The Update contains a round-up of key developments in this area during May 2016.

In summary:

Market Abuse Regulations (MAR)

• Financial Conduct Authority (FCA) confirms current position on preliminary results and the closed period under MAR
• FCA issues templates for notification of dealings by persons discharging managerial responsibility (PDMRs) and the persons closely associated (PCAs) with them

Entrepreneurs' relief

• What shares should be counted as "ordinary share capital" and why does it matter?

Tax

• HMRC revises Capital Gains Tax Manual for Employee Shareholder Shares

In full:

MARKET ABUSE REGULATIONS

FCA confirms current position on preliminary results and the closed period under MAR

One of the most significant outstanding issues in relation to the impact of MAR was how to interpret closed periods in Article 19(11) of MAR in light of a preliminary announcement made pursuant to LR 9.7A.1R.

The Financial Conduct Authority (FCA) has announced that, pending clarification from the European Commission (Commission) and the European Securities and Markets Authority (ESMA), it will continue to take the view that where an issuer announces preliminary results, the closed period exists immediately before the preliminary results are announced. Under MAR, the length of the 'closed period' will be 30 days.

The FCA stresses that this will only be the case where the preliminary results announcement contains all inside information expected to be included in the year-end report.

Thus, while the definitive position remains to be provided by the Commission and ESMA, the FCA's announcement is to be welcomed as it means that issuers who have no further inside information relating to year-end results following the publication of their preliminary results announcement will, in line with current practice, move into an open period notwithstanding that they have not yet published their annual report. This is particularly helpful for issuers whose PDMRs are used to dealing following the announcement of preliminary results, as they will be able to continue with this practice. In addition, issuers whose share award calendar has been timed around the preliminary results announcement will be able to continue with their existing arrangements as regards the granting and vesting of options and awards.

FCA issues templates for notification of PDMRs and their PCAs

The FCA has published the 15th edition of its Primary Market Bulletin. Described as a "special edition", it focuses solely on the implementation of MAR. In particular, it publishes the forms for use when submitting notifications to the FCA by PDMR/PCA in relation to transactions conducted on their account in or related to the financial instruments of a relevant issuer in accordance with Article 19 – click here. Such notifications must be made promptly and no later than three business days after the date of the transaction.

The forms are not yet "live" but are provided for information at this stage.

The FCA states in the bulletin that, given the extended scope of MAR, it plans to work closely with market operators to monitor its application and compliance. For issuers with financial instruments admitted to trading on multi-lateral trading facilities, such as AIM, the FCA intends to collaborate with market operators on compliance issues and real time market monitoring.

ENTREPRENEURS' RELIEF (ER)

What shares should be counted as "ordinary share capital" and why does it matter?

You may recall that in the March Employee Incentives Update we reported on the case of Castledine v HMRC in which the First-tier Tribunal determined that a director did not qualify for ER (whereby capital gains on shares are taxed at 10%) as his holding of shares only came to 4.99% of the total ordinary share capital (rather than the required 5%) once the deferred shares in the company had been included. The deferred shares had no voting rights, dividend entitlement or entitlement to a distribution on winding up and the company had therefore not included them in the total ordinary share capital of the company. However, in this case the First-tier Tribunal found that the wording of section 989 of the Income Tax Act 2007 (ITA 2007) was clear that "all the company's issued share capital (however described)" should be counted towards the total ordinary share capital for the purposes of the shareholding requirements for ER.

However, a differently constituted First-tier Tribunal in the case of McQuillan v HMRC has now held (the contradictory view) that a class of redeemable shares with no dividend entitlement were fixed rate preference shares and therefore did not form part of the ordinary share capital of the company. In contrast to the Tribunal in Castledine, in this case the Tribunal considered that section 989 of ITA 2007 was ambiguously drafted and that a right to no dividend could be a right to a fixed dividend of zero per cent. In McQuillan, the consequence of excluding the redeemable shares from the ordinary share capital was that the taxpayers were entitled to entrepreneurs' relief, as they each held more than 5% of the remaining capital.

Clearly this leaves companies in a very unsatisfactory position. The decision in McQuillan contradicts long standing HMRC practice, whereby HMRC considers that shares with no dividend rights are ordinary share capital. It is hoped that the decisions in both cases will be appealed and that clarity can be given by the courts to this issue which impacts not only ER but on other areas such as the "material interest" test for tax-advantaged share plans.

TAX

HMRC revises Capital Gains Tax (CGT) Manual for Employee Shareholder Shares (ESS)

HMRC has updated its guidance on the CGT treatment of ESS shares. The guidance now takes into account the £100,000 lifetime limit on exempt gains arising on disposal of ESS shares that was announced in the 2016 Budget. This lifetime limit applies to ESS agreements entered into on or after 17 March 2016.