ICSA Guidance, IR35 & more: NEDs take care!

Posted by admin at 15:51 on 13 Feb 2017

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In January of this year (2013), the Institute of Chartered Secretaries and Administrators (ICSA) circulated a guidance note on the liability of care, skill, and diligence of non-executive directors (NEDs). The guidance included steps that NEDs can take in order to help them demonstrate to a regulator or a court that they have exercised caution at both the stages of accepting and fulfilling their role.

This guidance follows that issued by ICSA in June 2012 on induction of directors.

The 2013 guidance for NEDs highlights the key areas of best practice to take note of as:

1) Due diligence: ICSA state that it would be advisable for an NED taking on a new role to carry out their own due diligence.

2) Conflict of Interest: Competing interests can make it difficult to fulfil duties impartially and therefore should be avoided.

3) Development: NEDs should look to provide input into their induction programme and take responsibility for their own continual training.

4) Be well-informed: It is important for NEDs to be actively aware of what is going on. They should insist on receiving high-quality information prior to any meetings, and any subsequent information that becomes available.

5) Neutrality: Making decisions objectively in the interests of the company is paramount. NEDs should be prepared to provide independent oversight and constructively challenge the board.

To see the full ICSA guidance on liability of non-executive directors: care, skill and due diligence click here.

Acquisition of equity

Over the years, we at RM2 have found that all too often NEDs are often unhappy with their equity reward structure. Tasked with helping an executive board to navigate a safe course of passage for an entrepreneurial business, often for the whole journey from start-up, through fund-raising to commercial viability and ultimately to exit, it is not surprising that many NEDs are less than happy with the income tax charges associated with many of the schemes put in place. Particularly when you consider that such inefficient incentive awards are probably not just in one company, but across the portfolio of businesses they mentor.

Our solution is a Deferred Share Purchase Plan (DSPP), a plan which has been very carefully constructed around the relevant legislation to ensure that gains are within the favourable Capital Gains Tax (CGT) regime. For an illustration of why this arrangement is worthy of consideration in preference to the standard Unapproved Share Option Plan (USOP). So, care is needed in the structuring of an NED equity award also.

Personal Service Companies

Finally, a word of warning for those NEDs operating via personal service companies. Existing IR35 legislation is being extended so that (i) a worker who would be regarded for income tax purposes as the holder of an office or (ii) a worker who is an office-holder of the client company is brought within the IR35 rules. Finance Bill 2013 contains the revision which means NEDs, previously considered to be outside of the scope of this legislation, will now be caught.

For more information on possible NED equity rewards, please contact any member of the RM2 team on 020 8949 5522, or email enquiries@rm2.co.uk.