………… for the attention of all companies operating deferred remuneration or unapproved employee share schemes
HMRC have re-issued their responses to Frequently Asked Questions (“FAQs”) relating to the new “Disguised Remuneration” rules. The full text of the revised FAQs is here.
In the context of conventional deferred bonus and employee share incentive plans, a revised and extended FAQ24 now describes more clearly the circumstances in which an “earmarking” of shares held by an employees’ trust (“EBT”) will not (disregarding any relevant exclusion) give rise to an immediate charge under the new Part 7A of ITEPA 2003. This should now allow companies to settle their arrangements with trustees of an EBT so as to avoid unexpected charges under Part 7A, and to do so with greater certainty and comfort.
The relevant wording of the answer to FAQ24 is:
“In general, there will be no earmarking where there is a pool of shares and a pool of employees and:
- the trustee has not granted the awards to the employees
- the trustee does not know the number of shares awarded to be awarded (sic.) to an employee
So, for example, no earmarking will have occurred if the trustee:
- only knows that ‘x’ shares have been granted to ‘y’ employees of a particular company; or
- only knows that ‘x’ shares in total have been granted to a named group (sic.) of employees but does not know how many of those shares have been awarded to particular individuals.”
To avoid any possibility of penal charges arising under the new rules, we recommend that companies which have established and funded an EBT to acquire and hold shares to satisfy awards or options granted under an LTIP, unapproved share option plan, or other incentive arrangement (or intend to do so), to take the following actions:
1. Ensure that all awards/options are granted by the company (that is, the employer company or another member – typically, the group holding company – of the same 51% group), and not by the EBT;
2. Review and, if necessary, amend the terms of any linking agreement between the company and the EBT, under which the EBT trustee agrees to satisfy awards/options granted by the company, so that, when notifying the trustee of the proposed making of awards (which – for trust law reasons – should normally be done before the awards are made), the EBT trustee is only made aware that awards over a total of ‘x’ shares have or will be made to a total of ‘y’ employees of a particular company. The trustee should not be made aware of the actual numbers of shares in respect of which awards have been made to each individual employee.
It follows that EBT trustees must ensure that the administration and record-keeping in relation to employees’ share plans is kept distinct from the trusteeship of the EBT so that there is no possibility of the actual “earmarking” by the administrator (who does not hold the shares and is not therefore within the scope of the Part 7A charge) being attributed to the trustee (who holds the shares and is prima facie within the scope of the new rules).
3. Review and, as is likely to be necessary, amend the plan rules so as to ensure that (for the avoidance of any doubt in relation to the question of whether their might be an “earmarking” of award shares), the structure of the awards fall squarely within the terms of the relevant statutory exclusion from an earmarking charge (for most LTIPs and option plans this will be s 554J and L) – see further below.
4. Ensure that the “specified vesting date” of an award (see further below) is set sufficiently far in the future that there is no risk of vested shares being transferred to an awardholder later than that date (eg because a close period prevents immediate transfer of vested shares).
The need to amend plan rules
It is, inter alia, a requirement of the relevant statutory exclusion that there be a fixed “vesting date” which is not later than 10 years after the award is made and that the award must be subject to conditions which, if not met on or before that date mean that the award is revoked. There must be a reasonable chance that the award will be revoked because not all the specified conditions will be met on or before that date.
HMRC are presently understood to interpret this as meaning that there must be at least one condition (being a condition which, from the outset, there is a reasonable chance will not be met) which runs to the specified vesting date.
Further, if the condition(s) is/are met, but the shares (or cash) are not received by the awardholder on or before the specified vesting date, then charges will arise which (a) will give rise to double taxation which may need to be paid before being recouped and (b) may not be recouped in full if, for example, the share price rises before the shares/cash is transferred to the awardholder.
X plc operates a share-based Long-Term Incentive Plan (L-TIP) under which deferred share awards are conditional upon the attainment of a 3-year performance target. At present, the target relates to a period of 3 financial years, after which there is a period, during which the accounts are drawn, at the end of which the vested shares are transferred by the company’s EBT as soon as practicable (and after the expiry of any “close period” restricting dealings”). In other words, there is no “specified date” when the payment or transfer will be made. Further, if, once the entitlement to the award has been crystallised at the end of the 3-year performance period, there is no further condition remaining to be satisfied for the awardholder to be entitled to the cash or shares, then again the statutory conditions for the exclusion from any “earmarking” of shares or cash to satisfy such award, will not be satisfied. Once the EBT trustee knows of the identity of the awardholder and the number of shares concerned, a charge would arise under Part 7A, notwithstanding that the shares may not be (or are not in fact) immediately transferred to the awardholder.
An answer is for the terms of such a plan to be amended so that an award will “vest” – in the sense that, if all conditions have been met, the shares/cash will then be paid over – on or before a specified date (which, in the above example, might be, say, 4 years and 6 months from the award date). It would also need to be a further term that, up until that date (or, if earlier, the time at which the shares/cash are paid over), the entitlement must be at risk of forfeiture (at least in part) if, for example, the awardholder is a “bad leaver”. In practice, insofar as the award is not revoked because either (i) the performance targets have not been met or (ii) the awardholder is a “bad leaver”, the vested shares/cash could, as now, be transferred as soon as practicable after the end of the performance period, but care is needed to ensure they are not in any event transferred later than the specified date.
Such amendments will normally only require board – not shareholder – approval.
Note: this issue is distinct from the issue of whether there has been an “earmarking” in the first place, as to which, see above. Nevertheless, given the very broad wording of the legislation, we recommend that, in addition to taking the steps necessary to avoid any “earmarking”: plan rules be amended, as suggested above, before any fresh awards are made or options granted.
Deferred Bonus Plans
Amendments may also need to be made in relation to deferred remuneration (deferred bonus) plans. The terms of the relevant exclusion (in s554H) from any earmarking charge are similar to those described above, save that the specified vesting date must not be later than 5 years from the time of award.
How can we help?
We are best placed to amend your plan rules and plan documentation cost-effectively, and with a minimum of fuss. If you would like us to do so, please telephone or email any member of our team:
telephone: 0121 348 7878