The effect on NEDs of proposed reforms to IR35

The effect on NEDs of proposed reforms to IR35

Some non-executive directors (NEDs) also provide consulting services to the companies on whose boards they sit and to others. How will the proposed changes to IR35 affect the provision of those consulting services?

HMRC published a consultation paper Off-payroll working rules from April 2020 on 5  March 2019. The consultation period closed on 28 May and the results will be taken into account when the Finance Bill is published in the summer. It seems likely, based on the consultation document, that existing public-sector legislation (Chapter 10, Part 2 of ITEPA 2003) will be the starting point for legislation governing the private-sector, but we will have to wait for the Finance Bill to find out for sure.

Since 2017, public-sector companies have been responsible for determining whether those they engage to provide services are employees or independent contractors. Private-sector companies have been spared this responsibility, which hitherto has fallen on the service provider. From April 2020, however, medium-sized and large private-sector companies will also be responsible for determining whether an agreement to provide services amounts to a deemed employment. No new tax is being introduced; only a change to the person responsible for determining if a deemed employment exists and for accounting for income tax and NICs.

Many individuals provide their services through a personal service company (PSC) which receives the fees paid for the services provided and from which the individual may receive a salary and possibly dividends. From 2020, private-sector companies will have to disregard the existence of a PSC and decide if the individual should be treated as an employee for tax and NIC purposes if engaged directly.

From next April, if a private-sector company decides that its agreement for the provision of services amounts to a deemed employment, it (and not the PSC) will be required to deduct income tax and NICs from the fees it pays, for those services.  This change is likely to mean more work for in-house HR teams and their (internal and external) legal advisers and could involve a substantial increase in the fee-payer’s employer’s NICs liability. If the new legislation follows the public-sector regime, three key consequences will flow from the requirement to make an assessment as to whether, for tax and NIC purposes, an employment relationship exists between it and an individual contractor:

• the company must inform its contracting party (agency or PSC) of the outcome of its assessment when the contract is made and may also have to inform the individual contractor of its decision;

• if any questions are raised about the company’s assessment, it has 31 days in which to respond; and

• the company must take reasonable care when making its determination as to whether a deemed employment exists.

This will affect NEDs who are also contracted to provide consulting services in the same way as it affects other contractors. A directorship is separate from an engagement to provide consulting services. Fees for carrying out the office of director are subject to income tax and NICs, payable through the PAYE system.  However, whether consulting fees are subject to the same deductions depends on the nature and terms of the agreement and on whether a deemed employment exists. It would, therefore, seem sensible for any agreement to provide consulting services to remain separate from an agreement to carry out the office of director.

For further information, contact Paul Norris.

FRC publishes a guide on financial reporting for smaller listed and AIM companies

FRC publishes a guide on financial reporting for smaller listed and AIM companies

The Financial Reporting Council (FRC) together with the Chartered Institute of Accountants have recently published a guide to help improve financial reporting within smaller listed and AIM quoted companies.

It is specifically aimed as a guide for Audit Committee members and provides top tips for the members to consider and ask themselves (including questions which should be put to the external auditors and the management team) during each of the following stages:

• Planning the audit

• Production of interim and annual reports

• Review of performance

• Formulating an action plan for next year

For the full report and more information click here.

Proxy advisers: proposed US regulations are misguided

Proxy advisers: proposed US regulations are misguided

This is a summary of an article written by Robin Ferracone, CEO of Farient Advisors, MM&K’s US partner in the Global Governance and Executive Compensation Group (GECN).

Proxy advisers, such as Institutional Shareholder Services (ISS), review company disclosures and provide cost-effective, independent research and voting recommendations to institutional investors, using the investors’ own voting guidelines.  This enables resource-constrained investors to cover hundreds, if not thousands, of companies and to engage with each as necessary to protect their investments.

Certain companies have criticised the increasing influence of proxy advisers, claiming that they are not fair, lack transparency, do not understand the company and are difficult to engage with.  In response, the US Congress has proposed legislation to require the advisers to register with the Securities and Exchange Commission (SEC) and to subject themselves to audits for conflicts of interest.

However, does it make sense to regulate organisations that provide voting recommendations to shareholders cost effectively?  The power of proxy advisers may be overstated: research by Glass Lewis has found that their investor clients vote differently from their recommendations 37% of the time.

Farient recently examined Say on Pay (SOP) votes cast for S&P 500 companies by 1,200 institutional investors, testing the hypothesis that smaller investors, with fewer resources, are more likely to follow ISS’s voting recommendations.  It found that:

• The largest 200 investors voted in line with the recommendations of ISS 84% of the time, while the smallest 200 investors voted with the recommendations 89% of the time.

• In contrast, looking at “AGAINST” recommendations only, larger investors are more likely to vote with ISS compared to smaller investors, 74% to 56% respectively.

• The top 20 investors, ranked by assets under management, vote very differently relative to ISS recommendations. For example, BlackRock voted in support of SOP resolutions 97% of the time, following ISS recommendations 90% of the time; while BNY Mellon voted in support of these resolutions 56% of the time, following ISS recommendations only 64% of the time

This evidence shows that institutional investors consult research by their proxy advisers to inform their voting decisions but in the end make up their own minds in casting their votes.

Farient, like MM&K, encourages its client companies to engage with their investors and proxy advisers, to help them to understand what is happening.  Directors should tell the company’s story and provide a compelling narrative to ensure that proxy advisers do their jobs while the directors take the opportunity to explain that they are doing theirs.

For further information, contact Mike Landon.

Creating successful bonus structures – five things to think about

Creating successful bonus structures – five things to think about

Whether you think in these terms or not, the way a company sets up, manages and then settles its bonus plans will have a direct impact on the behaviour of people within the organisation. Here are five thinking points in respect of creating successful bonus plans for 2019 and beyond:

1. Be clear about the company’s real values
This is the single most important element in achieving a successful bonus structure. Many companies in the “open communication” era will have a set of values describing how they want people to behave – these may be found on the walls of the office or in a handy booklet. However, underneath this will be the “real” values of the company – the values which may not make a good soundbite but which accurately describe how your enterprise functions most successfully. Taking the time to unlock this is crucial in all aspects of remuneration design – including bonuses.

2. Make sure it is affordable
Some might consider this obvious but it is crucial to make sure that payments are tied to affordability. There are few things more demoralising than bonus numbers having to be scaled back due to miscalculations or when a line manager has to revise down bonus levels due to wider company bonus issues. It is possible to put bonus plans in place where this issue is mitigated or even eradicated.

3. Back up bonus plans with hard decisions
If you have created a bonus structure which rewards people for ‘how’ they have done things as well as for ‘what’ they have done, then a potential management decision may arise when a “star performer” delivers results in a way that goes against the expressed values of the company. Will the leadership team be willing to risk upsetting the star performer by not paying out some or all of the bonus? If they are not then the company should reconsider the structure of the bonus plan, as a bonus plan which rewards “bad” behaviour will send a clear message that the values of the business can be ignored.

4. Decide how widely the bonus plan should apply
It is tempting, especially when money is perceived to be tight, to decide to reward only those who are “high performers”. However, research evidence on this point indicates that bonus plans created in this way may be more harmful than plans which provide bonuses across a wider range of performers. Consider ways in which your bonus plan could have wider applicability.

5. Communicate regularly
The most successful bonus plans should form part of the management tool kit of the business and not just be something that is pulled out at the end of the year. There are a number of things that can be done to embed the bonus plan within the review process in order to get the most out of it.

For further information or to discuss any questions you may have, contact Stuart James.

Launch of MM&K’s 2019 UK and European Private Equity / Venture Capital Compensation Survey

Launch of MM&K’s 2019 UK and European Private Equity / Venture Capital Compensation Survey

This month MM&K Launched its 24th annual Compensation Survey for the European Private Equity and Venture Capital Industry.  The 2019 Survey will provide participants with information on both quantum and structure in respect of salary, bonus plans, carried interest plans and co-investment plans. Through participation in our survey, participants will obtain data which allows them to:

• Make the best choices on remuneration structures for their businesses

• Have meaningful conversations on remuneration with partners and employees

• Improve staff retention and morale

If you are working in a Private Equity / Infrastructure / Venture Capital House and you believe that your firm might like to participate, please contact Margarita Skripina or request your questionnaire here.

To find out more about MM&K 2019 PE/VC Compensation Survey click here.

 

Gender Pay Gap – three things for businesses of any size to consider

Gender Pay Gap – three things for businesses of any size to consider

Legally, the reporting of the Gender Pay Gap (“GPG”) is only required by companies that have 250 or more employees who are based in England, Scotland or Wales. However, there are some important lessons for all organisations in respect of remuneration and the issue of divergence on gender pay can become an issue for any commercial enterprise.

Here are three points to consider with the passing of the second anniversary of reporting on the GPG.

1. Every company will have a GPG
Unless you have exactly the same number of people of each gender at each of the levels within your organisation, it is a mathematical certainty that you will have a GPG inside your organisation, based on the way that the reporting model is constructed.

Nonetheless, establishing your GPG – and then analysing it in order to understand how it has come about – is likely to be the most productive first step that an organisation can take to review its recruitment and promotion policies.

2. “Blind recruitment” may not be the answer
There is a notion that, either consciously or unconsciously, people tend to hire people in their own image . In order to overcome the first hurdle to this – getting a more diverse range of candidates through the initial CV vetting process – some firms have started using “blind” copies. These are documents which remove any trace of a person’s gender, or indeed any other area of diversity which may be from the subject of bias.

However, whilst there is some superficial logic to this, a number of studies, most notably a high profile one undertaken in Australia (see here for coverage**), indicates that this method does not always deliver the intended outcomes.

In our experience, better recruitment can come from identifying the core values of the business itself and then using these as guiding principles to develop and establish everything from recruitment processes to bonus and incentive structures. Given that values are not gender specific, using this approach has the advantage of making the recruitment process fairer to all.

3. Pay gaps may really be rewarding certain characteristics
Whilst some GPGs (or even part of a GPG) may be explained by “structural” differences, such as the number of people of each gender at each level of the organisation, among people who do similar jobs, the difference may not be so much about gender but may instead reflect varying individual skill-sets.

Discretionary pay awards might favour the most skilled negotiators but, whilst it would not be appropriate to ‘punish’ those who have strong negotiating skills, it would be appropriate to consider whether people who are hired for a different set of skills might need a different approach to their remuneration. There may be short term gains from supressing the remuneration levels of ‘quieter’ employees, but such an approach often leads to growing resentment and can become self-defeating. Once resentment over remuneration takes hold, it can lead to people making a “no way back” decision to leave a company for new pastures. It may, therefore, be more cost-effective for remuneration policy to take account of a person’s skill-set and motivators, as well as their job role.

For further information or to discuss any questions you may have, contact Stuart James.

2019 MM&K Private Equity / Venture Capital Breakfast Seminar

2019 MM&K Private Equity / Venture Capital Breakfast Seminar

In early April, MM&K held a PE/VC Breakfast Seminar for the participants in its last three PE/VC Compensation Surveys. At the seminar the 2018 Landscape of the Private Equity / Venture Capital industry was discussed. We also discussed the outlook on what 2019 may hold for the industry.

Prior to the event, MM&K organised a 2019 Pulse Survey, that was sent out to all of the invitees to the seminar, to get a picture of the most up-to-date Remuneration and Staffing trends in the UK and European PE/VC industries. Also, some of the interesting insights and findings from the 2018 MM&K PE/VC Compensation Survey were presented to compare with the results of the 2019 Pulse Survey.
The event opened with a networking opportunity for all the attendees and closed with a vocal Q&A session.

2019 MM&K Private Equity / Venture Capital Pulse Survey

This short  Pulse Survey focuses on the most recent developments in the UK and European Private Equity / Venture Capital industry. The Pulse Survey is run for the benefit of MM&K’s PE/VC Compensation Survey participants, and provides them with an outlook on the most up-to-date trends in compensation and staffing levels in the PE/VC industry.

91% of participating houses indicated a salary increase across all of their professionals at their most recent review date.  However, only 15% indicated increases in bonus levels for their investment professionals (over 2018).

About 70% of the participants indicated they focused on selected groups of staff when determining bonuses for last year’s performance. 86% of firms expect an increase in the number of investment professionals in 2019.

All in all, there remains perhaps a surprisingly high level of confidence in the industry, which is encouraging to see.

If you are working in a Private Equity / Infrastructure / Venture Capital House and you believe that your firm might like to participate, please contact Margarita Skripina or request your questionnaire here.

Recent HMRC announcements relating to EMI options

Recent HMRC announcements relating to EMI options

HMRC recently made new announcements about tax-advantaged Enterprise Management Incentive (EMI) share options in its Employment Related Securities Bulletin 31 (21 March 2019) and in updated Share Valuations guidance (1 April 2019).

Errors in notification of EMI options to HMRC

When a company grants an EMI option, it must notify HMRC of the grant through the online reporting system within 92 days of the date of grant; otherwise the option will not qualify for tax exemptions.

If the company realises that it has made a mistake in its notification about the grant of EMI options, the consequences depend on the period which has elapsed since the date of grant.

• If it is still within 92 days of granting the options, the grants can be re-notified through the online system within that 92-day period. The originally notified options should then be cancelled on the next EMI annual return.

• After 92 days, but within nine months of the original grant date, provided it has a reasonable excuse for not re-notifying within the 92-day deadline, the company should notify HMRC of the facts. If HMRC accept the explanation, they will issue a “reasonable excuse code” which will allow the company to re-notify the corrected options through the online system.  Again, the originally notified options must be cancelled on the next EMI annual return.

• After nine months of granting the EMI options, the legislation does not allow errors or omissions to be corrected. The company must notify HMRC of the error.  If HMRC regard the error as material and that it may cause the options to fail to meet the legislative requirements, the options will remain in existence but will not benefit from the EMI tax exemptions.

Impact of IFRS 16 on a company’s gross assets

The tax advantages of EMI options are intended only for small companies. The EMI legislation therefore does not allow EMI options to be granted if the company’s gross assets (including the gross assets of its subsidiaries) exceed £30 million at the date the EMI options are granted.  (The test does not need to be met at the time of exercise.)

HMRC has updated its guidance on the gross assets test to confirm that if a company uses international accounting standards, IFRS 16 will apply from January 2019 in determining the value of the company’s assets on its balance sheet.

Working time declarations by EMI option holders

At the time of grant of EMI options, the employees must sign written declarations that they spend at least 25 hours each week or, if less, 75% of their working time working as employees for the company or a qualifying subsidiary.  Employees have to make new working time declarations for each new grant of EMI options.

HMRC have confirmed that the declaration must be made at the time of option grant and it cannot be backdated.

Restrictions on shares to be acquired through EMI options

The option agreements for EMI options should contain all the terms and conditions of the options and any restrictions on the shares to be acquired on exercise of the options.

HMRC have stated that where restrictions on shares have not been notified to option holders at the date of grant the company should seek to remedy this as soon as possible.  HMRC’s advice should be sought as to whether any proposed retrospective action could result in the options losing their tax-advantaged status.

Valuation of shares for EMI options

Where shares to be acquired on exercise of EMI options are not listed on a recognised stock exchange, the value of the shares must be agreed by HMRC Shares & Assets Valuation (SAV) before the date of grant. This may be crucial in determining the taxable amount when the options are exercised.

In practice, where the shares are traded on AIM, SAV often agree to accept the quoted AIM price.  However, the value for unquoted shares must be based on an accepted share valuation methodology.

HMRC have confirmed that agreed valuations will remain valid for 90 days.  The previous limit was 60 days.

For further information contact Mike Landon

New Directors’ Remuneration Reporting Regulations

New Directors’ Remuneration Reporting Regulations

On 10 April 2019, the Government laid before Parliament a new set of revisions to the Directors’ Remuneration Reporting Regulations (DRRR or “Schedule8”).

After the wholesale revision to the DRRR in 2013, the regulations remained pretty much unchanged until July, 2018. The 2018 Companies (Miscellaneous Reporting) Regulations then introduced a number of changes to the Companies Act aimed at improving disclosure and corporate governance. Included in this Statutory Instrument were some key changes to the DRRR, in particular:

1. The requirement for UK companies with more than 250 employees to publish, in the form of a table, the ratio of the total pay and benefits for the chief executive to the equivalent figure for UK employees at the lower quartile, median and upper quartile. The requirement, starting with FY 2020, is to report the most recent two years and then steadily build up to a nine-year table over time.

The 2013 regulations required companies to compare the percentage change in the latest year of the remuneration of the chief executive with that of employees of the company taken as a whole; this comparison was to be made for the salary, taxable benefits and annual bonus figures in the single figure table. The 2018 regulations added a pay ratio as well as a pay movement comparison, and added the requirement to report this for a period building up to 9 years.

2. A second important change was to break-out the impact on remuneration of the effect of company share price changes, both in the remuneration table for the year and in the scenarios charts for future remuneration. The old scenario charts ignored share appreciation completely, which proved a serious omission when the forecasts proved wildly low due to stock market movements.  The 2018 regulations went the other way – the scenario modelling had to assume 50% price appreciation over the plan period.

As last year’s changes to the DRRR apply for reports for financial years starting 1 January 2019, no companies have yet had to apply them.  But the new 2019 regulations apply to reports for years starting on 10 June 2019, so companies with a year start between June and December will find themselves adopting both new sets of rules at once.

The Government has introduced the latest changes to the regulations to bring them in line with the 2017 EC Shareholder Rights Directive II (SRD II).  This directive was mainly concerned with flows of information between companies, investors and intermediaries; however, it included some articles aimed at improving the governance of directors’ remuneration.

It is important to note that, as well as requiring certain specific items of disclosure, SRDII mandated the EC to prepare full guidance on the contents of the remuneration report, and the Commission published this guidance on 3 March 2019.  Had BEIS followed this guidance for the UK regulations, the new DRRR would have become very onerous without adding any great benefit for companies or shareholders.  Fortunately, the guidance is not mandatory and the UK Government has chosen to ignore it and only to implement the specific points mentioned in SRD II.  These are limited in their scope.  The changes in the UK DRRR are as follows:

1. The pay movement comparison in the earlier regulations has been extended from one year to five years on a “building up” basis. So there are now potentially five years of pay movement comparisons and nine years of pay ratios to be reported.

2. The pay movement comparison has been broadened from the chief executive to all directors; but not the pay ratio analysis, which is curious. It is not evident that this change provides stakeholders with any insights that go beyond the movement for the chief executive for the additional work involved by the reporting company.   But these changes are necessary to comply with the specific requirements of Article 9b 1. of SRD II

3. The Single Figure table is required to break out separate totals for fixed remuneration and variable remuneration.

4. Where aspects of directors’ remuneration are required to be disclosed under the regulations, it is made clear that this includes the chief executive and deputy chief executive (if any). This prevents the company from hiding the chief executive’s pay by excluding him or her from board membership.

5. The regulation introduces a privacy restriction on including certain categories of personal data. Subject to this, the directors’ remuneration report must be kept available for a period of at least ten years.

6. Throughout the report, the requirement to report has been broadened from “quoted companies” (ie UK companies on the official list of a main exchange) to include “traded unquoted companies” (this covers companies that were previously listed on a main exchange but are no longer listed. It does not include AIM-traded companies.)

7. The regulations expand on the detail that is required to be given about the decision making process for the determination, review and implementation of remuneration policy.

For further information, contact Damien Knight

Don’t miss the deadline for online share plan returns

Don’t miss the deadline for online share plan returns

The deadline for submitting annual online employee share plan returns to HMRC for the tax year ended 5 April 2019 is 6 July 2019.  This is also the deadline for registering new plans which were first operated during that tax year.

We recommend that companies should try to complete registrations and annual returns well before then, as there are often last minute technical hitches.

Which plans should be reported?

Returns must be submitted for each individual share plan which is registered with HMRC.  Plans include:

Tax-advantaged SIP, SAYE and CSOP

If the company operates more than one of any of these plans, for example if a plan was replaced with a new one after 10 years (as opposed to being renewed), there must be a separate return for each plan.

Tax-advantaged EMI options

A single return should be made in respect of all Enterprise Management Incentive (EMI) options, even if more than one plan is operated or if there are no formal plan rules.

“Other” share plans

All other non tax-advantaged share plans (often referred to as “unapproved”) or arrangements for employees to acquire shares should be reported as “Other” plans.

A company can register all these arrangements as a single “Other” plan or as two or more separate plans.  If more than one “Other” plan is registered, a separate annual return must be made for each.

Combined plans

Where a set of rules contains more than one type of plan, for example an unapproved share option plan with a tax-advantaged CSOP schedule, this should be reported as two separate plans.

Which events should be reported?

The annual return should provide details of:

• the grant, exercise, cancellation, lapse or release of share options

• the grant, vesting, cancellation, lapse or release of other conditional share awards (eg under a standard “LTIP” or deferred bonus)

• all share acquisitions under a SIP or through other employment-related arrangements such as the award of growth shares or other restricted securities

• SIP shares forfeited or ceasing to be subject to the plan

• other taxable post-acquisition events, including the lifting of forfeiture restrictions on shares.

In the case of a tax-advantaged SIP, SAYE or CSOP, the company must also report amendments to “key features” of the plan, ie those which meet the requirements of the legislation for that plan, and adjustments to SAYE or CSOP options following a variation in the company’s share capital.  The company must declare that the plan continues to meet those requirements after the changes have been made.

Different arrangements for EMI options

You should note that, to qualify for tax relief, the grant of tax-advantaged EMI options must be reported online within 92 days of the date of grant.  If no EMI arrangement has already been registered, this must be done before the grant can be reported.

We recommend that companies should print out HMRC’s acknowledgement of option notifications, as it will not be possible to access this again at a later date.

What if there have been no reportable events?

If there have been no reportable events during the tax year, to avoid penalties the company must still make a “nil return” for each of its registered share plans.

If a plan has been terminated, the company can specify a “date of final event” on the annual return.  A final online return must be submitted for the tax year which contains the “date of final event”, so it may be wise to specify a date towards the end of a tax year rather than at the start of a new one.

Even if a plan has been registered by mistake, the “date of final event” must be specified and a nil return submitted for the tax year.

Penalties for late and incorrect submissions

If a share plan return is not submitted by the 6 July 2019 deadline, a first late filing penalty of £100 will be issued.

Additional automatic penalties of £300 will be charged if the return is outstanding three months after 6 July 2019, and a further £300 if it is still outstanding after six months.  If a return is still outstanding nine months after 6 July 2019, daily penalties of £10 per day may be charged.

HMRC can impose a penalty of up to £5,000 for a material inaccuracy in a return, unless this has been corrected by an amended return “without delay”.

For further information contact Mike Landon