Managing your employee share plans and designing new arrangements through the COVID-19 crisis will require the consideration of many new additional areas. There will be many design issues and unintended tax consequences to deal with. We shall update this page when these areas become more certain through HMRC announcements and the development of post-crisis remuneration best practice.
We detail below potential tax issues and then wider executive remuneration points.
The first immediate impact is probably that it will be more difficult to meet HMRC deadlines, for example:
1. The usual 90-day window for valuation agreements from HMRC. Companies with agreed valuations may not be able to grant their awards within this period and In fact current valuations may need to be revised and resubmitted due to the effect of Covid-19 on values. We have heard that HMRC may extend this to 120 days as a temporary measure.
2. The 6th July ERS annual return filing deadline. At time of writing, there has been no announced relaxation of this deadline although there is speculation and lobbying to do so (for example by ProShare).
3. The 6 July deadline for the self-certification of tax advantaged plans (e.g. CSOPs and SAYE).
4. The 90-day post 5 April time-period for reimbursement by employee of PAYE due in order to avoid an additional charge.
5. The 92-day notification deadline after the grant of EMI notification options deadline. We query whether COVID-19 would be a “reasonable excuse” for failing to meet this deadline.
6. The 90-day EMI exercise window following a disqualifying event (leaving employment is one such disqualifying event). It is not currently clear what the impact is for employees who are furloughed (see below).
7. The option exercise windows for SAYE and CSOP options.
8. The tenth anniversary expiration of CSOP options and tax efficient EMI options.
9. The 14-day period deadline by which a s431 tax election has to be made after acquiring restricted securities.
Perhaps HMRC will be considering extending the above deadlines and timescales to recognise the difficulty in taking actions as quickly as they could be taken before the working environment changed due to COVID-19. There are also more fundamental tax issues to consider aside from extending deadlines:
10. Making it clear that employees designated as ‘furloughed workers’ will be still classed as employees (i.e. not leavers) under tax advantaged share plans and still able to participate in new options and awards.
11. Making it clear that employees designated as ‘furloughed workers’ will be still classed as employees for EMI purposes, that EMI options can still be granted and that there will be no disqualifying event for EMI options when considering working/reckonable time calculations.
12. Temporary lay-offs – SIPs/SAYE.CSOPs – perhaps extend the SIP/SAYE/CSOP armed forces reservists service treatment to employees that may be laid off with a view to rejoining when stability returns so that they can still participate in new plans and be treated as still being an employee
13. Making it easier to stop and restart deductions from employees to purchase shares under a Share Incentive Plan and a relaxation to allow employees to later make up on missed contributions. Extending the SAYE savings contribution holiday period from the current permitted 12 months. Perhaps the existing SAYE maturity date could also be maintained, rather than delayed, if an employee decides to take a contribution holiday.
14. Ensuring that if performance targets attaching to EMI/CSOP options are amended to take into account the pandemic that this will not be treated as either breaching the terms of the option or as such a fundamental change that HMRC will deem this to be the grant of a new option.
General points for Remuneration Committees
Moving away from tax, there are also significant general executive pay decisions that remuneration committees will need to grapple with in order to maintain incentivisation going forward whilst also taking into account the sacrifices that many in the workforce will have made or been forced to make and the potential losses that shareholders may have suffered:
15. Should performance targets be amended? Surely this is one of those scenarios where there has been an event that is so fundamental that may share plans would allow a complete reset of performance targets/measures?
16. Dealing with a reduced share price: How to deal with absolute share price and absolute TSR targets? How to deal with underwater share options? How to calculate the number of shares in new awards (as the low share price denominator may give larger than usual/planned numbers of shares in awards unless the methodology is changes).
17. Should companies take advantage of a deflated share price? This could include accelerating awards, implementing new arrangements or reviewing existing awards. Actions here are often more appropriate for private than listed companies. Listed companies who settle options from existing shares that are purchased in the market may consider now a good time to make share purchases. Steps taken based on the share price are investment decisions and appropriate investment advice should be sought.
18. Leaver rules – the use of discretion. Good leaving caused by the COVID-19 will be wider than just due to the ill health of the award/option holder.
19. The Pensions & Investment Research Consultants (PIRC) has written to company secretaries urging companies to place executives on no more than basic salary until the end of the financial year in order to show “shared sacrifice in these difficult times". This broadly means suspending bonus payments. Remuneration committees should be mindful of this sentiment at a time when cash flow is such a key consideration for most companies.
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