(Not) Simplifying the tax on termination payments!

By Squire Patton Boggs on July 30, 2015 Posted in Employment Tax

Friday last week saw the release of an almost comical consultation document setting out HMRC’s proposals for the simplification of the tax and NIC treatment of termination payments.

As many people will know, the tax treatment of termination payments depends on the reason for the payment. The most often confused aspect is whether a payment in lieu of a notice is taxable. If there is a contractual right to pay the employee in lieu of notice (a so called PILON), the payment is taxable. In the absence of a contractual right to pay, the payment in lieu of notice is not taxable (at least up to a maximum of £30,000) – essentially because this latter payment is damages for breaching the contractual notice provision. Failure to adhere to the contract in this way gives rise to a wrongful dismissal claim (remember that phrase for later!).

HMRC propose to do away with the artificial distinction between contractual rights to pay in lieu of notice and payments in lieu that aren’t contractual. The tax exemption is not to be available for either a PILON payment or a payment for breach of the notice provision (but see below for the general exemption that is available if there is a statutory redundancy).

However, elsewhere in the document HMRC have suggested that a separate exemption should be available for payments made in respect of unfair or wrongful dismissal. I’m sure I’ve seen a reference to wrongful dismissal somewhere else. Oh yes. It’s the term of art used to describe a dismissal that is not in accordance with the contractual agreement. So pay in lieu is taxable while wrongful dismissal compensation (being exactly the same thing at law) is not. Right hand, meet left hand.

The consultation goes on to propose that the main exemption for termination payments will only be available for statutory redundancy situations. The suggestion is to provide a basic exemption limit (£6,000 is the amount used in the examples in the consultation document) that kicks in when the dismissal is for one of the statutory redundancy reasons and then to increase that amount annually (£1,000 in the consultation document). The exemption will cover all payments be they statutory redundancy, PILON, ex gratia and even (apparently) contractual entitlements like accrued holiday pay. Not wishing to be cynical or anything, but doesn’t that mean everyone will want to be made redundant? Often terminations for being rubbish at one’s job or for sickness are dressed up as redundancy to give the poor soul a chance of getting a new job. These “redundancies” are accompanied by explicit warnings of dire consequences if the employer supports an employee’s assertion to, for example, an insurance company to allow him to claim under a policy that pays out in the event of a “redundancy”. The redundancy label is really just a less ugly wrapper for the dismissal. Even more dire warnings would need to be issued to help make sure that employers aren’t complicit in dodging tax if the consultation leads to these proposals being introduced.

And in a finale of silliness comes the proposal to take away the problems of apportioning compensation for discrimination (which will continue to be receivable tax free) by requiring that the tax free nature of these payments will only be available if the award is made by an Employment Tribunal. So rest assured, you sensible employers out there, no sensible employee is going to settle a half decent discrimination case before going to Tribunal because to do so would mean that the compensation will be taxable.

It seems unlikely that the proposals will be adopted in anything like their suggested format – at least I hope so. Even accepting that it is only a proposal, the document shows a wholly disconcerting lack of awareness of basic contractual principles of how and why employment settlements are reached and of the likely consequences for both employees and employers of making such agreements harder and more costly to reach. It is impossible to avoid the conclusion that this is not about simplicity and fairness at all, but is actually an overt tax-grab regardless of the consequences.

Squeezing PIPs until they squeak!

By Squire Patton Boggs on July 29, 2015 Posted in UK Pensions

By Sarah Gosling

Whilst many IFAs and scheme administrators may be glad that pension input periods (“PIPs”) are being aligned with the tax year – the proposed transitional process to get them there may cause some serious headaches and prompt some rule amendments. It was announced in the Summer Budget that PIPs are to be aligned with the tax year from 6 April 2016. A PIP is the period over which pension savings are assessed to establish whether a tax charge (known as an “annual allowance charge”) arises. Previously, a pension plan could nominate its own PIP; many plans did this in line with their own “scheme year” to streamline administration. However, from 6 April 2016 onwards all PIPs will be aligned with the tax year. Where a PIP has been embedded in the pension plan rules it is likely that a rule amendment will be appropriate.

The proposed transitional arrangements that will apply for the 2015/16 tax year are extremely complex. Essentially, all open PIPs as at 8 July 2015 are closed with effect from that date and another PIP will then run from 9 July 2015 to 5 April 2016. In addition, the 2015/16 tax year is to be split into two mini tax years for annual allowance purposes – the first running from 6 April 2015 to 8 July 2015 (the “pre-alignment tax year”) and the second from 9 July 2015 to 5 April 2016 (the “post-alignment tax year”). Individuals will have an annual allowance of £80,000 for the pre-alignment tax year and unused annual allowance from this period can be carried across to the post-alignment tax year, subject to a cap of £40,000. Carry forward of unused annual allowance from the three previous tax years may also be utilised.

And to add insult to injury, once all that complexity has been addressed, the Government has said that it may decide to further “simplify” the rules by removing the concept of a PIP altogether!

Clawback – What’s your flavour of who, when and why?

By Squire Patton Boggs on July 16, 2015 Posted in Executive Remuneration, SEC

The recent clawback laws being discussed and introduced in the UK and the US differ quite markedly and represent two almost entirely different approaches to recovering “erroneously” awarded incentive-based compensation. So which flavour do you prefer?

One shouldn’t forget, of course, that the PRA’s provisions regarding clawback are only one half of a two pronged attack on overpaid remuneration. The other aspect of the PRA’s requirements relate to deferral obligations to enable more effective operation of malus provisions. Interestingly, the US proposals do not include any requirements or recommendations regarding deferral periods.

Who?

The first major difference is who the new laws are applicable to. There are actually two “who’s” to compare. “Who” in the sense of which entities the new rules apply to and “who” in the sense of which people at those entities.

Whilst the SEC (US) proposed that the new clawback laws must be implemented by all listed companies, the PRA (UK) clawback provisions only need to be implemented by all financial services companies (for which read banks, building societies and PRA-designated investment firms and UK branches of non-EEA headquartered firms), and a strong recommendation for all other public companies (see our previous post regarding changes to the Corporate Governance Code).

As for who, within those organisations, must have clawback provisions applicable to them, the SEC have proposed current and former executive officers who received incentive based compensation. This is coupled with a proposal to define executive officers by reference to the meaning of “officer” in the Securities and Exchange Act.

The PRA’s clawback provisions are to apply to “material risk takers”. This would include senior managers within the organisation and other material risk takers using the qualitative criteria from the European Banking Authority’s regulatory technical standard on the identification of staff with a material impact on the risk profile of a firm.

Why?

The second and seemingly most striking difference, is under what circumstances clawback can be claimed. The PRA decided that for clawback to be claimed against an individual, there has to be reasonable evidence of employee misbehavior or material error or there has been a material failure of risk management in the relevant business unit but taking account of the proximity of the employee to the failure and their level of responsibility, i.e. the individual must have some responsibility or nexus to the problem that gives rise to the ability to clawback remuneration. By contrast, the SEC plans to operate their laws on a “no fault” basis, without regard to whether there was any misconduct by the executive officer in question. However, clawback will only be required if there is accounting adjustment or restatement to correct a material error. The two approaches are a fascinating contrast of breadth and causation. On the one hand clawback “UK style” can be triggered by a broader range of circumstances than proposed in the US but on the other hand the US approach does not allow for any discretion even if the employee had nothing to do with the issue that caused the problem.

When?

The third difference relates to the “when”. Clawback under the PRA’s proposals should be possible up to seven years after the grant of the award (unless there is an existing investigation underway at the end of that seven-year period). In the US, the SEC has recommended that clawback could be enforced against remuneration paid in the three fiscal years that precede the accounting restatement.

Both sets of provisions include several other aspects, including the SEC’s specific acknowledgment that the companies should not seek to enforce clawback if the expense of recovery would exceed the amount to be recovered, but in so far as they cover the same ground the differences in approach reflect different “US style” and “UK style” philosophies to recovering “overpaid” variable remuneration.

Budgeting for employee healthcare costs

By Matthew Giles on July 16, 2015 Posted in Benefits

We anticipate that the significant increase in insurance premium tax that was announced in the UK Summer Budget on 8 July will encourage many more employers to explore corporate healthcare trusts. IPT will increase from 6% to 9.5% from November 2015. This will apply to employee health insurance policies like all other UK insurance products. Corporate healthcare trusts are a way of providing healthcare benefits to employees other than through insurance. Instead of paying premiums to an insurer, the employer pays cash into a trust for the benefit of its employees. The trustees then pay for medical treatment or reimburse employees for medical expenses which have been incurred. As the tax saving that these structures generate is to increase by more than 50%, it might be music to the ears of the FD!

On the other hand, if employee health insurance is provided through a flexible benefits package, it may now be subject to increased HMRC scrutiny as a result of the review of salary sacrifice arrangements also announced as part of the Budget.

The IRS Restricts a U.S. Pension Plan De-Risking Strategy

By Gregory Viviani on July 15, 2015 Posted in US retirement plans

Recently released IRS Notice 2015-49 will prohibit U.S. pension plan sponsors from offering lump sum payments to existing pensioners. Thus, for example, if an employer is going to do a lump sum “window”, existing pensioners could not be offered a lump sum. Nevertheless, it does appear that lump sums can still be offered to pensioners upon a plan termination.

The Notice has a July 9, 2015 effective date. The Notice has some complicated grandfathering rules that can apply for plan amendments adopted before July 9, 2015, and some similar situations.

Summer Budget – pension tax changes

By Squire Patton Boggs on July 8, 2015 Posted in UK Pensions

As widely trailed, the UK government has confirmed in the Summer Budget on 8 July that pensions tax relief for those earning more than £150,000 will be severely restricted from April 2016 – relief will be tapered to a minimum of £10,000 a year.

In addition, the government announced that it is launching a consultation on the wider taxation of pensions.

The current system can broadly be described as ‘exempt, exempt, taxed’ with the contributions and the investment growth attracting tax relief but the payout being taxed, subject to the application of a tax free lump sum. Arguably the upfront system of tax relief favours taxpayers who pay tax above the basic rate.

Under the consultation the industry will be asked to consider whether a ‘taxed, exempt, exempt’ system produces a more efficient outcome. Under this system contributions would be paid out of taxed monies with the potential for a government top up but money taken out would not be taxed. This is the way in which ISAs work.

We will be monitoring the consultation closely and will be issuing further updates. Clearly the prospect of further radical reform of pensions has significant implications for the UK economy as a whole and for the public purse.