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My PFS - Technical news - 26/09/17

Personal Finance Society news update from the 13th to 26th September 2017.

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Taxation and trusts

Investments

Pensions

TAXATION AND TRUSTS

Fuel rates for company cars

(AF1, RO3)

HMRC has announced the new fuel rates for company cars applicable to all journeys from 1 September 2017 until further notice.

The rates per mile are based on fuel prices and adjusted miles per gallon figures.

For one month from the date of the change, employers may use either the previous or the latest rates. They may make or require supplementary payments, but are under no obligation to do either.  Hybrid cars are treated as either petrol or diesel cars for this purpose.  The rates are as follows:

Engine size

Petrol

LPG

Engine size

Diesel

1,400 cc or less

11p

7p

1,600 or less

9p

1,401cc to 2,000cc

13p

8p

1,601cc to 2,000cc

11p

Over 2,000cc

21p

13p

Over 2,000cc

12p

Self-Assessment - Ending The Tax Return For Many

From September 2017 HMRC will remove the need for some customers to complete a tax return, starting with two groups:

  • new state pensioners with income of more than the personal tax allowance in the tax year 2016/17
  • PAYE customers, who have underpaid tax and who cannot have that tax collected through their tax code

All existing state pensioners who complete a tax return because their state pension is more than their personal allowance will be removed from Self-Assessment in the tax year 2018/19.

The new system will broadly work by HMRC using the data it already holds to calculate the tax which is owed. Those will more complex affairs will, however, have to continue to complete a Self-Assessment form.

HMRC is writing to customers this month with a tax calculation and if customers believe the calculation is correct they can pay their tax bill online. However, should they believe the information is incorrect they will have 60 days within which to contact HMRC to prevent any penalties being levied. And, if customers are unhappy with a follow-up response from HMRC, they will have 30 days within which to appeal the decision.

Further details can be found here.

INVESTMENT PLANNING

Venture capital trusts – perfidious albion?

(AF4, FA7, LP2, RO2)

One of the VCTs which was seeking to raise fresh capital this Autumn has pulled its issue on concerns about possible future changes to the VCT rules.

At the start of August the Treasury issued a consultation paper entitled “Financing growth in innovative firms”. It was focused on “patient capital”, with a review of existing investment incentives and a section on “how to support greater retail investment in patient capital”.

In chapter 6 of the document, a section headed “Relative costs of current interventions” notes:

‘…the upfront Income Tax relief provided through the schemes encourages a subset of investors and fund managers to use them for ‘capital preservation’ investments. This typically involves investment in lower risk, often asset-based companies that generate stable returns without aiming for significant growth. Even with no growth in capital and low dividend payments, an investor will see a healthy return. Industry estimates suggest that the majority of EIS funds (which are distinct from VCTs and invest on behalf of EIS investors) had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation.’

At the end of the chapter, one of the consultation questions is ‘Are there areas where the cost effectiveness of current tax reliefs could be improved, for example reducing lower risk ‘capital preservation’ investments in the venture capital schemes?’

Albion Venture Capital, which on 6 September launched a joint fundraising with the other Albion VCTs, announced 6 days later that it has “… decided to suspend its offer until it is clearer as to what categories of investment by VCTs will be permitted in the future”. The Trust said that the decision “…was made in light of ongoing discussions in respect of investment in asset-based businesses following publication…of the consultation document” and that “It is anticipated that changes arising out of the consultation are likely to be made in the Autumn Budget, which is expected in late November or early December”.

Albion Venture Capital says it “invests solely in asset-based businesses”, and a look at its portfolio confirms this. The VCT’s sudden change of heart on capital raising and its comments point to a Treasury clamp down on asset-backed schemes in the Autumn Budget. Advisers should take this into account when recommending VCTs from the current crop of issues.

The September interest rate decision

(AF4, FA7, LP2, RO2)

What a difference a couple of months makes. When the Bank of England published its last Quarterly Inflation Report (QIR) at the beginning of August, it showed market expectations were that base rate would not return to 0.5% until late in 2018. At the time the Bank’s press release warned that ‘…if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.’  

The markets chose to ignore the Old Lady’s hint that they were being too optimistic about rates remaining unchanged. There were good reasons for the markets to be sanguine. The Bank has a track record in recent years of making noises about rate rises that never become reality – hence the Governor being described as “an unreliable boyfriend” by a member of the Treasury Select Committee in Summer 2014. Similarly, for all the threat of rates rising faster, at the August meeting only two of the then eight Monetary Policy Committee (MPC) members – both independents – voted for a rate increase.

The latest meeting of the MPC was expected to be another steady-as-she-goes non-event, complete with a further (ignorable) suggestion that rates might rise sooner than the markets thought. In the event, the MPC took a much more robust stance, which surprised the market to the extent that the Footsie dropped over 1% while the pound bounced up about two cents against the dollar and over a cent against the euro. To see why, it is worth looking at some of the detail in the Bank’s latest press release:

  • Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. Underlying pay growth has shown some signs of recovery, albeit remaining modest.’ Translated from Bankspeak, that means that slack in the economy is being taken up and wage pressures are starting to emerge.
  • Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.’ The August QIR implied that the Bank did not expect inflation to reach 3%, but the 0.3% jump in the August inflation rate makes a 3%+ rate look more likely for September. Mr Carney will then be forced to write an explanatory letter to the Chancellor. 
  • Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2% target over the next three years.’ The timeframe here is significant as the Bank would normally look to have inflation around its 2% target level at the end of two years.
  • The Committee judges that, given the assumptions underlying its projections … some tightening of monetary policy would be required to achieve a sustainable return of inflation to the target. Specifically, if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.’ This is a repeat of the August nudge to the markets to remove the rose-tinted glasses.
  • All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.’ This is also a repetition of a common Bank statement: when rates rise, it will not be a 0.25% per meeting exercise, but a very gradual process.

By the end of the day of the latest MPC meeting, the money markets had put the chance of a rate rise by November at about 50%, with virtual certainty of a 0.5% rate by February 2018. Gilt prices fell (and thus yields rose) to reflect the new expectations. In one sense, the MPC had obtained the benefits of a rate rise – higher yields, stronger sterling – without having to unwind the 0.25% Brexit-inspired cut made in August 2016. All eyes will now be on 2 November, the next “Super Thursday”, when the Autumn QIR, MPC rate decision and MPC minutes are all published.

Government Borrowing Figures Improve Again

(AF4, FA7, LP2, RO2)

The August borrowing numbers showed a smaller than expected deficit for the month, after July's surplus.  It is a one more small piece of good news for the Chancellor ahead of 22 November and the first Autumn Budget of this millennium.

At the time of the March 2017 Budget, borrowing (PSNB) for 2017/18 was forecast to be £58.3bn, 13% up from its then estimate of £51.7bn for 2016/17. The borrowing figures for August have recently been released, giving us a snapshot of the first five months of this financial year. The picture - at this stage - is better than most pundits had predicted.

First off, there has been another revision for the last fiscal year. The latest estimate for 2016/17 PSNB is £45.6bn, a £0.5bn increase on July's calculation, but still £6.1bn below the OBR’s March 2017 estimate. The 2016/17 deficit estimate had been coming down each month because of recalculations of receipts (generally up) and expenditure (generally down). The latest estimate reflects small upward revisions to central and local government expenditure according to the OBR commentary on the ONS data.

For now, the OBR is standing by its Budget estimate for 2017/18, as it expects self-assessment receipts to suffer (relatively) in January 2018 because of the surge in January 2017 that stemmed from dividend payments made in 2015/16 to avoid the tax reforms.

The borrowing figures for the month of August alone revealed a deficit of £5.7bn against a deficit of £7.0bn last year and market expectations of a deficit of about the 2016/17 level. Self-assessment receipts were down markedly on a year ago, but this was probably due to calendar factors, as 31 July was a Sunday in 2016, which meant some payments moved into Monday and August. Across July and August, self-assessment receipts rose by 4.4% over 2016/17. The lower August 2017 self-assessment receipts were countered by buoyant PAYE, NICs and VAT income.

For the first five months of 2017/18 PSNB amounted to £28.3bn, down £0.2bn on 2016/17. If the borrowing pattern follows the 2016/17 experience, that suggests an outturn for 2017/18 very similar to 2016/17 at about £45bn. The anticipated fall in self-assessment receipts mentioned above means that last year’s pattern will not be repeated. However, five months into the financial year, the overall pattern points to the Chancellor having perhaps £10bn to play with by next March, compared with the original Budget projections.

These borrowing numbers give the Chancellor some wriggle room heading towards his Autumn Budget.

PENSIONS

Lifetime Allowance look up

(AF3, FA2, JO5, RO4, RO8)

The lifetime allowance look up facility has now been launched by HMRC and is to be used by scheme administrators

To use the look-up service the scheme administrator will need the member’s protection notification number and their scheme administrator reference.

Members can find these reference numbers in their personal tax account, even if they didn’t apply for lifetime allowance protection online.

Pension dashboard

(AF3, FA2, JO5, RO4, RO8)

The pension dashboard project has now moved on and the Pension Dashboard Project has a demo for stakeholders.

The Pensions Dashboard Prototype Project has three objectives:

  • Agree and document the design of an initial infrastructure for data sharing.
  • Build and demonstrate a basic working prototype using anonymised data.
  • Learn lessons on challenges and potential solutions for future industry-wide dashboard infrastructure.

According to the Pensions Dashboard project on average, a working adult in the UK may have 11 different jobs during his or her working life. That means up to 11 different pension pots and the State Pension.

The collation of pension benefits from state, company and private provision will empower the pension scheme members to have a holistic pension view which is becoming increasingly important with the proliferation of small auto enrolment pension pots.

DWP publishes consultation on introduction of FAS long service cap

(AF3, FA2, JO5, RO4, RO8)

A consultation has been published by the Department of Work and Pensions to establish whether the draft regulations achieve the policy intent of creating an increased Financial Assistance Scheme cap for long service, and whether the proposed long service cap operates correctly in the particular circumstances covered in the consultation document. The government welcomes views from interested parties on the draft regulations, including any possible unintended consequences, such as the impact on particular groups.

About the change

On 15 September 2016 the then Pensions Minister, Richard Harrington MP, laid a written statement in the House of Commons announcing the government’s intention to introduce a long service cap for the PPF in April 2017 and the FAS in April 2018.

The long service cap for the PPF was introduced, as planned, in April 2017 and the PPF cap now increases at 3% for every year of pensionable service in the scheme above 20 years, subject to a new maximum of twice the standard cap. In line with the written statement, the government now intends to introduce a long service cap to the FAS.

Currently, for anyone whose entitlement begins between 1 April 2017 and 31 March 2018, the combined total of the payments to any one member is restricted to £34,229 a year for each scheme (different amounts apply depending on the date entitlement starts).

This is called the cap and applies to any pension that is in payment or will be paid. So, if a member’s pension was £39,000 a year from their scheme and the scheme could not pay anything, the FAS would work out 90% of £39,000 (£35,100). As the FAS cannot pay more than the cap amount which applies to the member, the member in this example would receive £34,229.

The cap is revalued on an annual basis according to the Consumer Prices Index (CPI). Indexation of FAS payments in general is limited to accruals from April 1997 subject to a maximum increase of 2.5%.

The cap may not apply to certain people who are in a transferring scheme. As their FAS payments may be based on what the scheme could have bought for them rather than 90% of their expected pension, they may receive more than 90% of their expected pension and in such cases the cap does not apply.

Following the introduction of the long service cap, FAS members will have their cap increased by 3% for each full year of pensionable service above 20 years when they first become entitled to payments from the FAS, subject to a new maximum of double the standard cap. Only a full year of pensionable service will be counted. Part years will not be included in the calculation.

The increase is applied to the cap amount in place for the member at the time assistance is first put into payment. The increase is not backdated and takes effect from the member’s first pay day on or after the regulations come into force, currently expected to be implemented in April 2018.

Consultation questions

  1. Do the draft regulations achieve the policy intent of increasing the current FAS cap for those with long service in a single scheme as described in the consultation paper?
  2. Are you aware of any unintended consequences resulting from the draft regulations?
  3. Do the regulations as currently drafted allow the FAS to increase the long service cap for all groups with long service in a single scheme?

How to respond

Reponses should be sent to:

Daniel Tinker
Department for Work and Pensions
ALB Partnership Division
3rd Floor South Zone F Quarry House
Leeds
LS2 7UA

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