Carillion and the “failure” of clawback

The collapse of Carillion has raised many issues relating to public procurement, the actions of the board and the role of the auditors. But a press release by the Institute of Directors suggesting that in 2016 Carillion relaxed the clawback conditions that applied to bonuses has raised questions over remuneration governance. The change seems to have removed “corporate failure” as a clawback/malus event, substituting conditions so that pay could only be clawed back in the event of a mis-statement of financial results or gross misconduct of an individual (neither of which may be triggered in this case).

No doubt the reasons for the change and the extent to which it was, or wasn’t, flagged up to shareholders when they overwhelmingly approved the revised remuneration policy at the 2017 AGM will be looked at very carefully. However, this also gives a timely focus on clawback given the FRC’s current consultation on changes to the UK Corporate Governance Code (the “Code”), which we previously blogged about here.

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U.S. tax reform – retirement plan provisions finalized

The tax reform bill is done.  President Trump signed the bill on December 22, meeting his deadline for completion by Christmas.

While there is much to be said about the Tax Cuts and Jobs Act (the “Act”), the update on the retirement plan provisions is relatively unexciting.  Recall that when the tax reform process started, there was a lot of buzz about “Rothification” and other reductions to the tax advantages of retirement savings plans.  For now, that pot of potential tax savings remains untapped (perhaps to pay for tax cuts in the future).  Nonetheless, the Act that emerged from the Conference Committee reconciliation continues to include a section entitled “Simplification and Reform of Savings, Pensions, Retirement”. The provisions that remain are effective on December 31, 2017.

Recharacterization of Roth IRA Contributions.

Current law allows contributions to a Roth or Traditional IRA (individual retirement account) to be recharacterized as a contribution to the other type of IRA using a trust-to-trust transfer prior to the IRA-owner’s income tax deadline for the year.

Under the Act, taxpayers can no longer unwind Roth IRA contributions that had previously been converted from a Traditional IRA.  In other words, if a taxpayer converts a Traditional IRA contribution to a Roth contribution, it cannot later be recharacterized back to a Traditional IRA.  Other types of recharacterizations between Roth and Traditional IRAs are still permitted.

Plan Loans. 

The Act gives qualified plan participants with outstanding plan loans more time to repay the loans when they terminate employment or the plan terminates.  In these situations, current law generally deems a taxable distribution of the outstanding loan amount to have occurred unless the loan is repaid within 60 days.  The Act gives plan participants until their deadline for filing their Federal income tax returns to repay their loans.

Length of Service Awards for Public Safety Volunteers. 

Under current law these awards are not treated as deferred compensation (and, thus, are not subject to the rules under Section 409A of the Internal Revenue Code) if the amount of the award does not exceed $3,000.  The Act increases that limit to $6,000 in 2018 and allows for cost-of-living adjustments in the future.

That’s all folks!  Happy Holidays!

New UK Public Register names and shames corporate governance offenders

Over one in five companies in the FTSE All Share index received at least 20% shareholder votes against a resolution at their 2017 AGM, or chose to withdraw a resolution. And executive pay remains a key issue for investors, with 38% of resolutions that in 2017 received significant votes against or were withdrawn related to annual remuneration reports, remuneration policies or other remuneration related resolutions.

This information comes from the Investment Association’s newly published Public Register of listed companies who have faced significant shareholder rebellions or withdrawn resolutions. As part of its response to the 2017 consultation on corporate governance reform, the government asked the IA to proceed with putting together the Public Register. The aim is to highlight companies which have received significant votes against a resolution, or withdrawn a resolution, and how they have responded to shareholder concerns.

The requirement to explain how a company intends to respond to votes against a resolution has been part of the corporate governance landscape since 2013. Substantial reforms to the directors’ remuneration reporting (DRR) regime introduced then included a requirement for companies who received a significant vote against a remuneration resolution to publish the reasons for that vote and the actions the company intended to take to respond to shareholder concerns. The DRR regime did not specify what “substantial” meant, but guidance published by the GC100 stated that it should mean at least 20% of votes cast against. This figure is proposed to be formally adopted as part of the changes which the FRC is consulting on making to the Corporate Governance Code.

The Public Register is likely to be a useful barometer for all issues on shareholders’ radar, both in the executive remuneration sphere and beyond, as it lists all affected resolutions and not only those related to remuneration. And it will be very useful for anyone looking to write their next article on Fat Cats!

U.S. tax reform – retirement plan differences to be reconciled

Now that the House of Representatives and the Senate have passed their own versions of H.R. 1, the Tax Cuts and Jobs Act, a tug-of-war on a compromise that both bodies can pass is in full force.  Congress is following the normal legislative process by setting up a Conference Committee to reconcile the differences between the two competing bills – as each chamber must pass identical bills before it can go to the President for his signature.   While this tug-of-war officially is between the members of the House and Senate appointed to the Conference Committee, informal, behind-the-scenes negotiations are likely to have an outsized impact on the contest.

The differences in the retirement plan provisions will not make any splashy headlines, but they are, nonetheless, worth noting.  Continue Reading

The FRC puts the UK Corporate Governance Code on a diet

The Financial Reporting Council has published for consultation its review of the UK Corporate Governance Code.  This follows a fundamental review, with the proposed revised Code being a slim shadow of its former self (13 pages instead of 32).  The FRC describes the result as “shortened and sharpened” but the outcome isn’t radical, with the concepts of the unitary board and the “comply or explain” approach being retained.  The revised Code builds on the Government’s conclusions announced in August following its consultation on Corporate Governance Reform but also on a variety of other sources including the BEIS select committee report from earlier this year and the FRC’s own 2016 report on corporate culture.  There may also be a hint of influence from the Investment Association’s agenda in there as well.  Since this is a remuneration and benefits blog, we’ll concentrate on those aspects of the new Code in this post.  Continue Reading

Tottenham Hotspur FC 2 : 0 HM Revenue & Customs

Football, football teams, footballers, footballer’s pay… a comprehensive review of the case law on the taxation of termination payments… this one has got it all!

The match… the case (HM Revenue & Customs v Tottenham Hotspur Limited) concerns termination payments made to Peter Crouch and Wilson Palacios. The facts are relatively straightforward. Both player’s contracts with Tottenham Hotspur were for a fixed term and could only be terminated by mutual consent. Both contracts were terminated early (by mutual consent) when both players moved to Stoke City during the 2011 summer transfer window.  Both players received lump sum termination payments from Tottenham as part of overall transfer arrangements.

HMRC, arguing that the lump sums paid to Crouch and Palacios were “from an employment”, determined that both income tax and national insurance contributions (NICs) were due. Tottenham disagreed and appealed against the determinations.

The First-tier Tribunal (FTT) decided, back in 2016, that the the payments were not taxable as earnings from employment, and were not subject to NICs. Crucially, the FTT drew a distinction between payments “received in connection with the termination of employment” (such as those received by Mr Crouch and Mr Palacios) and payments that were “earnings from employment”. One-nil, Tottenham. Perhaps realising that football is a game of (at least) two halves, HMRC appealed against that decision.

The Upper Tribunal undertook a detailed summary of the voluminous case law in this area, but ultimately upheld the FTT’s decision. It found that the termination payments “fell squarely” into the category of payments made where the entire contract of employment is abrogated and distinguished such payments from those “made in pursuance of a pre-existing obligation … under a contract of employment”. Two-nil, Tottenham.

While this is good news for Spurs, and the individual players involved, it is worth noting that the law in this area will be changing with effect from April 2018.

Currently, termination payments made in line with a contractual provision (such as a payment in lieu of notice (PILON) clause) are taxable in full, whereas payments which are not contractual are not subject to NICs at all and the first £30,000 of the payment is free of income tax.

From April 2018, that distinction between “contractual” and “non-contractual” PILONs, so critical in this case, will fall away. Under the new rules any “post-employment notice pay” (broadly, the basic pay the employee would have been paid up to the termination date if they had worked their notice period) will be subject to income tax and NICs. The £30,000 exemption and full exemption from NICs will only apply to termination payments that exceed the “post-employment notice pay”. The goalposts are moving.

HMRC v Tottenham Hotspur Limited [2017] UKUT 0453 (TCC)

Tax reform progress – retirement plans still safe?

The U.S. House of Representatives passed the “Tax Cut and Jobs Act” (H.R. 1) last Thursday without, unsurprisingly, any Democratic support.  The retirement plan provisions in the bill haven’t changed. No eleventh-hour revenue-grabbing effort to convert all 401(k) plan contributions to Roth contributions or to place substantial limits on pre-tax plan contributions.  But there are still opportunities to do so if the need for additional revenue offsets arises.

There was additional action on Thursday night – the Senate Finance Committee approved its version of the tax reform bill.  The Committee removed two of the retirement savings provisions from the earlier version of the Senate bill: the application of the 10% early withdrawal tax to governmental section 457(b) plans and the elimination of catch-up contributions for high-wage employees, which were described in our last post.  But the big headline out of the Senate is that the bill now includes the repeal of the Affordable Care Act’s individual coverage mandate.  The repeal gives tax writers an additional $338 billion in savings over a decade, which helps offset the bill’s tax cuts and keeps the bill compliant with the Byrd Rule.  It also, of course, creates additional controversy.

The bill, still in discussion form, likely will hit the Senate floor shortly after the Thanksgiving break.  Presumably, there will be legislative language before then – but it’s not clear how long before then.  There is lots of opportunity for legislative mischief in the translation process.  There also is the possibility that the individual mandate repeal gets pulled – in which case, a new revenue source will be needed and retirement savings plans could be in the hot seat again.

Senate proposes changes to retirement savings programs

Just as they appeared to survive round one of the House tax reform bill released last week, retirement savings programs, such as 401(k) plans and Individual Retirement Accounts, seem to emerge relatively unscathed from the Senate’s tax reform deliberations.  Nonetheless, the Senate Finance Committee’s proposal does include a few changes to these programs. Continue Reading

VAT on pension costs – some good news!

It’s a while since we last commented on VAT on pensions but we return with some good news which HMRC have quietly slipped out in updated content to the VAT Manual.

Back in 2014, following the PPG case, HMRC proposed withdrawing their practice of allowing employers to recover VAT on charges on administration costs for DB pensions. The debate over various alternative VAT arrangements has rumbled on since then, with HMRC repeatedly extending the transitional period before their new approach kicked in. It’s fair to say that it was proving very difficult to make the alternatives (such as tripartite contracts, VAT grouping and onward supply of services by the employer to the trustees) work from a legal, tax or regulatory viewpoint.

The updated guidance now confirms that the old practice can continue to be used, including the 70/30 rule of thumb that allows employers to recover 30% of VAT incurred on combined investment and administration services. This does not block the use of other arrangements which may enable an employer to recover more VAT, provided the other issues surrounding their use can be satisfactorily resolved.

Employers and trustees can perhaps breathe a collective sigh of relief that this long running saga now seems to have reached a final conclusion. A final check on the way VAT is recovered on DB schemes may still be appropriate, just to make sure that the optimum arrangements are in place for the future.

Investment Association sets bar for 2018 AGM season

The Investment Association (IA) has published its annual letter to Remuneration Committee chairs and updated its Principles of Remuneration (the “Principles”), and many companies will need to take action before their 2018 AGM. The IA is encouraging voluntary disclosure of CEO pay ratios in 2018 Directors’ Remuneration Reports, has introduced a new requirement to defer bonuses in excess of 100% of salary and is keeping up the pressure on overall levels of pay.

The remaining changes to the Principles are limited, and for the most part reflect the continued focus on pay restraint and transparency. An interesting addition to the foreword is a specific reference to the Principles being relevant to AIM listed companies – perhaps a shot across the bows for those companies? Continue Reading