EU publishes a Regulation replacing the EU Prospectus Directive – new exemptions from the requirement to issue a prospectus

The EU Prospectus Directive (“the EUPD”) is to be replaced by the EU Prospectus Regulation (“the Regulation”) published (after a long wait) in the Official Journal of the European Union on 30 June 2017. Here is a link to the full text of the Regulation.

The provisions of the Regulation differ from the EUPD in a number of respects. For example, under the Regulation all companies, wherever headquartered and wherever their securities are listed, will be able to rely on the new and broader exemption, from the obligation to issue a prospectus when transferable securities are offered in the EU pursuant to an employees’ share scheme.

The existing regime is unnecessarily complex, not least because the EUPD has since 2003 been given effect, by local laws, rather differently in different EU member states. By contrast with the EUPD, the Regulation will have direct effect in member states.

The Regulation enters into force on 20 July 2017. However, there is a two-year transition period before it applies, in full, from 21 July 2019.

The existing exemption, from the need to issue a prospectus when transferable securities are offered to employees or directors, applies only if the company has either:

  • its head office or registered office in an EU member state; or
  • securities listed on an EU regulated market.

The new exemption, from the obligation to issue a prospectus if transferable securities are offered to the public (as defined and which would include an offer to employees), applies if transferable securities are “offered to existing or former directors or employees by their employer or an affiliated undertaking, provided that a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer or allotment”.

(A corresponding exemption, from the obligation to offer a prospectus if securites are to be admitted to trading on an EU regulated market, is in similar terms and applies if “the said securities are of the same class as the securities already admitted to trading on the same regulated market and that a document is made available containing information on the number and nature of the securities and the reasons for and detail of the offer or allotment”.)

Crucially, the Regulation removes the requirement, to rely on the exemption, (a) for a company to have its head or registered office in the EU and, in the case of an offer of shares not traded on an EU regulated market, (b) for the shares to be listed on a particular stock exchange. A company relying on these exemptions must still provide an information document detailing the reasons for and details of the offer and the number and nature of the securities available, although, in practice, this is not an onerous requirement.

These new exemptions can be relied upon from 21 July 2019, the end of the two-year transition period although, given that the UK is presently scheduled to leave the EU on Friday 29 March 2019, it remains unclear as to what will be the position between those two dates.

Other exemptions

Under the Regulation, the de minimis exemption (below which no prospectus is required for either an offer to the public or an admission to trading) is set as “an offer of securities to the public with a total consideration in the Union of less than EUR 1 000 000, which shall be calculated over a period of 12 months” (Art 1, para 5). This replaces the €5-million exemption under the EUPD.

However, each member state may set a higher limit, of up to a maximum €8 million, under which an offer of securities to the public (but not an admission to trading) is exempt from the obligation to publish a prospectus. A member state intending to do so must notify the EU Commission and ESMA of the amount below which the exemption applies. The new total consideration exemptions in each member state can be relied upon from 21 July 2018. Whether the UK will confirm a limit of €5 million is as yet unknown.

Offers to fewer than 150 persons

There will still (as now) be an exemption for offers of securities to fewer than 150 people per EU member state. (A proposal to increase this number to 350 people was not adopted.) The current ‘150 persons’ exemption is reflected in s86 FSMA 2000 and extends to such offers in any EEA state.

Warning to UK companies

As the Regulation does not fully apply until 21 July 2019, and the UK may have left the EU by then, a prospectus may still be required in the case of an offer of securities in another EU member state in the period between Brexit and that date by a company headquartered in the UK or a UK-listed company if no other exemption applies.

© David Pett November 2017

Glasgow Rangers – the final score: remuneration paid to a third party is taxable

The former Rangers Football Club Plc has lost its appeal to the Supreme Court in its long-running litigation with HMRC concerning the proper tax treatment of payments made to a discretionary trust as part of the package of agreed payments for securing the services of players and employees.

Amounts paid by the club to the trustee were then re-settled onto sub-trusts each in accordance with the wishes of the employee who, whilst not within the class of beneficiaries, would be appointed as a ‘protector’ with power to change the trustee(s). The employee would then be made a loan on which interest would be rolled-up and which he would not normally expect to repay until after his death. The club argued that payment to a third party, of money arising from the performance of duties, does not amount to the payment of earnings unless the employee already has a legal right to receive it and it is paid at his direction to a third party. On the facts, the players and employees never had a right to receive the sums paid to the trust; the loans were just that, and were not ‘earnings’ subject to income tax under PAYE.

HMRC argued that the contributions made to the principal trust were taxable earnings as, although not paid to the employee, they were paid as remuneration for the work done by the individual and the individual had requested or agreed that the remuneration be re-directed to a third party.

It was not in dispute that what is taxable is the remuneration or reward for services. The central issue was whether, for it to be taxable, it is necessary that the employee should receive, or at least be entitled to receive, the remuneration.

Lord Hodge (giving the judgement of the Court) stated that, if an employee enters into a contract with an employer which provides that he receives a salary of £X and that, as part of his remuneration, the employer will also pay £Y to his Aunt Agatha, the court could discern no statutory purpose for taxing the former, but not the latter. The charge to tax on employment income extends to money that the employee is entitled to have paid as his remuneration whether it is paid to the employee or a third party. It is not necessary that the employee himself receive it.

However, not every payment to a third party falls within the general charge:

  • “perquisites” (or “perks”) are not taxable unless the benefit is received by the employee and is capable of being converted into money or something of direct monetary value to the employee (per s 62(2)(b) ITEPA 2003);
  • if an employer spends money to confer a benefit-in-kind which the recipient cannot convert into money, that payment is no taxable under the general rules – although it may fall to be taxed under the “benefits code” in Part 3, Chapters 2-11 of ITEPA (living accommodation; cars; loans; expenses, etc.);
  • Part 6 of ITEPA has special rules for ‘employer-funded retirement benefits’ and Part 7 has special rules for the taxation of employment-related securities;
  • a situation in which the person entitled to receive the sums paid by the employer does not acquire a vested right to those sums until the occurrence of a contingency (per Edwards vs Roberts CA 1935) – this being the situation addressed in the recent Supreme Court decision in Forde vs McHugh, and a situation with which many employer-funded deferred bonus arrangements are concerned.

Earlier cases, such as the Special Commissioners’ decisions in Sempra Metals v Revenue & Customs Comrs (2008) and in Dextra Accessories vs Macdonald (2002) had focused on the question of whether funds paid by an employer into a trust belonged to the employee or was at the absolute disposal of the employee. Lord Hodge stated that Sempra Metals was wrongly decided, and the Special Commissioners in Dextra were not presented with the arguments advanced by HMRC in the Glasgow Rangers’ appeals.

In short, the Court held that (i) income tax on earnings is due on money paid as a reward or remuneration for the employee’s exertions; (ii) the relevant statutory provisions (except those relating to ‘perks’) do not provide that the employee must receive the remuneration; (iii) references in the PAYE Regulations to making a payment “to an employee” or other payee” should be construed as meaning payment to either the employee or the person to whom it is made with the agreement or acquiescence of, or as arranged with, the employee; (iv) the specific statutory rules governing gratuities, profits and incidental benefits (i.e. perks), in s62(2)(b) ITEPA, apply only to such benefits;  and (v) the Special Commissioners erred in the Sempra Metals and Dextra cases.

Comment

At last, HMRC has the decision it has been craving for so many years and which, had it been handed down a decade ago, would have largely obviated the need for the 36+ (and growing!) pages of ‘disguised remuneration’ legislation. It is a ‘moot point’ for many a gathering of advisers as to why it has taken so long for the basis on which earnings are taxed to be so clarified. Of course, there will no doubt be arguments to be had over whether, in any particular case, an employee has ‘agreed, acquiesced in, or arranged with the employer’ for a payment to be made to his Aunt Agatha, a trustee, or any other third party.

© David Pett July 2017