Proposed remuneration changes to the Corporate Governance Code

The Financial Reporting Council (FRC) is consulting on changes to its UK Corporate Governance Code (Code) which, if implemented, would take effect for financial years beginning on or after 1 January 2025. The proposed changes follow the Government’s 2021 white paper on restoring trust in governance and audit.

The FRC is proposing several changes to the section of the Code that deals with executive pay. None of the changes are ground-breaking, but they do display a clear desire to create a stronger link between remuneration and long-term strategy, particularly on ESG matters.

A revised fundamental principle on executive remuneration in the Code will make it clear that remuneration outcomes should be clearly aligned to “performance, purpose and values” and the successful delivery of the company’s long-term strategy.

Although the mentioning of ESG in the context of remuneration and strategy is a new addition to the Code, it merely reflects the fact that the vast majority of listed companies now link some element of executive pay to their organisation’s ESG objectives.

As expected, the revised Code also includes an ever-increasing focus on malus and clawback, prescribing these as a standard feature of director contracts and remuneration arrangements. The changes require companies to report, in their annual directors’ remuneration report, not only details of the applicable malus and clawback provisions they have adopted, but also their practical use during the prior year and over the last five years.

Other changes include a proposal by the FRC to remove existing Provision 40 which currently sets out six factors that must inform a company’s executive director remuneration policy and practices. The FRC is concerned that this prescriptive list is generating boilerplate disclosure, rather than thoughtful reporting. Instead, reporting would rest on a shorter list of factors that remuneration committees should consider, which would, in turn, allow for more flexible narrative reporting.

The FRC has asked for comments on the proposed changes by 13 September 2023. You can read our more in-depth article on all the proposed changes to the Code.

SAYE bonuses are back

At long last HMRC have announced an update to the mechanism used to calculate bonus rates for employees participating in Save As You Earn (or Sharesave) plans (SAYE).

As set out in the Employment Related Securities (ERS) Bulletin 51, a new mechanism will calculate bonus and interest rates by reference to the Bank of England base rate (the Bank Rate). This update will result in a bonus being provided on SAYE participant’s savings for the first time in nearly ten years. The participant may then use such bonus to acquire additional shares or choose to receive it tax-free.

The new mechanism will come into effect from 18 August 2023 and, going forward, SAYE bonus rates will change on the 15^th day following a change in the Bank Rate. A new template SAYE prospectus has been issued by HMRC in order to give effect to the mechanism and it will not be required to be replaced every time there is a change to the bonus rate in future.

For companies that wish to launch a SAYE plan prior to 18 August, the current SAYE prospectus setting out the nil bonus will continue to apply (provided that the first monthly contribution is made within 30 days of 18 August). These companies may consider deferring this year’s SAYE offering. As bonus rates are fixed at the start of the SAYE plan, any employees already saving under an existing SAYE plan will not be affected by the rate changes.

For companies contemplating launching a SAYE offering, care should be taken to ensure that the grant documentation and communication to participants deal with the treatment of bonuses under the plan; something they haven’t needed to do since 2014.

HMRC report on CSOP, SAYE and SIP

HMRC previously commissioned London Economics to undertake research on the impact of four of its five tax-qualified share plans, namely the Company Share Option Plan (CSOP), Save As You Earn Option Plan (SAYE) and the Share Incentive Plan (SIP). Enterprise Management Incentive Plans (EMIs) were not covered as they have been recently evaluated. The research covered a quantitative, qualitative and econometric analysis of the plans.

On 5 June 2023, HMRC published their report. The report seeks to provide insights into the awareness and use of the plans, companies’ reasons for opting in (or not) to them, the plans’ impact on business and employment outcomes, the plans’ association with a ‘savings culture’ amongst participating employees and their proportionality.

As part of the research process, surveys and interviews were conducted with companies and employees participating in either CSOP, SAYE or SIP plans and also with companies not registered for any tax-advantaged share plan. An econometric analysis based on HMRC administrative data was also conducted.

The report laid out a number of key findings which are summarised below.

• Awareness of the plans was limited. Among surveyed companies that are registered for either CSOP, SAYE or SIP plans, 55% of companies were unaware of having operated one of these plans in the last ten years, but reported being familiar with its general concept.
• Surveyed companies that were aware of being registered for a plan reported having a good understanding of the plan they are offering and most found out about the plan through their tax advisers. In addition, the small number of interviewed employees reported having a good general understanding of the plan they participate in, but there were some gaps in their understanding of how the tax relief works.
• Out of CSOP, SIP and SAYE, the former is the most used tax-advantaged share plan: CSOP was more frequently used by companies (68% of companies between 2015 and 2019) than SAYE (12%) and SIP (26%) and was often combined with other share plans.
• Companies mostly opt into share plans to improve employment outcomes. For example, the most common reasons provided by companies for offering CSOP, SAYE or SIP are to create a feeling of ownership (50%), help retain staff (in general) (32%), retain skilled employees (24%), attract skilled employees (21%), as well as improve staff morale (26%). The report found employees mostly participated in share plans to save.
• This contrasts with those companies that do not offer one or more of the plans to employees which generally perceived the process of setting up and administering the plan as complicated and difficult and as such found this a barrier to offering the plan.
• The report found that CSOP, SIP and SAYE appear to improve business and employment outcomes. Out of all surveyed companies that are aware of being registered for a CSOP, SIP or SAYE, 81% indicated an improvement in employment and/or business outcomes. The most commonly reported impact relates to staff retention, followed by recruitment.
• There is mixed evidence in the report that share plans contribute to a savings culture. There is some evidence of a positive impact of these share plans on employee saving behaviour. However, not all respondents indicated an increase in their savings and some suggested that they would have saved or invested the money in another vehicle in the absence of the share plan.
• Companies not offering any of the plans indicated that changing the maximum limits (either upwards or downwards) would have no impact on their likelihood of participating in a tax-advantaged share plan. However, an increase in the limits might be beneficial to incentivise more senior staff.
• Some interviewees raised doubts about the suitability of the three plans for smaller companies. This mirrors some of the reasons why some small companies decided not to opt into the scheme.

Relaxation of remuneration rules for "smaller firms"

In February this year, the PRA issued a consultation (CP5/23) in which it proposed to relax some of the remuneration rules for smaller banks and building societies and those investment firms regulated by the PRA (“smaller firms”). The PRA’s proposals were recently supported by the FCA when they released a similar consultation on 12 May 2023 (CP23/11) entitled: “Remuneration: enhancing proportionality for dual-regulated firms”. The aim of the two consultation papers is to introduce a more appropriate and proportionate regime for smaller firms by relaxing some of the remuneration rules that apply to such firms.

There are two proposals of key substance.

• Amending proportionality thresholds by increasing the total asset threshold and changing the additional criteria that firms with over £4 billion of total assets must meet. This proposal will increase the number of firms that can take advantage of proportionality. It means that firms which either have average total assets equal to or below £4 billion on a three-year average, or have average total assets greater than £4 billion and equal to or below £20 billion and which meet other criteria, will be able to disapply certain remuneration rules, namely, deferral, payment in non-cash instruments, retention, discretionary pension arrangements and (now) malus and clawback – the latter of which is a new addition, see below.

• Removing the requirement for malus and clawback. Firms meeting the amended proportionality thresholds will no longer be required to include malus and clawback provisions in their variable remuneration arrangements. As noted above, this means the firms qualifying for proportionality will be exempt from all the stringent remuneration structure rules mentioned above.

The consultation proposes other smaller amendments to FCA’s rules on identifying “Code staff” so as to align them with the equivalent provisions in the PRA Rulebook on identifying “Material Risk Takers”. 

The FCA plans to publish its policy statement and final rules and guidance in Q4 2023.

Separately, the outcome of a separate consultation on the removal of the bonus cap for all firms (CP15/22) will be the subject of final rules expected to be published in Q3.

IR35 and Lineker v HMRC - he thinks it’s all over; HMRC aren’t so sure…

In one of the more high-profile IR35 cases involving well-known media personalities, Gary Lineker has scored a victory against HMRC in the First-tier Tribunal after Tribunal Judge Brooks found in his favour.

Read our short blog.

Employment tax update roundup

We have published our first two monthly bulletins on employment tax updates following the release of the April and May HMRC Agent Updates (Issues 107 and 108). Our May bulletin covers:

• the update to HMRC guidance for off-payroll working (IR35) to offer increased clarity for those engaging contractors;
• the update to the "fix problems with running payroll" guidance and new process coming soon for overpayments of National Insurance contributions;
• the update to the assessment year for Time to Pay arrangements for disguised remuneration and the loan charge;
• the update to HRMC guidance to clarify the eligibility criteria for homeworking deductions for expenses and benefits; and
• HMRC’s aim of increasing awareness of the tax and National Insurance treatment of termination payments.

Read the full May bulletin.

Our June bulletin covers:

• end of year reporting deadline for Employment Related Securities (ERS) – 6 July 2023;
• the new tax year basis for calculating taxable profits for income tax self-assessment purposes; and
• changes to the self-assessment threshold for income taxed through PAYE.

Read the full June bulletin.