Directors' know how is a monthly article which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.
On 16 March 2016, the Chancellor of the Exchequer gave his Budget to Parliament. These were some of the announcements most relevant to quoted companies:
- Capital Gains Tax Entrepreneurs’ Relief extension to long-term investors: Capital Gains Tax Entrepreneurs’ Relief is to be extended to external investors in unlisted trading companies for newly issued shares purchased on or after 17 March 2016. This is a success following the Quoted Companies Alliance’s proposals for taxation reform.
- Capital Gains Tax rate reduction: From 6 April 2016, the higher rate of Capital Gains Tax (CGT) will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.
- Corporation Tax rate reduction: The main rate of corporation tax will be cut to 17% in 2020, which will benefit one million companies of all sizes.
- Employee Shareholder Status: The government will introduce an individual lifetime limit of £100,000 on gains eligible for Capital Gains Tax exemption through the Employee Shareholder Status.
- Reform of the Substantial Shareholdings Exemption: The government will consult on possible reform of the Substantial Shareholdings Exemption for corporate capital gains.
- Reform of loss relief: The current streaming rules will be made more flexible so that losses arising on or after 1 April 2017 will be useable, when carried forward, against profits from other income streams or other companies within a group. Also, from 1 April 2017, companies will only be able to use losses carried forward against up to 50% of their profits above £5 million. For groups, the £5 million allowance will apply to the group. The government will consult on the design of the reforms in 2016, and will legislate for the measure in 2017.
- Employee share schemes: there will be a number of technical changes to simplify the tax-advantaged and non-tax-advantaged employee share scheme rules.
The new Register of People with Significant Control (PSC Register)
From 6 April 2016, UK companies and companies that have a subsidiary incorporated in any part of the UK must keep and maintain a new register that records all the people or legal entities that have significant influence or control over it – a register of people with significant control (the PSC register, introduced by the Small Business, Enterprise and Employment Act 2015).
Quoted companies are exempt – companies obliged to report under DTR 5 (Official List companies and those on AIM and the ISDX Growth Market) will only need to create a PSC register and set out on its face that the Company is not obliged to make any entry onto such register, by reason of its exemption as a DTR 5 Issuer.
However, companies should note that the DTR 5 exemption only applies to the company with traded securities, not each member of the group. It is therefore necessary for each of the DTR 5 company's subsidiary companies incorporated in any part of the UK to prepare and maintain a PSC register.
Under the new PSC register regime, companies not otherwise exempt will need to:
- find out whether there are any people with significant control over it;
- contact those persons to confirm the position and to obtain certain required information;
- create and maintain its PSC register (from 6 April 2016); and
- deliver the PSC register information to Companies House for inclusion on a searchable public register (from 30 June 2016).
Edward Craft of Wedlake Bell LLP has written an article on the new structure and obligation on most companies to maintain a register of people with significant control. As the Chairman of the Quoted Companies Alliance Corporate Governance Expert Group, he has been sitting on the committee supporting BIS in the development of the guidance to this new legislation on behalf of the Quoted Companies Alliance.
FRC publishes letters to Audit Committee Chairs, Finance Directors and Investors
The Financial Reporting Council (FRC) has written a letter to Audit Committee Chairs, offering pointers for the 2016 corporate reporting season against a backdrop of increased uncertainty and/or volatility. The FRC has responded to requests for guidance on how matters such as volatile asset prices and uncertainty over interest rates in certain jurisdictions should be dealt with in annual reports and accounts.
This follows the FRC's letter to Finance Directors published late last year on what investors have told the FRC they value in the annual report and accounts of smaller listed and AIM companies. This letter highlighted areas that companies should focus on when preparing their annual reports and accounts. The FRC notes that investors want:
- The Strategic Report to be clear, concise, balanced and understandable;
- Accounting policies to be clear and specific, particularly in relation to revenue recognition and expenditure capitalisation; and
- A clear explanation of how the company generates cash flow.
The FRC has also recently written a letter to Investors, highlighting some recent changes and encouraging investors to engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short.
Investment Association unveils Productivity Action Plan
The Investment Association has published an industry-wide Productivity Action Plan (pdf) to encourage long-term investment and enhance investor stewardship to help reverse the UK’s productivity problem. The IA Productivity Action Plan’s five principal objectives are to:
- Enhance company reporting for efficient capital allocation;
- Enhance investor stewardship and engagement;
- Simplify behavioural incentives and the investment chain;
- Develop efficient and diverse capital markets; and
- Overcome tax and regulatory impediments to the provision of long term finance.
We are delighted to be working alongside the IA to encourage equity investment and improve the equity offering process (Recommendation 9 of the Action Plan). By the end of 2016, the IA and the Quoted Companies Alliance will publish a plan to identify small and mid-cap pre-IPO companies and to develop a dedicated engagement programme to prepare such companies and their management for the public market.
BIS is consulting on effective reporting
The Department for Business, Innovation & Skills (BIS) has published a call for views on effective reporting alongside proposals to implement EU requirements introduced by the Non-Financial Information Directive.
BIS’ consultation seeks input on the regulatory changes necessary to implement the Directive, as well as on a number of topics that fall outside its scope, such as the costs and benefits of reporting in general. BIS is exploring possibilities to reform the scope of narrative reporting and will be assessing whether there would be an opportunity to reduce unnecessary regulations and burdens for companies.
If you have any comments on non-financial reporting or on the costs of reporting in general, please email Maria Gomes (firstname.lastname@example.org) with your views to help inform the Quoted Companies Alliance’s response to this consultation.