Essential Corporate News – Week ending April 22, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On April 21, 2016 the Executive Remuneration Working Group, established in September 2015 and chaired by Nigel Wilson, Group Chief Executive of Legal & General, published an interim report as part of its drive to simplify and improve pay practices at UK listed companies. The Working Group, which includes representatives of companies, investors and asset owners, has made a series of proposals ahead of a consultation, to take place in the coming weeks.

The Working Group believes the current approach to executive pay in UK listed companies is not fit for purpose, and has resulted in a poor alignment of interests between executives, shareholders and the company. It believes greater transparency, clearer alignment of shareholder, company and executive interests, more accountability on the part of remuneration committees and greater engagement with and control by shareholders, working through company boards, is needed to restore confidence in a system widely seen as broken.

The proposals in the interim report are centred on resetting the expectations both of listed companies and investment managers around pay structures and overhauling the current dominance of Long-Term Investment Plans (LTIPs), which often result in a poor alignment of interests between executives and shareholders.

The Working Group believes companies should move away from the current ‘one-size-fits-all model’, and that a range of other options should be considered when deciding on executive pay structures, based on the company’s own business strategies and circumstances. These options might include a simple restricted share awards scheme. The Working Group also believes that pay-setting should be carried out within a clear and simple structure that calls for alignment with shareholders’ interests, recognition of company performance, the implementation of a long-term strategy and which is consistent with the approach for other employees.

The interim report sets out:

• the key proposals of the Working Group; 
• a discussion on alternative structures (looking at the LTIP model, deferral of bonuses into shares, performance on grant and restricted share awards); and 
• a consultation on possible parameters for those moving to alternative structures. The aim is to hold discussions on the interim report with a wide range of stakeholder groups, with the Working Group hoping to produce its final report in early Summer 2016.

(Executive Remuneration Working Group, Interim Report, 21.04.16)

HM Revenue & Customs (HMRC) has published a consultation on the new criminal offence by corporations which fail to take adequate steps to prevent the criminal facilitation of tax evasion. This includes draft guidance on the procedures which can be put in place to prevent a corporation from committing this offence.

This offence was first announced in the March 2015 Budget, with initial consultation on policy issues taking place last year. This concluded with an announcement in the Autumn Statement that the Government would legislate for the new offence. Although draft legislation has been in circulation since December 2015, concerns were expressed about its scope and, on April 17, 2016, HMRC published revised draft legislation and guidance for further consultation on the detail.

Why introduce a new criminal offence?

The Government is concerned about the difficulty of prosecuting corporations for the criminal acts of those who act on their behalf; this typically requires the involvement of senior management in the illegal activity, which is very rarely the case. By its nature, criminality is likely to be hidden from a company’s directors, and there is a concern that corporations are not always fully aware about how staff in, for example, non-UK operations or agents are conducting themselves.

The purpose of the new offence is to encourage corporations to monitor the activity of their staff, and others who act for them (e.g. consultants) more closely and to report any criminal activity which is discovered. This is to be achieved by penalising companies which do not take reasonable steps to prevent their agents (e.g. employees) from facilitating tax evasion by someone else, such as the corporation’s customers or suppliers.

What does it mean for my organisation?

The main defence to such an offence will be to have reasonable “prevention procedures” in place; i.e. procedures designed to prevent an organisation’s agents from facilitating tax evasion by others. Most businesses will build in these procedures alongside their other similar measures.

It is helpful that the requirement is not an absolute one, but rather to have “reasonable” prevention procedures in place. However, this does introduce an element of uncertainty as to what procedures each organisation will have to put in place. Businesses should examine their risk areas, and put in place well documented procedures to minimise the chances of any tax evasion being facilitated.

There are some points to bear in mind about the requirement to monitor and report:

• it applies to persons who perform services on behalf of the corporation, not just its employees. This can include contractors and subsidiaries, although it is intended to exclude activity carried out in a private capacity;
• partnerships, 1907 Act Limited Partnerships and Limited Liability Partnerships are within the scope of the new offence, not just companies;
• the aim is to identify the facilitation of tax “evasion” offences, and this requires the organisation’s customer, supplier etc. to have done more than making an innocent (or even potentially negligent) error in filing their taxes; and
• although the focus is on having procedures in place to prevent evasion of UK tax, UK companies/partnerships will also need to identify and report certain types of overseas tax evasion.

Next steps

Although the revised legislation is narrower than the original draft (reflecting concerns about the ordinal drafting) and the guidance contains some helpful material, there are still points which merit attention. Businesses have until July 10, 2016 to comment on the drafting, and respond to the specific questions raised by HMRC. This is your opportunity to have particular concerns addressed; for example, by ensuring that the guidance adequately addresses how your business operates. At the same time, businesses should start to examine how they operate, what risks they have and what procedures should be put in place.

(HMRC, Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion, 17.04.16)

On April 18, 2016 the Financial Reporting Council (FRC) published its final non-mandatory guidance on the going concern basis of accounting and reporting on solvency and liquidity risks for companies that do not apply the UK Corporate Governance Code (the Code), with an accompanying feedback statement.

In June 2012, the Panel of the Sharman Inquiry published its Final Report and Recommendations on Going Concern and Liquidity Risk. The Final Report included a recommendation that the FRC review its 2009 guidance on going concern to ensure that the going concern assessment was integrated with the directors’ business planning and risk management processes and included a focus on both solvency and liquidity risks, considering the possible impacts on the business over the longer term. In response to the Sharman recommendations, the FRC published two consultation papers seeking views on implementation of those recommendations and, after considering the feedback received, decided to amend the Code in September 2014 for companies within the scope of the Code and to issue separate, simplified guidance for directors of companies that do not apply the Code. The FRC issued a consultation on this simplified draft guidance in October 2015 and the final guidance is in substantially the same form.

The guidance is intended to serve as a proportionate and practical guide for directors of companies outside the scope of the Code. It brings together the requirements of company law, accounting standards, auditing standards, other regulation and existing FRC guidance relating to reporting on the going concern basis of accounting, and solvency and liquidity risks and reflects developments in the FRC’s thinking as a consequence of the Sharman Inquiry. It incorporates recent developments in the corporate reporting framework, most notably the introduction of new UK and Ireland GAAP and the strategic report. The guidance:

• encourages directors to take a broader view, over the longer term, of the risks and uncertainties that go beyond the specific requirements in accounting standards;
• acknowledges that companies will have risk management and control processes in place that will underpin the assessment and that the degree of formality of this process will depend on the size, complexity and the particular circumstances of the company; and
• uses the term ‘going concern’ only in the context of referring to the going concern basis of accounting for the preparation of financial statements.

The guidance covers:

• scope of the guidance;
• overview of the guidance;
• going concern basis of accounting and material uncertainties;
• solvency and liquidity risks;
• the assessment process;
• materiality and placement of disclosures;
• auditor reporting; and
• application to other reports.

(FRC, Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks: Guidance for directors of companies that do not apply The UK Corporate Governance Code, 18.04.16)

On April 12, 2016 the European Commission published a proposal for a Directive amending the Accounting Directive (Directive 2013/34/EU) together with an impact assessment and an executive summary of the impact assessment. The over-arching objective of the proposal is to achieve further public transparency on corporate income taxes by way of country-by-country reporting (CBCR) to be published by multinational enterprises (MNEs). The initiative seeks to geographically align corporate income taxes with actual economic activity, foster corporate responsibility to contribute to welfare through taxes, and promote fairer tax competition in the EU through an informed democratic debate on how to remedy market and regulatory shortcomings.

Different policy options to achieve these goals were considered by the European Commission, with the preferred option being that mandatory public CBCR should be prepared by all EU and non-EU MNEs with activities in the EU and a consolidated turnover above EUR 750 million.

The CBCR report must contain the following information for the reporting entity (the undertaking establishing the branch in the case of branches) and all affiliated entities consolidated in the financial statements in the relevant financial year:

• a description of the undertaking's activities;
• number of employees;
• total net turnover, which includes turnover from related party and third party transactions;
• profit or loss before income tax;
• income tax accrued (excluding deferred taxes and provision for uncertain tax liabilities);
• income tax paid; and
• accumulated earnings.

The information must be presented separately for each member state and for every jurisdiction which, at the end of the previous financial year, appears on a list of jurisdictions drawn up by the European Commission. Separate reporting for listed jurisdictions does not apply if the report includes a confirmation that undertakings governed by the laws of listed jurisdictions do not directly transact with undertakings governed by the laws of member states. For non-EU and non-listed jurisdictions, the information may be presented on an aggregated basis. The report must also contain an explanation of material discrepancies between the income tax accrued and income tax paid.

The European Commission will monitor implementation of the policy in cooperation with member states. The first evaluations should be carried out a few years after companies have begun to publish their country-by-country reports.

(European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches, 19.04.16)

The International Association of Oil & Gas Producers (IOGP) published its updated industry guidance on The Reports on Payments to Governments Regulations 2014 on April 22, 2016. Draft guidance made available by  the Department of Business, Innovation and Skills (BIS) was subject to stakeholder engagement in November 2014 and the final guidance has been reviewed by BIS.

In order to provide for enhanced transparency of payments made to governments, the Reports on Payments to Governments Regulations 2014, as amended by the Reports on Payments to Governments (Amendment) Regulations 2015 (the UK Regulations), require certain entities to disclose material payments made to governments in the countries in which they operate in a separate report, on an annual basis. The UK Regulations apply to companies involved in extractive and logging of primary forest activities. The UK Regulations are based on Chapter 10 of Directive 2013/34/EU (the Accounting Directive). Directive 2013/50/EU (the Transparency Directive Amending Directive) introduced changes to Article 6 of the Transparency Directive (Directive 2004/109/EC) that have been reflected in the Disclosure and Transparency Rules. These changes extend the general effect of Chapter 10 of the Accounting Directive to companies that are active in the extractive or logging of primary forest industries with transferable securities listed on the Main Market of the London Stock Exchange, including companies that are not registered in the UK.

The aim of this document is to provide guidance to entities that have to meet the reporting requirements and promote consistency in the reporting of payment information. The guidance is based on the previous draft published by BIS in November 2014 and has been updated to reflect recent developments in the reporting requirements.

The guidance covers the following topics:

• which entities are under an obligation to prepare and deliver a report;
• whether every entity must prepare a report or if a consolidated report can be prepared for a group;
• whether any entities are exempted from preparing reports under the UK Regulations;
• the reporting requirements for entities that are subject to equivalent disclosure regimes;
• whether the report only cover payments made by the entities that have to prepare reports or if they should cover payments made by other group entities;
• which business activities are within the scope of the UK Regulations;
• which types of payment must be included in the report;
• who has the obligation to include payment information in a report in situations where a payment is made on behalf of multiple parties;
• which government entities that receive payments have to be covered in the reports;
• how payments should be attributed to projects; and
• when and how reports should be delivered.

The guidance will be updated after two reporting cycles to take account of the experience of IOGP member companies in meeting the requirements of the UK Regulations.

(International Association of Oil & Gas Producers, The Reports on Payments to Governments Regulations 2014 (as amended) - Industry Guidance, 04.16)

On April 15, 2016 the Department for Business, Innovation and Skills (BIS) published the first UK Extractive Industries Transparency Initiative (EITI) report, which covers payments received by UK Government Agencies from extractive companies in 2014.

The report was prepared by the UK EITI Multi-Stakeholder Group (MSG), which is composed of representatives from the Government, the extractive industries and civil society and is charged with the implementation of the EITI in the UK, and Moore Stephens, acting as the Independent Administrator (the IA). 71 extractive companies participated in compiling the report and their participation was voluntary as there is no legislation in the UK requiring companies to participate in the EITI. The EITI Global Board initially published the ‘EITI Standard’ in May 2013, with an updated version being published in February 2016. The EITI Standard sets minimum requirements that implementing countries must meet, with the fundamental aspect of revenue transparency at its core.

The report contains detailed information relating to £3,233 million of revenues received by UK Government Agencies from extractive companies in 2014 for a range of payments included within the scope of EITI. The report shows a breakdown of this sum between the oil and gas and mining and quarrying sectors, between the different payment types and between the Government Agencies that received those payments. The IA has been able to reconcile £2,431 million of those payments to disclosures made by companies. The report shows the breakdown of this sum between companies and is the first time such information has been made available to the public. Information on the unreconciled amounts has also been included in the report.

A number of features of the global EITI Standard and how it interacts with the UK legislative framework presented the MSG and the IA with challenges in meeting the requirements of the EITI requirements. Those features, which are described in more detail within the report, include:

• voluntary reporting;
• taxpayer confidentiality;
• oil and gas sector taxes; and
• mining and quarrying sector taxes.

Going forward the MSG hopes all companies within the scope of the UK EITI process will participate and the process will focus on those extractive companies that have made payments in excess of the £86,000 materiality threshold set by the MSG.

(BIS, United Kingdom Extractive Industries Transparency Initiative (UK EITI): UK EITI Report for 2014, 15.04.16)