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My PFS - Technical news - 30/08/16

Personal Finance Society news update from 17 August to 30 August 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

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HMRC consults on proposals to fine accountants and IFAs who enable the use of tax avoidance schemes

(AF1, RO3)

HMRC has recently published for consultation proposals for sanctions against those who enable or use tax avoidance arrangements which are later defeated. The wider definition of an 'enabler' would extend to all those in the 'supply chain' including IFAs and accountants.

At Budget 2016 the government announced that it would be exploring further options to deter promoters and other intermediaries who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC; and to change the way the existing penalty regime works for those whose tax returns are found to be inaccurate as a result of using such arrangements.

In a consultation document, published on 17 August, the government sets out details of proposals to penalise anyone in the 'supply chain' who benefits financially from enabling others to implement tax avoidance arrangements that are later defeated by HMRC. This would include IFAs, accountants and others who earn fees and commissions in connection with marketing such arrangements; as well as those who arrange access and provide introductions to others who may provide services relevant to evasion.

The penalty could either be based on the financial benefit enjoyed by the enabler in providing their services or be linked to the amount of tax understated by the user with a cap to ensure that, where a scheme has been widely marketed, the aggregate number of penalties faced by an enabler remains proportionate to the enabler's involvement in the defeated avoidance.   Safeguards would apply to ensure that unwitting parties are excluded from the definition of enabler. The government also proposes to include the option of naming enablers, who are subject to the new penalty, to act as a further deterrent. 

The consultation document additionally sets out options to clarify how the existing penalty scheme in Schedule 24 Finance Act 2007 should operate where a person claims to have taken 'reasonable care' in submitting their tax return (and argues that a penalty should not therefore apply). Options for change include either placing the requirement to prove reasonable care onto the taxpayer or incorporating a statutory definition of 'reasonable care' into the existing legislation.

Finally, the consultation includes a number of potential interventions which HMRC is considering in order to influence the behaviours of those involved in tax avoidance schemes.

The government has already introduced a number of measures to bear down on tax avoidance, most recently bringing in new sanctions for those who engage in or promote multiple avoidance schemes that fail; and a penalty on those who trigger the GAAR.

The additional proposals, set out in this latest consultation document, reiterate HMRC's commitment to act against users and enablers of tax avoidance.

Draft legislation published on changes to the taxation treatment of termination payments

(AF1, RO3)

In summer 2015, the government published a consultation document setting out a number of ideas for the reform of the tax treatment of termination payments. At Budget 2016 certain changes designed to prevent manipulation and make the system simpler and fairer were announced. The government has now published a further document, summarising responses to the earlier consultation and seeking views on the draft legislation that will bring these changes into effect.

The draft legislation, which will take effect from April 2018, ensures that:

  • The first £30,000 of a termination payment remains exempt from income tax; and any payment made to any employee that relates solely to the termination of the employment continues to have an unlimited employee NICs exemption;
  • The rules for income tax and employer NICs are aligned so that employer NICs will become payable on any sum exceeding the £30,000 tax free limit;
  • Income tax and Class 1 NICs will apply to any post-employment payment that the employee would have received if he or she had worked his or her notice period (even if the employee is asked to leave employment immediately or part way through their notice period). This ensures that all payments in lieu of notice (PILONS) will be taxed as earnings and subject to Class 1 NICs whether they are contractual or non-contractual (currently non-contractual PILONs can qualify for the £30,000 exemption while contractual PILONS cannot); and
  • Awards for injury to feelings are taxable by providing that, in order for an exemption to apply to an award for injury, there must be an injury or disability of a physical or psychological nature that is sufficient to cause the employee to be unable to perform his or her job properly.

The consultation closes on 5 October 2016.

The rules on the taxation of termination payments have been around for many years. However, given their complexity, they frequently cause confusion and the changes provide some welcome clarity. Proposals made during the original consultation to reduce the existing £30,000 exemption for non-contractual termination payments, or link it to length of service, have been dropped and this news will also be welcomed.

Draft disguised remuneration legislation published for consultation

(AF1, RO3)

HMRC has long since held the view that disguised remuneration schemes - such as those employed in the long-running Rangers EBT case - do not work and at Budget 2016 the government announced a further package of changes to tackle the continued use of disguised remuneration schemes which exploit perceived weaknesses in the disguised remuneration legislation introduced by Finance Act 2011.

A technical consultation launched on 10 August, alongside draft legislation for inclusion in Finance Bill 2017, includes more detail on the proposals which also include a retrospective tax charge on loans that remain outstanding at 5 April 2019 where the loan has not been taxed and no settlement has been agreed with HMRC.

The schemes that are being targeted by the new measures typically involve loan transfers, where employees become indebted to a third party instead of their employer who made the loan.  The new rules put beyond any doubt that all such schemes, which result in a loan or other debt being owed by an employee to the third party, are within the scope of the disguised remuneration legislation at Part 7A ITEPA 2003 whatever the intervening steps.

This consultation - which will run from 10 August to 5 October 2016 - also includes details of proposals to tackle similar schemes used by the self-employed, and proposals to restrict the tax relief available to employers in connection with the use of these schemes.

Disguised remuneration was one of the first areas of tax avoidance tackled by the then coalition government. These schemes usually involve an individual's income being funnelled through a third party, with the money often then being paid to the individual as a 'loan' that is never repaid.

While the disguised remuneration legislation, introduced in 2011, was successful in stopping the promotion of schemes that existed at that time, since then a number of new schemes have evolved.  Furthermore, the 2011 legislation did not have retrospective effect - only loans made after 9 December 2010 were in scope. The new measures make it clear that all arrangements which result in the employee being indebted to a third party are 'treated in the same way as if the third party made the loan directly' and provide that, as at 5 April 2019, any outstanding loan or similar payment from an EBT will be treated as if it were a taxable bonus subject to PAYE and NICs as at that date.

Making tax digital - consultations

(AF1, AF2, RO3, JO3)

The government has now launched a series of consultations which look at how the tax system can be transformed with a view to moving to a fully digital tax system.

Although this is the start of the formal consultation period, HMRC has been engaging extensively with stakeholders since Making Tax Digital was announced last year and much of the content of these consultations has been informed by that engagement.

The collection of consultations cover:

  1. An overview for small businesses, the self-employed and smaller landlords
  2. Bringing business tax into the digital age
  3. Simplifying tax for unincorporated businesses
  4. Simplified cash basis for unincorporated property businesses
  5. Voluntary pay as you go
  6. Tax administration
  7. Transforming the tax system through the better use of information

Specific detail at to what is covered is provided in bullet point form against the relevant consultation.

As can be seen from the list each one will be of interest to various parties, not only individuals, employers and businesses but also software developers and other organisations that provide customer information to HMRC.

HMRC is also running a series of webinars and face-to-face events to provide more detail on the consultations together with the opportunity to ask questions.

The consultation period will run until 7 November 2016 and it will be interesting to see how much progress will be made.


The July inflation numbers

(AF4, CF2, RO2, FA7)

Annual inflation on the CPI measure was 0.6% in July, 0.1% up on June's figure. Market expectations had been that the July inflation numbers would be the same as June's.

This month's figures are considered important for two reasons:

  1. They offer the first potential evidence of the impact of sterling's fall on inflation. The pound is down about 14% against the dollar and 12% against the euro since 23 June. In practice hedging by importers will have dampened the immediate impact, but there has been anecdotal evidence of some suppliers using Brexit as a reason to increase prices. Producer prices (often referred to as factory gate prices) rose by their fastest in over two years, albeit at an annual rate of only 0.3% (against a 0.2% fall in June).
  2. The July RPI sets the basis for rises to regulated rail fares from next January. The now downgraded inflation measure is still used because higher fares means the government has less to pay the train operators.

The CPI showed prices down 0.1% over the month, whereas between June and July 2015 there was a 0.2% fall. The bad news for rail season ticket buyers is that CPI/RPI gap widened by 0.2% over the month, with the RPI up 0.3% on an annual basis to 1.9%. Over the month, the RPI rose by 0.1%.

The uplift in the CPI annual rate was due to four main "upward contributions", offset by a two main "downward contributions", according to the Office of National Statistics (ONS):


Transport:Overall prices rose by 1.6% between June and July this year, compared with a rise of 1.2% between the same two months a year ago. Within transport, the largest upward effect came from motor fuels, with prices rising between June and July 2016, having fallen overall between the same two months last year. Smaller upward effects came from second-hand cars, with prices falling by less than they did a year ago and from international rail fares, which increased by more than they did last year.

Alcoholic beverages and tobacco: Within this category, the upward contribution came from alcoholic beverages, for which prices rose overall by 0.5% between June and July 2016, compared with a fall of 2.5% between the same two months last year. This was primarily due to prices for wine, which fell by less than they did a year ago, although last year's fall was particularly large.

Restaurants and hotels:Overall prices rose by 0.4%, compared with a smaller rise of 0.1% a year ago. The main upward contribution came from accommodation services, in particular overnight hotel stays, for which prices rose by more than they did a year ago.

Food and non-alcoholic beverages:The upward contribution came from food. Overall prices still fell, but by 0.2% between June and July this year compared with 0.7% between the same two months a year ago. Annual food pricedeflationis now 2.6%.


Housing, water, electricity, gas and other fuels:Overall prices were unchanged between June and July this year, having risen by 0.3% between the same two months a year ago. The downward effect came from housing rental, specifically Registered Social Landlord (RSL) rents, which saw a decrease between June and July 2016, having increased between the same two months last year. The ONS thinks this may relate to the controversial announcement in the Summer Budget 2015, which committed to reducing social housing rental prices by 1% per year for 4 years, starting in 2016.

Recreation and culture:Overall prices decreased by 0.1% this year compared with an increase of 0.2% a year ago. The downward effect came primarily from games and toys, particularly computer games and consoles, which fell in price between June and July this year, having risen in the same period last year.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell by 0.1% to an annual 1.3%. Four out of twelve index components were in negative annual territory, the same number as last month. Goods inflation rose, but continues to be solidly negative (up 0.2% at -1.4%), while services inflation fell by 0.1% from June to +2.7%.

An extra 0.1% on the CPI is no real evidence of a Brexit feed-through, although the same is not true of the producer price numbers.


Could members lose the right to a transfer under proposed DB pension reforms?

(AF3, CF4, RO4, JO5, FA2, RO8)

According to a report in the Daily Telegraph on 31 July 2016, millions of workers who have final salary pensions could miss out on flexible access to their savings if plans to allow companies to renege on pension promises made to employees are backed by the Government. Under the measures, thought to be favoured by MPs and pension funds, cash-strapped employers would be able to cut workers' pensions by tens of thousands of pounds without approval by the courts. This could trigger a rush of savers trying to move their money out of schemes as quickly as possible.

However, this was followed on 1 August by a Press Release from the Association of Consulting Actuaries (ACA), a blanket ban on members transferring their DB pensions is not necessary and could disadvantage pension scheme members and sponsors.

Bob Scott, Chairman of the ACA, commented: "There is a very real danger that speculation about a ban on transfers could cause a rush for the door while stocks last mentality by private sector scheme members who may be concerned about the security of their pensions, especially given the regular reports on 'growing deficits'.... A blanket ban could also lock some members into schemes where there is a real possibility that targeted benefit will not be forthcoming and it would seem very wrong that in such cases members, particularly those with long service, should be prevented from protecting their pension prospects by way of a transfer ban."

The Work and Pensions Select Committee plans to start an inquiry in which MPs will consider ways to prevent a rush of individuals trying to cash in their pensions. Chairman Frank Field said: "This rush could be a problem and the whole area of slowing down access to pension funds is something [we] will look at in our call for evidence in the autumn." A DWP spokesperson commented: "We have a robust and flexible system for the regulation of occupational pensions and are working closely with the sector to understand the issues affecting defined benefit schemes."

In addition to the Daily Telegraph article, it was picked up elsewhere and there is also a petition on

Whilst a ban on DB transfers would be a retrograde step, any doubt or uncertainty needs to be nipped in the bud. If this does not happen there is the potential for a "buy now while stocks last" approach which in turn could lead to individuals transferring out, who with the benefit of hindsight might regret the move. Do I hear the term "mis-selling scandal" waiting in the wings?

PPF compensation limits may be incompatible with European law

(AF3, CF4, RO4, JO5, FA2, RO8)

According to a recent provisional ruling by the Court of Appeal, Hampshire v The Board of the Pension Protection Fund [2016] EWCA Civ 786, the current caps applied by the Pension Protection Fund (PPF) on compensation payments it makes to scheme members of failed DB pension schemes may not comply with European law.

The case was brought by 15 former employees of Turner & Newell, which has been in PPF assessment for about ten years, who argue that EU laws state compensation schemes should pay at least half of the benefits members were entitled to.

This ruling could eventually mean higher pension compensation for some scheme members; either for those who suffer a significant reduction in benefits at the point of retirement as a result of the cap, or because of the restrictions imposed on inflation proofing.

However, a decision from the European Court of Justice (ECJ) needs to be made before any changes are made and the UK Government would also have to decide on a response to the ECJ. The scheme in question, Turner and Newell plc has been in PPF assessment for around 10 years.

Any modification of PPF compensation limits would still have to be paid for, either in the form of reductions to other aspects of the compensation scheme benefit structure, or in higher levies imposed on the occupational schemes which pay for the PPF.

It is also important to note that this case has already been through a number of stages, including the Pensions Ombudsman and the High Court. Nothing is expected to change in the short term and Brexit events could even end up overtaking any judgment eventually made by the EU Court of Justice.

High Court winds up pension liberation scheme

(AF3, CF4, RO4, JO5, FA2, RO8)

Details of a recent Insolvency Service led investigation has resulted in the winding up of Thames Trustees Ltd, a company operating a pension liberation scheme.

The investigation found that 79 members had joined the scheme, investing an aggregate of £3,333,665 by transferring their existing pension scheme investments into it. Members had been promised cash payments in return, either in the form of a 'loan' from an associated company or from commission on investments made by the company.

The High Court found that the company had operated with a lack of transparency and a lack of commercial probity, that there was never any intention that the loans received by clients would be repaid, and that the investments made with the scheme funds were not made for any true commercial purpose.

Insolvency Service Investigation Supervisor, Colin Cronin, commented: "The structure of this pension liberation scheme was deliberately opaque and the lack of transparency was added to by the failure of those in control of the company to fully cooperate with the investigation. The operation of the scheme was highly prejudicial to the clients who were required to invest their pension funds into it in order to obtain the early release of part of those funds. The balance of the funds were not legitimately invested as clients were led to believe." He noted that the proceedings "show that the Insolvency Service will take firm action against companies which mislead the public in this way."

NEST: Responsible investment report published

(AF3, CF4, RO4, JO5, FA2, RO8)

NEST has released its first responsible investment report, entitled "Working for change NEST's activities as a responsible investor to 2016". The report sets out how NEST incorporates environmental, social and governance (ESG) risk factors when looking after members' money, to boost and protect their pots.

The report outlines how NEST represents millions of members who now have a stake in companies and markets around the world for the first time, thanks to auto enrolment. This includes engaging directly with companies, regulators and industry bodies. It also involves working closely with their fund managers and other large institutional investors in order to increase their effectiveness.

Working for change includes four case studies setting out how NEST looks to understand and act on a variety of issues that have an impact on long-term returns, sustainable markets and good business practices:

  • climate change and managing the transition to a low carbon economy
  • banking culture and conduct and how this can impact on performance 
  • the quality of company audits and the interaction between shareholders and auditors
  • the role of pay in company performance.

The scheme believes incorporating ESG factors into its investment process across all the NEST Retirement Date Funds and fund choices improves long-term returns and reduces investment risk for all its members. NEST also believes it's important to be transparent about their activities and start a dialogue with members about how they are acting as an owner on their behalf.

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