Legal briefing | Incentives & Remuneration, Tax, Employment |

Incentives and remuneration international news

Overview

On 23 June 2016, the British people voted to leave the EU and in March 2017, the UK government triggered the departure process by invoking Article 50 of the Lisbon Treaty.

The UK was due to leave the EU on 29 March 2019 but the departure date has now been extended for a third time to 31 January 2020 to allow for a General Election on 12 December 2019. The UK Government has negotiated the terms of a withdrawal agreement with the EU which provides for a transition period. During this the UK will no longer be an EU member state but will see some elements of its membership continue, allowing for more time to agree the terms of trade after the UK's exit. However, the terms of the withdrawal agreement are yet to be agreed by the UK Parliament.

  • If the UK Parliament does not ratify a deal with the EU by 31 January 2020 or having entered into a transition period, the UK is unable to agree the terms of a free trade agreement with the EU by the end of that period, then, unless there is a further delay to the Brexit process, the strict legal position is that the UK will leave the EU without a deal and will effectively become a "third country" for EU purposes overnight. UK politicians and business leaders, although keen to avoid a "no-deal" exit from the EU, are preparing for that eventuality.

  • Generally speaking, Brexit is not expected to have a significant direct impact on the operation of share plans in the UK. However, Brexit will (particularly in the event of "no-deal") have implications for securities laws, data protection rules and social security charges. UK companies will need to be mindful of these when operating share plans in the EU. The way in which global share plans are extended to UK-based employees might also change.

Data protection

The General Data Protection Regulation (GDPR), is EU legislation that took direct effect in the UK on 25 May 2018 and governs the way in which an individual's personal data can be collected, shared and used. This has been supplemented in the UK by a new Data Protection Act. Although a number of the key concepts follow the previous data protection regime, the consequences of breaching the rules are more severe and include penalties of up to EUR 20 million or 4% of global turnover (whichever is the greatest).

Running an employee share plan involves the processing of personal data and UK companies with such arrangements have to check that they comply with the requirements of the GDPR. The new data protection regime has broader territorial scope than before and companies doing business in the European Economic Area (EEA – being the EU member states plus Iceland, Liechtenstein and Norway) need to assess whether GDPR applies to them.

Companies operating share schemes in the UK have to ensure that they are processing personal data (names, addresses, social security numbers etc.) lawfully. Under GDPR, companies can no longer rely on consent as a basis for lawfully processing the personal data of their employees. This means that they have to find other grounds for data processing e.g. for the purpose of a legitimate interest (the operation of a share plan for the benefit of employees) or in order to perform a contract (an option) with the employee. Companies with UK share plans have had to reconsider their data protection provisions to ensure they comply with GDPR. This usually involves a review of the privacy notice for employees, the plan rules and the terms of any engagement with plan administrators (such as trustees of an employee benefit trust).

Particular issues arise where a US parent company operates a share plan for employees of a UK subsidiary. The European Commission has not given the US full adequacy status from a data protection point of view, however, personal data can be transferred if the US parent has signed up to the US Privacy Shield.  If not, the employee  can explicitly consent to a proposed transfer of personal data provided they have been informed of the possible risks of such transfer in the absence of either an adequacy decision or appropriate safeguards. Alternatively, group companies can enter into an agreement regarding data protection that contains standard clauses approved by the European Commission. For the time being this is the most administratively straightforward way for a US company to ensure compliance with EEA and UK data protection rules.

How will Brexit affect data protection?

On Brexit, the terms of the GDPR will be directly incorporated into UK domestic law and, in the event that the UK leaves the EU under a withdrawal agreement, there should be no immediate change to UK data protection standards. During any transition period, personal data will be able to flow freely between the UK and EEA as before and, provided the European Commission is able to make an "adequacy decision" in favour of the UK, this will continue beyond the end of that period.  

In the event of a no-deal Brexit, the UK will be a third country for EEA data protection purposes and transfers of information from the EEA to the UK will need to be subject to adequate safeguards (such as entering into agreements containing standard clauses). Conversely, if there is no-deal the UK government is expected to implement regulations that will recognise all EEA countries as "adequate" with the result that personal data can continue to be transferred from the UK to the EEA.

The US Department of Commerce (DOC) has published "Privacy Shield and the UK FAQs" on its website outlining steps that participants in the EU- US Privacy Shield must take to continue to receive UK personal data after Brexit. Broadly, this requires participants to update their commitments by the "applicable date" (either the end of the transition period or the exit date if there is a no-deal Brexit and no transition period) which includes an obligation to amend their HR privacy policy using model language provided by the DOC.

Other UK developments

The prospectus rules - offering shares to employees in the UK

Under the Prospectus Rules it is unlawful for a company or firm, wherever incorporated or registered, to make an offer of shares (or securities) to employees in the UK unless an approved prospectus has been published or an exemption applies. Once a prospectus has been published in one EEA Member State it can be relied upon throughout the EEA (known as "passporting"). The prospectus requirements in the UK do not apply to the grant of share options or award of free shares but different interpretations can apply in other EEA Member States. The prospectus requirements are particularly relevant for companies operating share purchase plans or share offers.

Producing a prospectus is costly and time consuming however there are a number of exemptions from the need to file a prospectus. For example, an offer currently falls outside the requirements of the Prospectus Rules if the aggregate consideration payable under the offer across the whole of the EEA is less than EUR8 million calculated over a period of 12 months, or if the offer is made to fewer than 150 people in each EEA Member State.

Even where none of the above exemptions are available, a prospectus will not be needed for an offer made to employees or directors provided certain conditions are met. In these circumstances, an employee information document will have to be made available which contains information on the number and nature of the securities offered, and the reasons and details of the offer.

The exemption for offers of securities to directors and employees previously only applied to companies with a head office or registered office in the EEA, and to non-EEA companies with securities traded either on an EEA regulated market or a non-EEA market that is deemed by the European Commission to have an equivalent legal and supervisory framework.

In June 2017, the EU adopted the Prospectus Regulation, which introduced directly applicable rules that repealed and replaced the existing provisions. One key change for employee incentives was that, from 21 July 2019, the exemption for offers made to directors and employees applied to all companies wherever they are based and wherever their shares are traded.

How will Brexit affect the prospectus rules?

If the UK leaves the EU with a deal then it is likely that the EEA prospectus rules will continue to apply and it will be possible to passport any prospectus between the UK and the EEA. In the event of a no-deal Brexit, the UK will be a third country for the purposes of the EEA prospectus rules.

Taxation of non-UK domiciled individuals

"Deemed" domicile rules came into effect on 6 April 2017. Under these rules, long-term UK residents (individuals resident in the UK for at least 15 out of 20 tax years) are deemed to be domiciled in the UK for all UK tax purposes and so cannot benefit from the remittance basis of taxation. In addition, persons who had a UK domicile of origin and a UK place of birth, but who have subsequently become domiciled elsewhere, will be regarded as UK domiciled for income tax and capital gains tax purposes if they return to the UK at any point and are UK resident under the statutory residence test (returning domiciles).

EMI receives state aid approval

Enterprise Management Incentives (EMI) are a tax efficient form of share option that can be granted by small and medium-sized companies that meet specific statutory criteria. The nature of EMI means that it is subject to European Commission approval under the EU State Aid rules. On 15 May 2018, the EU Commission confirmed that the scheme's State Aid approval would continue until the UK leaves the EU. This is good news as EMI can provide share incentives that benefit from income tax and social security relief plus a lower rate of capital gains tax. Following Brexit, it is anticipated that the EU State Aid regime will continue to apply during the transition period at the end of which the UK will adopt a state aid regime similar to that operating within the EU.  If the UK leaves the EU without a deal then it will apply its own state aid rules earlier.

Social security rules

The social security status of employees moving around the EU are currently governed by EU regulations. The general rule is that a person pays social security in the country in which they work. UK employers often rely on the regulations to enable secondees from the UK to remain within the UK social security net on the issue of a form A1. Not only can the employee continue to make contributions to the UK social security system for the purposes of state pension etc. the relatively low rates in the UK mean that it is economically more attractive.

If there is no-deal in relation to social security, it is possible that secondees will find themselves having to pay local social security contributions after Brexit. The government has issued guidance setting out the changes for UK workers seconded to the EU which acknowledges that such an individual could be subject to social security legislation in more than one state at a time.

The UK government is seeking to enter into reciprocal arrangements with EU countries to maintain existing social security co-ordination until December 2020 and has recently entered into such an arrangement with Switzerland (which is also party to the rules).  The position for UK nationals working in Ireland after Brexit will not change as they are covered under an agreement signed between the two countries in February 2019.

Off-payroll workers

Some individuals choose to work for a client through their own company (known as a "personal services company" or "PSC"). For clients, such an arrangement has the advantage that, unlike payments to employees, fees paid to PSCs do not generally attract withholding tax obligations and social security contribution liabilities. Further, the owner of the PSC can choose to extract value from their company in a more tax efficient way such as the payment of dividends. For some time, the UK government has been concerned that PSCs are being used to disguise what is essentially an employment relationship as self- employment.

To combat avoidance in this area, legislation was introduced that makes it impossible to avoid UK tax simply by providing services through a personal services company. The rules (known as "IR35" after the press release that originally announced them) deem payments made to service companies to be employment income if, were it not for the existence of the PSC, the relationship between the client and worker would be one of employment. These anti-avoidance rules apply wherever the company is incorporated or resident.

Until recently, where IR35 applies, it was the PSC that was responsible for accounting for the income tax and social security contributions due (rather than the client).  The UK government modified the rules in 2017 with the effect that, in the case of off-payroll workers in the public sector, it will be the client that has to collect the tax and social security contributions. The government perceives this as having improved compliance in this area and, as a result, it announced that these anti-avoidance rules will be extended to the private sector from April 2020.

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