In this summer of heatwaves, holidays, government uncertainty, and ongoing coronavirus disruption, you could be forgiven for not keeping on top of the UK’s share plan news! We therefore thought it would be useful to summarise some of the recent updates that you may have missed, including on the UK Corporate Governance Code, financial services laws, HMRC guidance and, the current leadership election!
Changes to the UK Corporate Governance Code: malus and clawback
In March 2021, the UK Government launched an extensive consultation on reforming the audit, corporate reporting and corporate governance systems, which we covered here. Of particular interest to the share plans industry were proposals to revise the UK Corporate Governance Code, including strengthening malus and clawback provisions.
Publication of the Government’s response to the consultation in May this year, was followed in July by the Financial Reporting Council (FRC) Position Paper setting out how it will support the Government’s reforms.
The Government’s initial proposals for malus and clawback included a minimum list of required triggers, and a minimum application period of two years “after an award is made”. In their response to the consultation, it appears the Government has moved away from a minimum list of triggers, to an “illustrative set of conditions” for malus and clawback, allowing for greater flexibility for remuneration committees.
The FRC, who will transition into the Audit, Reporting and Governance Authority (ARGA), have confirmed they will be revising the Code. The intention is that the revised Code will apply to periods commencing on or after 1 January 2024 and, amongst other updates, will include strengthened reporting on malus and clawback arrangements, with the aim of delivery greater transparency.
Responses to the consultation indicated a number of concerns with the risks of a “prescriptive approach” to malus and clawback – many companies have specific triggers relevant to their circumstances. There were further concerns that some proposed triggers were not sufficiently specific. It is therefore promising to see the Government has taken note of this, and it seems likely that remuneration committees should be able to retain flexibility in their approach. That said, as a review by the FRC will now take place, companies should watch this space carefully – malus and clawback remain a key focus point for the Government, as well as for investors!
Proposed Financial Services and Markets Bill
The current Chancellor, Nadhim Zahawi, used his Mansion House speech on 19 July 2022 to set out ambitious plans to transform the UK financial services sector. A key focus was proposed reforms to bolster the competitiveness of the UK as a global financial centre. The Financial Services and Markets Bill was then published on 20 July, which implements the outcomes of the Future Regulatory Framework Review, and provides further detail on how some of these reforms will take effect.
If passed in its current form, the Bill will revoke hundreds of pieces of EU retained law, allowing them to be replaced by “a coherent, agile and internationally respected regime that works in the interests of the British people”. In addition to any changes for remuneration regulation in the FS sector, of particular interest in a share plans context would be the repeal of the UK Market Abuse Regulation and UK Prospectus Regulation, and any changes to those regimes in the replacement legal framework.
It will be interesting to see how far the UK Government deviates from the content of EU legislation, when so much of it was directed by the UK’s approach to securities, listing and transparency in the first place. Whilst any improvements on the reporting burden that companies face will be welcomed, any organisations operating across the EU and the UK will need to keep up with the changing face of UK financial services regulation in the coming years as it continues to diverge. Share plan practitioners will be hoping (perhaps optimistically) for some common sense changes to the Market Abuse Regulation, to support the smooth operation of “business as usual” share incentive arrangements. We will have to wait and see what exactly any new market abuse regime looks like.
HMRC guidance: tax elections & EMI valuations
As a reminder, s.431 elections allow UK taxpayers to ensure that any “restricted” shares they acquire (including e.g. shares acquired subject to post-vesting holding periods), will be subject only to capital gains tax on sale (rather than any further income tax and national insurance when the restrictions are lifted). This is achieved by subjecting the full “unrestricted” value of the shares to income tax and national insurance contributions, at the time of acquisition. HMRC has recently updated its guidance on section 431 elections confirming that elections can be made in formats other than HMRC’s standard forms, including electronically and/or as part of another document.
Separately, HMRC have recently issued guidance relating to Enterprise Management Incentives (EMI). EMI plans remain the most popular UK tax-advantaged plan, perhaps due to their unrivalled tax breaks. One aspect of granting EMI options includes the ability to agree share valuations with HMRC. During the Covid-19 pandemic, the period for which valuations were valid was increased from 90 to 120 days. However, from 1 December 2022 onwards, EMI valuations will be valid, once again, for 90 days only.
Although the guidance regarding section 431 elections reflects existing HMRC practice, formal confirmation is to be welcomed. Companies, administrators and participants alike can now have greater comfort when it comes to entering into tax elections, with potentially fewer separate documents to sign at the relevant time.
For EMI, HMRC are reigning back some of the flexibility given during the pandemic. Companies looking to grant in reliance on an agreed valuation should ensure that they are aware of the relevant timeframe.
Leadership elections: tax implications?
The Government has already made a number of changes to taxation since the beginning of this Parliament. Under current plans, several more changes are to come for both individuals and corporations. Although income tax and NICs thresholds will be frozen for a further three years (following recent changes to NICs), the basic rate of income tax will be reduced by one penny in the pound in 2024-25. Elsewhere, corporation tax is set to rise significantly in April 2023, from 19% to 25%, for larger companies.
Mr Sunak has not announced any specific intention to deviate from these plans immediately, but has indicated a future income tax rate drop to the basic rate of 16% by the end of next parliament. Ms Truss, however, has stated that she would reverse the increase in NICs rates, at a cost of £13bn per year, to boost incomes across the board. She has also proposed cancelling the rise in corporation tax, at a cost of £17bn a year, according to some government estimates.
We are in turbulent times both economically and politically. It is unsurprising that Mr Sunak does not intend to deviate from his own policies, however, the changes proposed by Ms Truss would have a big impact, particularly for larger corporations.
Whilst (perhaps understandably!) neither candidate has explicitly mentioned reform of the UK tax advantaged plans, or rules and regulations surrounding share plans more generally, history shows us that changes in government often eventually lead to changes in our share plans world – so watch this space!
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 Tom Parker