May 2007 UK tax and Court case update
1st May 2007
HMRC comments on age discrimination
HM Revenue & Customs (HMRC) have recently published their view on the application of the UK age discrimination regulation (the “Regulations”) to approved employee share plans. The Regulations came into force on October 2006 and prohibit direct and indirect discrimination on the grounds of age. There are some limited exemptions, including where the discriminatory provision is required to comply with legislation or where it can be objectively justified (see our March 2006 Technical Update). We describe the key points of HMRC’s comments below.
Action
If you have not already reviewed your employee share plans (be they approved or non-approved) to ensure that they are compliant with the Regulations, you should now do so.
General approach
As expected, HMRC have confirmed that they will not advise on whether approved plans need to be amended to conform with the Regulations nor what kind of amendments should be made. As we have found in practice, HMRC will allow plans to be “levelled up” so that plans are amended to the benefit of both existing and future participants. An example of this would be to remove a requirement under a discretionary approved option plan that a “good leaver” must retire on or after a particular age. If plans are amended to the detriment of participants then HMRC would expect the participants to give their consent to the amendment. We have found that this approach has only rarely been adopted by companies.
Choosing a specified age
The legislation governing Sharesave Plans, Share Incentive Plans and approved Company Share Option Plans requires companies to include a “specified age” in their plan rules for retirement purposes which must be within a relevant statutory range of ages.
While this requirement is exempt from being caught by the Regulations because it is a statutory requirement, the choice of age used within the statutory age range could be discriminatory, with the lowest possible age being, potentially, the least discriminatory age.
HMRC will not recommend the use of any particular age but they have confirmed the following:
- companies may make changes to these ages for existing options and awards. In practice, we have found that HMRC will even allow a reduction in the Sharesave retirement age although this could be disadvantageous to existing participants. They may also allow, as a transitional measure, different ages to apply to different participants; and
- if retirement is not expressly referred to as a “good leaver” reason in Company Share Option Plan rules then HMRC will not allow companies to treat participants who retire as good leavers under a general good leaver discretion.
Changes required to NIC elections
Since May 2000, companies have been able to pass on UK employer National Insurance contributions (NIC) on share options to employees and this ability has since been extended to other share benefits. NIC liabilities can be passed on either by an agreement (where the employee agrees to reimburse the employer) or a joint election (where the legal liability is transferred to the employee). The terms of any election must meet certain HMRC requirements and be approved by HMRC.
Recently, HMRC announced, rather belatedly, that any election entered into from 6 April 2007 must incorporate additional wording to prevent any retrospective employer's NIC liabilities being passed on to employees. The possibility of such liabilities arise from anti-avoidance provisions in the National Insurance Contributions Act 2006 (although these should not, in practice, be relevant for most normal employee share plans). HMRC have told us that it will be acceptable to incorporate a standard form of wording into those elections which companies have already agreed with HMRC and then for those to be filed with HMRC. Elections entered into before 6 April 2007 do not need to be changed.
Action: Before entering into any new NIC elections, you should amend those elections to include the revised wording. If you are using a form of election already agreed with HMRC, the revised election will need to be filed with HMRC. Elections not previously approved by HMRC will need to include the new wording in order to receive approval.
Electronic filing of HMRC share plan returns
This year, HMRC have not sent companies their annual share plan returns in paper form but, instead, they have issued notices to companies to file returns either on-line or using paper forms which can be accessed from their website. The returns comprise forms for HMRC approved plans and Form 42 for unapproved share plans and other unapproved share incentives. The paper returns are available at http:www.hmrc.gov.uk/shareschemes/ann-app-schemes.htm. The form for EMI options cannot currently be filed online. Online filing is currently not obligatory but it is expected to become so. In order to use the online facility, the company must be registered to file its PAYE returns online. Further information on this facility is available from http://www.hmrc.gov.uk/online/index.htm.
The deadline for the submission of returns is 6 July 2007 for Form 42 and 9 July 2007 for the other forms. There are penalties for late submission, which can potentially be substantial if you have a lot of participants in your plans.
As HMRC is increasingly focusing on ensuring companies properly account for their PAYE liabilities, it is important that your share plan returns are accurate. Even if you did not receive a notice to file a return, you still have an obligation to file a return if any transactions covered by the forms occurred.
Action: Make sure you file your Form 42 on or before 6 July and your approved share plan returns on or before 9 July 2007.
Recent case on use of discretions
A recent Court of Appeal decision in relation to discretionary bonuses has implications for both cash and share incentive plans, particularly the exercise of discretions by Remuneration Committees and what those plans say about termination of employment.
Background
The case, Commerzbank AG v James Keen, was about a former employee claiming that the bank had acted in breach of contract for the relatively low levels of his bonuses for 2003 and 2004 and in not paying him a bonus in 2005 after he had left the bank.
Key conclusions
The key conclusions in the case were that:
- the bank was entitled to rely on a clause in the bonus scheme saying that an individual will not receive payment under the scheme if, on the scheduled payment date, he has ceased employment or is under notice of termination of employment;
- the Unfair Contract Terms Act 1997 (UCTA) does not apply to remuneration arrangements because an employee does not deal with his employer as a “consumer” and so the termination clause was not unreasonable under UCTA (although it should be borne in mind that the position in Scotland may well be different);
- as to the exercise of discretions, the court said that an employer, in keeping with its duty of trust and confidence, ought to provide an employee with an explanation of the reasons behind the exercise of a discretion relating to additional pay. It also emphasised the potential importance of direct, contemporaneous evidence as to the decision making process.
Consequences of decision
The general consequences of the decision are:-
- employers can rely on clauses that require employees to be in employment (and not under notice) on the date on which a bonus is due to be paid, even if the employee was in employment for the entirety of the financial year to which the bonus relates. This conclusion, together with the finding that UCTA does not apply to such arrangements, reduces the likelihood of claims being brought against employers in respect of their bonus arrangements;
- reinforcement of previous Court decisions that employers do not have an unfettered discretion as to how they operate incentive arrangements. Successful challenges could still arise where discretions are exercised irrationally, arbitrarily or perversely or where an employee is dismissed solely to enable the employer to avoid paying a bonus to him; and
- where discretions are exercised under plan rules, it is important to make a contemporaneous record of the decision-making process.
Action
Companies should consider properly minuting the exercise of discretions under their incentive plans so as to reduce the risk of a successful challenge being brought. A number of our clients have asked us to assist in reviewing the exercise of discretions generally following the introduction of the new age discrimination legislation and this case highlights that such a review could be useful.
If you wish to discuss any of the matters reported in this update, please contact your usual consultant at New Bridge Street Consultants.
This update is intended to highlight issues and not to be comprehensive, nor provide specific advice.