SIPs), Save As You Earn plans (SAYE plans) and Company Share Option Plans (CSOPs) must also be ‘self-certified’ online as being compliant with applicable UK tax legislation.
• If your plan has been registered and self-certified (if relevant) previously, you will not need to register it again. Registration will only be required for new plans implemented during the 2020/21 tax year. You should be provided with a unique scheme reference number for the plan within 7 days of registration.

File the ERS return

• Once you have the unique scheme reference number for your plan, you will be able to file the ERS return.
• To file the return, you must complete the relevant online template located on the UK Government website here.
• Each template asks for prescribed information in connection with relevant ‘reportable events’.
• The template that you must use will depend on the plan that you are completing the return for. Plans that are not UK tax advantaged plans will use the “other ERS schemes and arrangements” template and there are specific templates for each of the UK tax advantaged plans.
• Once you have completed the template, you can run it through a formatting check and then submit the return here.

What are some of the key points to look out for?

• Don’t leave it to the last day: we recommend that you complete and file your returns (and, if needed, register and self-certify) well in advance of the 6 July deadline. Once a plan is registered, it normally can take up to 7 seven days before the unique scheme reference number is provided to enable the filing to be made and the filing cannot be made before you have that. It can also take some time to work through the template, gather the necessary information to complete it and then carefully check it to ensure that there are no mistakes. Clients typically also have a few questions that they want to run by us before submitting the returns and so that would need to be factored into the timeline.
• Non-tax advantaged plans: you do not need to register and file a return for each non-tax advantaged plan separately. A single registration and return covering all existing non-tax advantaged plans will be sufficient. Please note, however, that all UK tax advantaged plans must be registered separately with separate returns filed.
• No plan activity: where you have registered a plan, you must continue to file a return even where there has been no plan activity in the relevant tax year. In these circumstances, a ‘nil return’ should be filed.  
• Outages: in previous years, the website where the return is submitted has experienced outages. The web page that is found here will notify users of any current and planned issues or outages.
• Terminated plans: if you no longer use a share plan, you will still need to make an annual return for outstanding awards. Once all awards have ‘paid out’, you can stop filing but only after you have informed HMRC that the plan has terminated. Further information on this is available here.
• Templates: we recommend that you always download the most recent templates from here and avoid using previously downloaded templates. The templates are format sensitive. You should not alter the template in any way, e.g. by deleting tabs or columns, altering the format or changing its name. Altering the template will result in an error message and the gateway will not allow you to upload it. The checking service found here allows companies to check for formatting errors prior to filing the completed templates. We recommend using this service to avoid delays in filing.
• Template file names: the file names for the templates still have “2015-6” in the title because they have not been renamed since they were first made available by HMRC. However, the templates available online are the latest versions and HMRC has confirmed that the templates should continue to be used and the format must not be changed (do not even attempt to expand the column sizes).
• EMI plans: there are different (and more onerous) requirements and deadlines for UK tax advantaged Enterprise Management Incentive (EMI) option plans. Please get in touch if you operate, or are intending to operate, an EMI plan.

Why is it important to register and file the return on time?

Failure to register and/or file the return on time can have serious consequences:

• Financial penalties automatically apply if you fail to register your plans (and, for certain tax advantaged plans, self-certify that they are compliant plans) by the deadline.
• Financial penalties automatically apply if you fail to correctly file your ERS returns by the 6 July deadline, even if no reportable events occurred in the tax year.
• Newly adopted UK tax advantaged plans will lose their tax status if you fail to register and self-certify them by the deadline where awards have been granted in the 2020/21 tax year. This means that any awards granted under new SIPs, SAYE plans and CSOPs on or after 6 April 2020 would not be tax advantaged. 

Tapestry comment 
The memories of HMRC’s benign approach to late paper based returns fade into folklore, as told by elder share plan lawyers to wide eyed novices, who know nothing but automated penalties levied for late registration and filings. The move to online reporting has meant HMRC will fine companies who do not submit returns on time without a good excuse. We suspect, unlike last year, HMRC will be much less willing to accept Covid-19 related excuses for lateness.

The online registration and reporting system is still unwieldy and often confusingly counterintuitive. It can take time to ensure a plan is registered before the return for that plan is submitted. HMRC’s dogmatic approach to terminology can be confusing, so that the actual preparation of a return can be much more complicated and time consuming (and stressful) than an unsuspecting share plan manager might expect. For example, issues like net settlement of awards require a specific reporting approach which is far from clear when confronted by the return template in isolation.

If you have not yet done so, take time to ensure your plans are registered and that you are familiar with the requirements of the return(s) you need to file so that the 6 July deadline can be met.

We assist a number of clients with their ERS registrations and returns each year. If we can assist you with this, please let us know.

Matthew Hunter and Chris Fallon

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4 June 2021

The Office of Tax Simplification (OTS) has today announced a plan to review the potential for moving the UK tax year. The review will look into the benefits, costs and wider implications of changing the date of the end of the UK tax year for individuals from the current 5 April to either 31 March or 31 December.

What is the focus of the review? 

The main focus of the review will be on the 31 March date as this is both the end of a calendar quarter and the closest month end to the end of the current tax year. It is also the financial year end date for the UK government and the date used for corporation tax rate changes.

Why change the tax year? 

The current tax year end date of 5 April dates back to a change to the UK calendar in 1800. Although the UK’s tax and accounting systems have developed around this date, businesses and most global tax systems tend to account to a month and quarter end date, with the majority of countries using the calendar year as their tax year, ending on 31 December. Other countries have made this change - for example, Ireland moved its tax year end from 5 April to 31 December in 2002 and in 2019 Costa Rica switched from a 30 September year end to 31 December.

What are the implications of changing the tax year? 

The OTS will look at how the change to the tax year could impact on tax collection and compliance, in particular in relation to income tax, PAYE, national insurance contributions, capital gains tax and inheritance tax. Amongst other issues, the review will also look into the financial and administrative implications for stakeholders (taxpayers, employers and businesses) and the practical implications of the change on IT systems operated by government departments.  Any change will also have to take into account the views of the devolved governments of Northern Ireland, Scotland and Wales.

Would there be a long or short first tax year? 

The expectation is that whichever date is chosen, the first tax year following the change (the transitional year) will result in a shorter tax year. If the tax year ends on 31 March, the transitional year would be shortened by five days and run from 6 April to the following 31 March. If the year end was moved to 31 December, the transitional year would be shortened by three months and five days and run from 6 April to the following 31 December.

What is the timing? 

The OTS will publish its report this Summer. 

Tapestry comment
If it wasn’t June, we might have mistaken this for an April Fool’s Day joke!   

Although many countries do use a 31 December tax year end (including the US and all EU countries), there are a number which have kept historic tax year dates. These include countries with which the UK has strong links such as Australia (ends 30 June), New Zealand and India (both end 31 March). However, all those countries do account to a quarter end date. It is rare for a country to have a tax year that does not end at the end of a month (we can think of Ethiopia, Iran and Nepal) and the OTS is looking to operate to its brief, in simplifying the structure by bringing the UK tax year for individuals into line with the government tax year.

The report from the OTS is expected this summer but remember that the OTS is only an advisory body and any changes to the tax year will ultimately be decided by the government. We will be watching with interest and you can be sure that we will let you know the outcome of the review.
 
If you would like to discuss this update, or anything else, please do contact us. 

Hannah Needle and Sharon Thwaites

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24 May 2021

The Irish tax authority (the Revenue) has announced that it will soon be releasing a new electronic return for reporting share-based remuneration. 

Current on-line reporting of share plan income

Although employers are already required to report all incentive-related income to the Revenue, currently the only specific reporting forms are for option plans (reported on form RSS1) and qualified share plans (ESS1 and KEEP1), all of which are filed on-line through the Revenue Online Service (ROS). 

New reporting obligation

The Revenue is now extending mandatory on-line reporting to cover other types of incentive income including RSUs, restricted shares, convertible shares, forfeitable shares, discounted shares and any other award with the cash-equivalent of shares. The e-report for the new Employers Share Awards (ESA) return will be similar in format to the existing reports, which are set out in a pre-formatted spreadsheet which is uploaded through the ROS.

Timing and reporting deadline

The new ESA return is expected to be available in June, with the deadline for reporting for the 2020 tax year extended to 31 August 2021. For tax year 2021, and in subsequent years, the ESA return will have the same 31 March filing deadline as the other share plan returns. Companies which have not previously made e-filings through ROS, should first complete the registration procedure (which can take up to three business days), as only registered users have access to the on-line filing system.

Tapestry comment
As with all share plan reporting, we recommend that you prepare well in advance so you don’t get caught having to rush to find the required information as the reporting deadline looms. The scope of the return means employers with larger scale and/or more complex share incentive arrangements in Ireland must be prepared for a more time consuming reporting process in this and future years. The Revenue has confirmed that it will be releasing additional information over the next few weeks and we will let you know once the ESA return is available on the Revenue website. 

The new reporting system feels reminiscent of the UK online reporting overhaul from a few years ago. That ran into teething trouble on deadline day as the online reporting portal collapsed. Many returns vanished and had to be submitted twice. This experience means we recommend early submission of the new Irish return to help avoid similar issues here!

We would like to thank one of our relationship firms in Ireland, A&L Goodbody, for alerting us to this update.

Please let us know if you have any questions about this new filing.

Chris Fallon and Sharon Thwaites

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13 May 2021

On 11 May, the Australian Treasurer handed down the 2021-22 Budget. 
 
The Treasurer announced various taxation measures aimed at reducing the unemployment rate. Amongst these measures was the removal of a tax trigger for tax-deferred Employee Share Schemes (ESS) at the point of participants leaving employment.

Currently, when an individual leaves employment and retains any unvested shares under an ESS in Australia, taxation will generally be triggered at that time.

The Australian Government has proposed removing this earlier taxation point for share and option schemes. The moment of taxation will then generally be the point at which the award is no longer at risk of forfeiture and there are no restrictions on disposal (in practice this would be the point of vest of a conditional award or exercise of an option).

This change will apply to ESS interests issued from the first income year after the date of Royal Assent of enabling legislation (Australian income years commence on 1 July).

The Government also announced that it will remove regulatory requirements for ESS where employers do not charge or lend to the employees offered the ESS.  

These measures are intended to help Australian companies to engage and retain the talent they need to compete on a global stage.

We will update you further when we have confirmation on the date these rules come into effect.

Tapestry comment
Taxation on cessation of employment can result in individuals suffering a "dry" tax charge (i.e. an unfunded charge as no share sale proceeds will be available to fund the tax charge). This can damage the effectiveness of "incentive" awards. This change will help to bring Australia in line with many other jurisdictions, making administration of leavers much easier for global companies and giving "good leavers" the ability to settle taxes due at the applicable tax point. Whilst this removal of early taxation for leavers is beneficial for ESS, the new rules being applicable to issues of ESS interests following implementation means the benefits may not be recognised for some time. 
 
If you would like to discuss this update, or anything else, please do contact us. 

Chris Fallon and Emilie Sylvester

 

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7 May 2021

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 the second in our series of quarterly Worldwide Wrap-Up newsletters for 2021, 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 12 May webinar.

Brexit Updates

Data protection: In our January Worldwide Wrap-up (here), we noted that the UK-EU Trade and Co-operation Agreement included a four month transition period (extended to six months, so expiring on 30 June 2021) under which the UK would not be treated as a third country for EU data protection law (GDPR). The purpose of the transition period was to give the EU time to adopt an adequacy decision confirming that the UK’s data protection rules will be treated as having equivalent status to GDPR. On 19 February, the EU Commission published a draft adequacy decision. The draft decision is now under consideration by the European Data Protection Board and a committee composed of representatives of the EU Member States. 

Social Security: the detached worker rules set out the post-Brexit agreement between the UK and EU member states to allow citizens of one state to continue to make social security contributions in their home state if working for a short period (up to 24 months) in another state. The EU member states all had to opt in to the detached worker rules and this was finally announced in February.

Tapestry comment:
These may seem like small points but they had everyone worried in December last year when it looked like no arrangements would be in place. There is still concern over the EU adequacy decision as the 30 June deadline is just over the horizon and historically such decisions take years rather than weeks.

Canada - proposed cap on deductions for stock options
There was no Canadian federal budget in 2020 due to the Covid pandemic but the 2021 budget is now progressing. Budget 2021 has confirmed the government’s plan to proceed with a proposal to limit the tax reduction currently available for holders of stock options (see our most recent newsletter here). We will be watching to see if the enabling legislation is in place by the planned commencement date for the new rules which is currently 1 July. 

Tapestry comment:
After several false starts, it looks increasingly likely that this change will come into force in 2021, and it is expected to have a major impact on the value of stock options for employees in Canada. We will continue to monitor developments.

Canada - additional reporting for non-resident trusts
In 2018, the Canadian government announced plans to require additional reporting by trusts (see our alert here). The new rules will require a trust to file a tax return, even if it has had no distributable income for the year, and to file a schedule reporting the identity of all trustees, beneficiaries and settlors of the trust, along with any other persons who have a measure of control over the trust or the decision making of the trustees. The new reporting rules are due to take effect from tax year 2021 but have not yet become law.

Tapestry comment
Although the new rules are not yet law, it would be prudent for companies operating share plans for employees in Canada, and who make use of a trust to hold the shares, to ensure that they have this information available.
  

GIG economy - Uber drivers are workers not self-employed

On 19 February, the UK Supreme Court confirmed earlier decisions that Uber drivers are workers for the purposes of UK employment legislation and are therefore entitled to receive national minimum wage and annual paid leave. Under UK law, employment status is categorised in three ways:

• Employees who have the full protection of employment law
• Workers who are entitled to more limited rights
• Self-employed who have limited employment rights.

In the Uber case, the company argued that the drivers were self-employed under the terms of the contractual arrangement between Uber and the drivers. The court rejected this argument and found that the level of control that Uber had over the drivers created a worker status. The court held that the designation of the drivers in the contract as self-employed could not change the employment status of the individuals.
Tapestry comment
The GIG economy has been hailed as creating a 21st century work model, but it has raised difficult questions over the status of the individuals who work for GIG economy, or platform companies. In the share plan world, if Uber drivers are not employees, they will usually not be able to benefit from share plans which are generally only available to employees. Although Uber initially suggested that the ruling only applied to the drivers who brought the case, it subsequently confirmed that it will treat all its drivers as workers, which means they are now entitled to receive minimum pay, paid leave and pensions. As the Uber case impacts on other platform companies, will these costs be absorbed by the companies or passed on to consumers? Or will gig economy companies look for creative ways to realign their business model to limit the impact of this and similar decisions in other countries?

Global tax rates for 2021

With several countries starting the 2021 tax year in March and April, and new rates being announced since our last webinar, we will look at where rates have changed. Our international advisors provide us with new rates to update our database as quickly as they become available. In this Wrap-Up we take a brief look at some of the changes.  
New Zealand - top rate of individual tax increased from 33% to 39%
South Africa - top rate tax band increased
UK - increase in personal allowance (no further increases until 2025/26) 
Tapestry comment
We will discuss the detail of these changes during our 12 May webinar. 

Global reporting

Remember to be ahead of the game with global reporting deadlines. Coming up in the next few months:

• Australia - ESS statement (employees) 14 July and ESS report (tax office) 14 August
• India - quarterly tax certificate  - 31 July
• Portugal - share plan reporting on Form Modelo 19 - 30 June
• UK - annual employee share plan return - 6 July

Tapestry comment
If you need this information for other jurisdictions not shown above or if you need any assistance with any global filings, please do get in touch with us.

USA - Doubling of CGT proposed
The US government has recently proposed an effective doubling of the CGT rate for tax payers earning over $1 million a year. Currently the rate of CGT paid depends on whether the asset is subject to short term rates (where the asset was held for less than 12 months) or long term rates (held for over 12 months). The short term rate is the tax payer’s marginal tax rate and the long term CGT rate is a flat 20% (plus 3.8% net investment tax for high earners).  The proposal abolishes the distinction between short term and long term CGT so that all capital gains would be taxed at marginal income tax rates. Combined with a plan to increase the top rate of income tax from 37% to 39.6%, this would bring the top CGT rate to 43.4%, once the net investment tax was added. The same change would apply to dividends.

Tapestry comment
It is too early to say if there is a realistic chance that such a significant change to US taxes will be approved.  If adopted, such a change may impact the attractiveness of long-term share ownership. Low rates of CGT can encourage participants to retain their shares, knowing that any increase in value is taxed at lower CGT rates. Equalising of rates of income tax and CGT would negatively impact the position of taxpayer participants.
Of course, many countries already treat capital gains as a standard part of personal income and subject to the same tax rates and, with governments struggling to fill the fiscal gap created by the Covid pandemic, more countries may look to follow the US example - assuming it is adopted.  Indeed, a similar proposal was included in the 2020 report of the UK Office of Tax Simplification (see our newsletter here). Although the UK government did not increase CGT rates in the recent UK budget, they did not rule out doing so in the future.

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, Matthew Hunter and Tom Parker

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