Welcome to our Employee Incentives Update, we hope you find it useful. This Update contains a round-up of key developments in remuneration during February 2017.

In summary:


  • HMRC issues Spotlight 35 focusing on tax avoidance using annuities and Spotlight 36 focusing on schemes to avoid disguised remuneration loan charges
  • HMRC issues revised guidance on valuing private company shares for EMI purposes
  • The First-tier Tax Tribunal confirms that, for capital gains tax purposes, employee share options which are settled otherwise than by the issue or transfer of shares on exercise are treated in the same way as employee share options where shares are issued or transferred on exercise

Corporate Governance 

  • FRC announces review of the UK Corporate Governance Code

Financial Services

  • European Banking Authority issues 2015 report on high earners in EU banks

In full:


HMRC Spotlight 35 – tax avoidance schemes using annuities

Spotlight 35 focuses on a disguised remuneration tax avoidance scheme that attempts to avoid income tax and National Insurance contributions (NICs). It involves using annuities as an alternative method of paying people for their services. This scheme is mainly aimed at contractors and involves the contractor being paid in two parts. The first part is by way of a salary, usually around the level of the annual allowance such that it attracts little or no income tax and NICs. The second part is by way of a payment to the contractor in return for the contractor agreeing to pay an annuity, the payment of which is deferred until a date agreed between the parties. The scheme promoters consider that the payment for the annuity is a non-taxable capital payment.

HMRC uses this Spotlight to issue an unequivocal warning to tax payer that it considers the scheme doesn’t work and that it will investigate all users of the scheme.

A copy of Spotlight 35 can be found here.

HMRC Spotlight 36 - schemes to avoid disguised remuneration loan charges

By way of background, disguised remuneration avoidance schemes are used by employers and individuals to avoid income tax and NICs. Although there are various types, they normally result in a loan from a third party (usually an employee benefit trust) on such terms that mean the loan is unlikely to ever be repaid.

During the Budget 2016 the government announced a number of changes to tackle existing avoidance schemes and prevent their future use, these include a new ‘loan charge’ on disguised remuneration loans which are outstanding on 5 April 2019.

Spotlight 36 focuses on schemes which purport to avoid this new loan charge and, as in Spotlight 35, HMRC is unequivocal in its view that this scheme doesn’t work and that the only way to avoid the new loan charge is to either to repay the loan, or settle the liability with HMRC, before 6 April 2019.

A copy of Spotlight 36 can be found here.

HMRC issues guidance on valuing shares for EMI purposes

HMRC's Share and Assets Valuations (SAV) has updated its guidance on valuing unquoted shares, including for the purposes of granting Enterprise Management Incentive (EMI) options. The guidance is designed to assist smaller companies in preparing EMI valuations.

The revised guidance includes additional details on calculating EBITDA (earnings before interest, taxes, depreciation and amortisation) multiples (which might be used instead of a price-earnings ratio to value shares). In particular, the guidance now includes helpful details of where appropriate EBITDA multiples can be found.

A copy of the revised guidance can be found here.

CGT treatment of cash settled employee share options

The First-tier Tax Tribunal has confirmed in Davies v. Commissioner for HMRC that employee share options which are settled (or are capable of being settled) by the employer otherwise than by issuing or transferring shares are treated, for capital gains tax (CGT) purposes, in the same way as employee share options where shares are issued or transferred on exercise. Whilst not an unexpected decision, had the Tribunal agreed with the taxpayer's arguments (set out below) this would have had a major impact on the CGT treatment of share options as many share option scheme give the employer flexibility to, for example, provide a cash alternative on exercise.

In this case, the Tribunal determined that no capital gains tax loss arose on the exercise of Mr Davies' option by virtue of the operation of Section 144ZA of Taxation of Chargeable Gains Act 1992 (TCGA 1992). In these circumstances, the base cost of the shares for CGT purposes is the sum of the amount actually paid for the shares (the exercise price) and the amount charged to income tax on exercise. This equates to the market value of the shares on exercise, so if the shares were immediately sold, there was no capital gain or loss.

The tax payer had argued that Section 144ZA did not apply in his circumstances as the grantor had a discretion to satisfy the options either by delivering shares (which could be achieved in a number of ways) or making a cash payment. He argued that the requirement of Section 144ZA(2) was not met, as the options did not "bind the grantor to sell" the shares to the option holder. Instead he argued that the market value rule in Section 17 of TCGA should apply such that he should be treated as having a base cost for CGT purposes equal to the market value at the date of exercise plus the amount on which income tax was paid such that on an immediate sale of the shares following exercise a capital loss was created.

However, the Tribunal took the view that section 144ZA(2) of TCGA 1992 must be construed as including references to an option which binds the grantor to enter into another transaction that is not a sale and that share options that could be satisfied in a number of ways including by the issue or transfer of shares were caught by this provision.

Corporate Governance 

FRC announces review of the UK Corporate governance Code

The Financial Reporting Council (FRC) has announced plans for a fundamental review of the UK Corporate Governance Code. This will take account of work done by the FRC on corporate culture and succession planning, and the issues raised in the Government’s Green Paper and the BEIS Select Committee inquiry.

The FRC will commence a consultation on its proposals later in 2017, based on the outcome of the review and the Government’s response to its Green Paper.

Financial Services 

European Banking Authority issues 2015 report on high earners in EU banks

Under the terms of CRD IV, the EBA is required to publish aggregated data on high earners in EU banks earning EUR1 million or more in a financial year. It must do this on an annual basis. The EBA has now published its analysis of the data provided to it for the year 2015, and compared it to the 2014 data. The main results of this analysis are as follows:

  • The number of high earners who have been awarded EUR 1 million or more in annual remuneration for 2015 increased significantly, from 3,865 in 2014 to 5,142 in 2015 (+33.04%). This was mainly driven by changes in the exchange rate between EUR and GBP, which led to an increased staff income paid in GBP when expressed in EUR;
  • The population of high earners that are staff identified as having a material impact on the institution’s risk profile was almost the same as in 2014. Around 86% of high earners were identified staff in 2015 vs 87% in 2014. This confirms that the percentage increased significantly after the regulatory technical standards (RTS) on identified staff entered into force in 2014 (59% in 2013).

A copy of the report can be found here.

Key Contacts

Jonathan Fletcher Rogers

Jonathan Fletcher Rogers

Partner, Employee Incentives
London, UK

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