HM Treasury: UK Listing Review
On March 3, 2021, the UK Listing Review (led by Lord Hill) published its report setting out a series of wide-ranging recommendations for changes to the UK listing and prospectus regime. This follows on from a previous call for evidence published in November 2020. These represent the most significant proposed reforms for many years and place a strong emphasis on the regulators’ role in promoting the UK equity capital markets and ensuring they remain sufficiently dynamic and competitive. You can read our views on the recommendations in our separate briefing here.
There are 15 recommendations covering the following seven broad themes.
Monitoring and delivering results
These include recommendations that the Chancellor should present an annual report to Parliament on the ‘State of the City’ and that consideration should be given to charging the Financial Conduct Authority (FCA) with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business.
Improving the environment for companies to go public in Londons
The recommendations in this category include:
- Allowing companies with dual-class share structures to list on the premium segment but maintaining high corporate governance standards by applying certain conditions (including restrictions as to duration of such structures and limits on the matters to which weighted voting rights apply).
- Re-branding and re-marketing the standard listing segment and encouraging investor groups to develop guidelines on areas they see as particularly important to allow for companies on the rebooted segment to be index-eligible.
- Reassessing the free float requirements to provide a better measure of liquidity, including by lowering the absolute requirement for free float from 25 per cent to 15 per cent and allowing more choice for companies of different sizes to use measures of liquidity other than an absolute free float percentage.
- Revising the Listing Rules which can require trading in the shares of special purpose acquisition companies (SPACs) to be suspended on announcement of a potential acquisition and providing additional protections for shareholders at the time of the acquisition (such as a shareholder vote and redemption rights).
Re-designing the prospectus regime
HM Treasury should conduct a fundamental review of the prospectus regime so it fits better with the breadth and maturity of the UK capital markets and the evolution in the types of business coming to market or already listed. As a minimum, it is recommended that consideration should be given to:
- Changing how the prospectus exemption thresholds function so that documentation is only needed where appropriate for the type of transaction and suits the circumstances of the capital issuance.
- Use of alternative listing documentation where appropriate/possible – e.g. for further issuances by existing listed issuers on a regulated market.
It is recommended that the existing regime for secondary and dual-listing is maintained, but that it should be considered whether prospectuses drawn up under other jurisdictions’ rules can be used to meet UK requirements.
Tailoring information to meet investor needs better
Recommendations in this category include:
- Facilitating provision of forward-looking information in prospectuses by amending the liability regime for issuers and their directors.
- Maintaining the three-year track record eligibility requirement for premium listing but reviewing the provisions that currently provide an exception to the revenue earning element for scientific research-based companies and broadening their application to a wider range of high growth, innovative companies across a variety of sectors.
- Amending the premium listing eligibility requirement for historic financial information covering at least 75 per cent of the issuer’s business so that this is only applicable to the most recent financial period within the three-year track record.
Empowering retail investors and improving capital raising for existing listed issuers
These recommendations include considering how technology can be used to improve retail investor involvement in corporate actions as well as re-establishing the Rights Issue Review Group and reconsidering its outstanding recommendations in order to facilitate a quicker and more efficient process for further capital raising by listed companies and more easily involving retail investors.
Improving the efficiency of the listing process
It is recommended that the relatively recently introduced rules relating to the inclusion of unconnected research analysts in the IPO process (which, in practice, result in an extra seven days being added to the public phase of the process) are reviewed.
Wider financial ecosystem
The final recommendation is that industry concerns in relation to the wider financial ecosystem (namely unlocking pension investment, a competitive tax environment, and SME research provision) should be considered and acted on.
The review notes that more detailed consultations and proposals will need to be brought forward by bodies such as HM Treasury and the FCA to implement the proposed recommendations.
The Chancellor has indicated that he is keen to move quickly to consult on the recommendations. The FCA has also welcomed publication of the report and indicated the aim of publishing a consultation paper by summer and seeking to make relevant rules by late this year.
(HM Treasury, UK Listing Review, 03.03.2021)
HM Treasury: Budget 2021
On March 3, 2021 the Chancellor delivered the Budget 2021. Main points of interest for companies include changes to corporate tax rates, changes to the rules concerning payments of interest or royalties to connected companies in the EU, a temporary extension of the period for the carry back of trading losses and “super-deduction” rules for plant and machinery.
Further details of these changes are below:
Corporate tax rates
The following changes to tax rates will take effect from April 1, 2023:
- The main rate of corporate tax will increase to 25 per cent.
- A small profits rate will be introduced (maintained at the current corporation tax rate of 19 per cent) and will apply to businesses with profits of £50k or less. There will be taper for businesses with profits between £50k and £250k so that only businesses with £250k or more profits will be taxed at the main rate of 25 per cent.
- Diverted profits tax (DPT) - the rates applying to diverted profits tax will also increase to maintain the 6 per cent differential between DPT and corporation tax rates (maintaining the disincentive for artificial diversion of profits from the UK intended by the regime).
A review will be undertaken of the bank surcharge (currently 8 per cent) in recognition of the fact that combined with the main rate increase to 25 per cent this would make the UK uncompetitive for banking. Details of how the Government intends to ensure that the combined rate on banks’ profits remains competitive will be set out in the autumn. It is worth noting that the timing of that review may mean that there is a period in which deferred tax will need to be measured at the higher combined rate (33 per cent) due to the future 25 per cent rate having been ‘substantially enacted’ before any changes have been made to calculation of the bank surcharge.
Payments of interest or royalties to connected companies in the EU
The UK ceased to be bound by the Interest and Royalties Directive (IRD) following Brexit. The IRD, broadly, prevents interest and royalties paid intra-group (25 per cent test) between EU companies from being subject to withholding tax. The fact that following Brexit the position for UK recipients of interest and royalties will now depend on the position under the relevant double taxation treaty has been widely trailed. The repeal of the UK legislation implementing the exemption for payments made to EU companies has come as a surprise however as the Government had suggested in its Brexit No Deal scenario publications that it would retain the no withholding position.
The UK legislation implementing the IRD will be repealed with effect from June 1, 2021 and existing exemption notices will be revoked with effect from that date. This means that where an EU recipient of an interest or royalty payment from the UK had previously relied on the IRD, they will instead need to consider whether the relevant double tax treaty provides for relief from withholding tax and make a double tax treaty claim if it does. Not all the UK’s treaties with EU countries provide for zero withholding (for example, Italy and Portugal). It is also important to be aware that treaty claims need to be made even if the treaty provides for zero withholding. Companies should check the withholding tax position on cross border interest and royalty flows between the UK and EU group companies and make sure the necessary claims are made.
Temporary extension of carry back of trading losses
The period in respect of which trading losses can be carried back will be extended from 1 year to 3 years. This is subject to a cap of £2m of losses made in each of accounting periods ending between April 1, 2020 and March 31, 2021 and April 1, 2021 and March 31, 2022. This £2m limit will be subject to a group-wide limit requiring groups with companies with capacity to carry back losses of £200k or more to apportion the £2m cap between its companies.
“Super-deduction” for plant and machinery
Two new categories of expenditure qualifying for enhanced capital allowances have been introduced. These will only apply for expenditure incurred between April 1, 2021 and April 1, 2023 which is not previously committed as at Budget Day. The rates are designed to encourage investment in a period when otherwise investment may be stagnant, or even deferred (as depreciation would be more valuable following the corporation tax rate rise).
The two main new categories are:
- A 130 per cent allowance for expenditure that would otherwise qualify for the main rate capital allowances pool.
- A 50 per cent allowance for expenditure that would otherwise fall within the special rate pool.
The enhanced rates are not available to certain categories of expenditure, including expenditure for leasing or on cars.
(HM Treasury, Budget 2021, 03.03.2021)
HM Treasury: Kalifa Review of UK Fintech
At the time of the Budget 2020, the Chancellor asked Ron Kalifa to conduct an independent strategic review to identify priority areas to support the UK’s FinTech sector. That review was formally launched in July 2020 with objectives for supporting the growth and widespread adoption of UK FinTech, and for maintaining the UK’s global FinTech reputation. On February 26, 2021, the final report of the Kalifa review was published by HM Treasury.
The review has identified a Five-Point Plan of recommendations in relation to the following areas, and both a strategy for the FinTech sector and a delivery model to help the UK realise the vision set out in the review are included in it:
- Policy and Regulation – Dynamic leadership that protects consumers yet nurtures FinTech activity and encourages competition, including implementing a “Scalebox” that supports firms focusing on scaling innovation technology.
- Skills – Ensuring FinTech has a sufficient supply of domestic and international talent and the means to train and upskill the current and future workforce.
- Investment – Completing the funding ladder from start-ups right through to IPO, including setting out a number of potential reforms to the listing environment to better position London as a global go-to destination for FinTech public listings and investments. The reforms suggested are the following: reduction of the free float requirements on the Premium segment from 25 per cent to 10 per cent, for a limited time post-IPO, or put in place a minimum threshold – the review notes that the New York Stock Exchange and NASDAQ both have set minimum thresholds for free float of $40-60m; enhanced governance rights such as a golden share or dual-class share structures so that founders can still retain control and guard against unwelcome takeovers, particularly in the years immediately following an IPO; and maintaining the relaxation of pre-emption rights to permit placings of up to 20 per cent of issued share capital, as introduced in 2020 by the Pre-Emption Group for a temporary period.
- International – A targeted approach to exports and inward investment.
- National connectivity – Leveraging the output of FinTechs across the UK and facilitating connectivity amongst them.
The review also recommends a government-backed “Centre for Finance, Innovation and Technology” (CFIT), mandated and supported by the Government, but led by the private sector to coordinate targeted FinTech policies that aim to scale the sector. It also suggests that in a year’s time, both the public and private sector should come back to report on the progress they have made to deliver the recommendations in the review, and that the Government should consider appointing a FinTech ‘business champion’ to support FinTech and deliver the strategy recommended on the review.
(Kalifa Review of UK Fintech, Final Report, 26.02.2020)
(Kalifa Review of UK Fintech, Executive Summary, 26.02.2021)
BEIS: National Security and Investment – Sectors in Scope of the Mandatory Regime: Government Response
On March 2, 2021, the Department for Business, Energy and Industrial Strategy (BEIS) published the Government’s response to a consultation that it ran until January 6, 2021 on proposed descriptions of activities of qualifying entities within 17 sectors that would be captured under the National Security and Investment Bill’s (NSI Bill) mandatory regime. The Government is seeking to ensure that these descriptions will enable potential acquirers to self-identify for the purposes of mandatory notification regime while ensuring that the Government is informed of proposed acquisitions in these areas and will be able to take action to investigate and, if necessary, address any national security risks.
The responses from the consultation have been used to refine the definitions to provide further clarity to allow parties to self-assess whether they need to notify the Secretary of State when they are contemplating a relevant acquisition of control. The sector definitions in this response document remain in draft so proposals during the remaining passage of the primary legislation can be taken into account. The final definitions will be set out in regulations in due course.
(BEIS: National Security and Investment - Sectors in Scope of the Mandatory Regime: Government Response, 02.03.2021)
BEIS: Policy Statements regarding statutory instruments required for the commencement of the NSI regime
On March 2, 2021 the Department for Business, Energy and Industrial Strategy (BEIS) published a document setting out policy statements for each of the statutory instruments within the National Security and Investment Bill (NSI Bill) which are necessary for the commencement of the regime provided for by the NSI Bill.
There are 10 delegated powers within the NSI Bill, of which eight are needed for the commencement of the regime, including a commencement order. Two of these instruments will be subject to the affirmative resolution procedure and five will be subject to negative procedure. The commencement order has no procedure attached to it.
The Government’s intention is to ensure that the NSI regime is commenced by the end of 2021, subject to further Parliamentary scrutiny and debate on the statutory instruments provided for in the NSI Bill. The Government intends to begin the process for making the statutory instruments subject to the affirmative resolution procedure as soon as possible following Royal Assent.
(BEIS: Policy Statements regarding statutory instruments required for the commencement of the NSI regime, 02.03.2021)