Personal Finance Society news update from 21 October 2015 - 03
November 2015 on taxation, retirement planning, and
Taxation and Trusts
Taxation and Trusts
EU ruling on state subsidies
An EU landmark decision has ruled against "comfort
letters" given to multinationals by EU states delivering
significantly lower tax rates.
It has been reported that Starbucks and Fiat will face tens of
millions of euros in tax repayments when the EU issues a landmark
decision this week on "state aided tax avoidance" by multinational
The case - led by Margrethe Vestager, the EU's Competition
Commissioner - is expected to set a far-reaching legal precedent
designed to curtail practices that are routinely used by
multinationals in Europe to limit their tax bills.
Other multinationals, such as Apple and Amazon, are likely to
also be seriously affected.
The case focuses on "tax rulings" - sometimes called "comfort
letters" - issued by governments to multinationals looking to trade
in the state in question. These 'tax rulings' effectively promise a
much lower effective rate of tax to the multinational who trades
(and employs) in the country concerned.
The decision is expected to signal that tax rulings issued to
Starbucks by the Netherlands and to Fiat by Luxembourg amounted to
illegal state aid. The Commission has, as a result, demanded
that almost all EU member states hand over their tax rulings for
Estimates of the sums involved in this week's cases are thought
to be more modest. The countries will probably receive
detailed descriptions from the Commission of how to calculate the
uncollected taxes, rather than an exact amount.
The Commission is likely to rule that Starbucks Manufacturing BV
was paying an effective tax rate of 2.5 per cent, rather than the
full Dutch corporate tax rate of 25 per cent.
Estimates of Fiat's tax rate are more vague. The
Commission is expected to say that Fiat Chrysler Finance Europe was
in effect paying a rate of about 1 per cent in Luxembourg, rather
than 29 per cent. People involved say that means it will owe
more than Starbucks but not more than 200m euros.
Commentators are of the view that the EU is more concerned with
establishing a tough line on the illegality of certain types of
aggressive tax avoidance than imposing heavy financial penalties on
Fiat and Starbucks.
The main issue seems to be that of transfer pricing, whereby
companies reduce their taxable profit through complex cross-border
The Dutch government claims that Starbucks' local coffee
roasting unit was allowed to reallocate a large slice of its profit
and attribute it elsewhere internally in the form of royalty
payments. The essence of the government's argument is that
much of Starbucks' profit derives from its brand value and other
intellectual property, such as recipes, which are not created
within the Netherlands.
The Commission has questioned these internal royalty
payments. It has also queried whether Starbucks was inflating
its costs internally by marking up the price of coffee beans
imported from Switzerland.
The Dutch government claims that all of the calculations it used
to assess Starbucks' tax burden were legal.
All of the countries and companies involved in the first four
cases - Starbucks in the Netherlands, Apple in Ireland and Fiat and
Amazon in Luxembourg - insist that they have done nothing
wrong. One suspects a "letter of the law" versus "spirit of
the law" battle lining up. It is predicted that the cases
will almost certainly be appealed to the European courts.
In the preceding article we have covered the EU ruling in
relation to comfort letters and "agreed" super low corporation tax
rates for some multinationals in some EU states. The low tax
rate represented, it is contended by the EU, a form of
non-permitted (and anti-competitive) state aid to certain large
multinational businesses to set up and trade in the country in
which the low tax rate was accessed.
In a piece of related news it was revealed that, in 2014,
Facebook's UK arm paid £4,327 in corporation tax and, in the same
year, found £35.4m for employee share bonuses.
Apparently, Facebook's UK corporation tax bill was therefore a
smaller amount of tax than the £5,393 paid by one person on the
average UK wage.
It seems that Facebook was able to minimise its corporation tax
(despite booking revenues of £105m) by paying those bonuses. The
numbers suggest, it is alleged, that its UK staff had average
earnings of £210,000 each last year.
As Facebook stresses, this is entirely compliant with UK tax
law. The corporate tax burden was shifted from the company to
Facebook reported a 34 per cent rise in global fourth-quarter
profits to $701m taking the total for 2014 to $2.9bn. That
was on a global revenue of $12.5bn, implying a profit margin of 23
Assuming its UK operation has much the same business model, then
those UK revenues of £105m ought to have generated a profit of
around £24m. At a 2014 corporation tax rate of 21 per cent,
that would suggest a tax bill nearer £5,115,600 than £4,327.
There has, apparently, been much indignation expressed over this
- in much the same way as the public, informed by the Public
Accounts Committee, complained about the low to nil effective rate
of tax on UK generated earnings paid by Starbucks, Amazon, Google
and the like.
Now, while one can appreciate the morality of the argument, if
the cause of turning high revenue into lower/nil profit is some
form of intra-group "profit shifting" eg charging high royalty
payments to a EU state-based group company from a group company in
a low/no tax jurisdiction, the same justification for indignation
can't really be used if the cause of a lower or no profit (or even
a loss) is a deductible payment of remuneration to a UK taxable
officer or employee of the company. Just as it couldn't if
the deductible amount were because of tax allowable pension
payments. There's just less scope these days for such
payments given the annual and lifetime allowances.
The point is that the payment of remuneration and bonuses to
real employees can't be categorised as the same kind of profit
shifting. Yes, it shifts revenue from the company to the UK
taxable employee but, no, tax isn't avoided. It's probably
Now, of course, the 362 happy receivers of the (average)
£210,000 of remuneration could tax plan themselves to reduce their
income tax bill. But these days there's increasingly fewer
ways to "legitimately and effectively" reduce income tax.
Interesting. So would a company "shifting their tax
burden" to UK taxable individuals (or reducing it due to deductible
pension/benefits payments) be caught by the new diverted profits
tax (DPT). Certainly not. This is not the kind of
operation the new DPT was designed to catch.
It is reasonably well accepted that the DPT is the UK's
"advanced" version of the general EU/OECD attack on profit shifting
from the countries in which the revenue giving rise to the profit
is generated to countries that offer low or nil rates of tax on
The remittance basis treatment of foreign income or gains used
as collateral for debts
(AF1, AF2, RO3, JO3)
Last year HMRC changed its guidance on the tax treatment of
foreign income and gains used as collateral for UK debts - broadly,
where someone had a 'relevant debt' which was secured over untaxed
foreign income and gains, they were to be treated as having used
the collateral in respect of that debt.
Essentially, anyone who had an existing arrangement in place
would have had until 31 December 2015 to notify HMRC in writing
that the debt will be repaid or will be replaced by non-foreign
income or gains by 5 April 2016.
However, since changing its practice and having had discussions
with representative bodies, HMRC understands that for some loan
arrangements it may be difficult or impossible to unwind or replace
the foreign income or gains used as collateral.
So, to ensure that the transitional period does not have an
unintended effect, after careful consideration HMRC has decided it
will, with effect from 21 October, not seek to apply the change
announced on 4 August 2014 to arrangements where the loan was
brought into or used in the UK before that date. Instead, from 21
October, there is no requirement to repay or replace foreign income
and gains collateral with non-foreign income and gains collateral
before 5 April 2016.
This change of practice will no doubt provide good news for
those who have existing arrangements in place which are difficult
Scottish taxpayer technical guidance
(AF1, AF2, RO3, JO3)
HMRC has published technical guidance on who, from
6 April 2016, will be a Scottish taxpayer.
The Scottish rate of income tax doesn't apply to income from
savings, such as building society interest, or income from
dividends. This rate will stay the same for all taxpayers across
the UK as will the personal allowance.
Broadly speaking, anyone who lives in Scotland will pay the
Scottish rate of income tax - it's where you live, not where you
work, that decides whether you're a Scottish taxpayer. If someone
moves to Scotland but has more than one home, they will need to
work out if they are a Scottish taxpayer.
The technical note also includes guidance on an individual's
'place of residence', 'main place of residence', tests for Scottish
taxpayer status and evidence used to establish someone's
HMRC will contact potential Scottish taxpayers in writing in
December. So, for anyone who does live in Scotland but does not
receive a letter from HMRC by the end of December, they should
contact HMRC with an updated address. Note the onus of
responsibility lies with the individual not the employer.
Anyone who falls into the category of a Scottish taxpayer will
have an amended April 2016 tax code which will begin with the
The Scottish rate of income tax will be announced in January
2016 and will apply from April 2016. In the meantime, any clients
who may fall into this category should ensure that HMRC holds
up-to-date information on their circumstances to prevent
complications further down the line.
Principal private residence relief claim allowed on basis of
expectation of continuing occupancy
The First-tier Tribunal has upheld a taxpayer's claim to
principal private residence relief and lettings relief despite him
having lived in the property for just seven weeks when it was first
bought in 2006.
The recent First-tier Tribunal (FTT) case of Dutton-Forshaw v
HMRC  UKFTT 478 involved the sale of a London flat which was
purchased by the taxpayer, Mr Dutton-Forshaw, in 2006 following the
breakdown of his marriage.
Evidence was presented which showed that while Mr Dutton-Forshaw
had intended to make the London flat his permanent home (for
instance by applying for a parking permit, joining a London-based
dating agency, attending Church there and making this intention
known to his ex-wife), a change in circumstances outside of his
control forced him to move back to Lymington to look after his
daughter after just seven weeks in occupation. The First-tier
Tribunal decided that, in the circumstances, Mr Dutton-Forshaw was
entitled to claim principal private residence relief (and
consequently lettings relief), so as to reduce his gain from almost
£40,000 to nil, when he eventually sold the London property in
As in many other principal private residence relief cases, this
case involved an unforeseen change in the taxpayer's personal
circumstances, which had an impact on his living arrangements. The
decision was accordingly based on very specific circumstances but
may nonetheless provide support for those who are making similar
claims in respect of short periods of occupation.
Gilts - A new benchmark
(RO2, AF4, CF2, FA7)
To some eyes, the Government has recently been
kowtowing to the Chinese in an effort to gain China finance for
infrastructure and other projects. Ironically, in the same week the
Treasury has also proved that it has little difficulty in raising
ultra-long and ultra-cheap finance.
On 20 October the Debt Management Office (DMO) -
the arm of the Treasury in charge of gilt sales - announced that it had sold £4.7bn of a new
benchmark gilt, having received offers for nearly £22bn worth
of the stock. Rather than China, the UK domestic market ended up
taking "around 95%" of the offer.
The new gilt is 2½% Treasury 2065, which was
sold via the DMO's syndication programme at a yield of just 2.56%.
Yes, there are plenty of institutions willing to lend money to UK
plc for half a century at a rate that would have seem laughable ten
years ago. The last time the government launched such an ultra-long
dated stock was in June 2013 when it had to pay a yield of 3.65% to
borrow over 55 years (3.5% Treasury 2068). At the time there was
surprise expressed at the low yield, but the 2068 stock is now
showing a 30% capital gain for its original purchasers.
That appreciation emphasises a point about
long-dated bonds with low interest coupons: their value is very
sensitive to the yield investors are prepared to accept. Indeed,
the new 50-year benchmark has the highest modified duration of any
conventional gilt, the bond expert's preferred yardstick for
interest rate sensitivity. That means if yields go back to the
3.65% of June 2013, the new gilt would lose about a quarter of its
This stock will probably have ended up with pension funds and
insurance companies, anxious to match very long-term liabilities.
It may not look attractive as a pure investment, but there is very
little alternative for such liability-driven investors.
Index-linked gilts of the same term offer a negativerealreturn of
National Savings - Guaranteed Bonds
(RO2, AF4, CF2, FA7)
Last month National Savings & Investments (NS&I)
announced a 0.25% cut in the rate on its market-topping Direct ISA
from 16 November. This month NS&I have announced a move in the
opposite direction for its Guaranteed Growth Bonds (GGBs) and
Guaranteed Income Bonds (GIBs).
Both the GGB and GIB are currently not on offer, having been
withdrawn in late 2009, but existing investors have the opportunity
to reinvest. The new rates, effective from 20 October, are:
Guaranteed Growth Bonds:
- 1-year increased from 1.25% to 1.45%.
- 2-year increased from 1.50% to 1.70%.
- 3-year increased from 1.70% to 1.90%
- 5-year increased from 2.35% to 2.55%.
Guaranteed Income Bonds:
- 1-year increased from 1.20% to 1.40%.
- 2-year increased from 1.45% to 1.65%.
- 3-year increased from 1.65% to 1.85%.
- 5-year increased from 2.30% to 2.50%.
None of these rates are anything close to table topping - most
are at least 0.5% adrift. The fact is that NS&I do not want a
vast inflow of money, as they are still sitting pretty with all the
money raised from the extended offer on the 65+ Bond (Pensioners'
It is interesting to see NS&I raising rates now for
reinvestment. However, its real reinvestment issue arrives next
year from mid-January, when the first of the 1-year term 65+ Bonds
mature. These are paying 2.8% - double the new GIB rate. With an
election now a long way off, the chances are the reinvestment terms
will not be as attractive.
Deferred benefits, protection and deflation
(RO4, AF3, CF4, JO5, FA2, RO8)
The UK enjoyed annual inflation in the year to September of
-0.1%, based on the CPI. The RPI was still in positive territory,
at 0.8%. As the September CPI inflation number is used in
calculating the statutory revaluation for deferred pensions, this
has raised a few questions about the impact on benefits and any
knock on effects on Fixed Protection (2012 and 2014) and enhanced
First off, it is worth noting that a year on year decline in
inflation to September is not a new issue in the context of
statutory revaluation, as the table below shows for the current
Period since leaving service
Higher rate (5%)
Lower rate (2.5%)
The emboldened drop between years 5 and 6 reflects the fact that
the RPI (as then applied) fell by 1.4% in the year to September
2009 (used for 2010 revaluation purposes). Broadly speaking the
latest negative CPI is going to shave 0.1% of all the above numbers
as they shift down at the end of the year. For example, someone
with two complete years since leaving service to pension age in
2016 will have a statutory revaluation of their leaving benefits of
Does this matter for fixed or enhanced protection applied to
deferred DB arrangement benefits? The answer, with very few
exceptions, is no. An explanation is given below.
Enhanced protection is lost if there is 'relevant
benefit accrual'. For DB schemes, this is only tested when there is
a benefit crystallisation event or a permitted transfer. The basis
for calculation is quite complex, as PTM092430 explains, but for deferred DB
schemes the key factor is that benefits can increase by the
- an annualised increase of 5% from 5 April 2006; or
- for contracted-out rights, rights subject to revaluation or
preserved rights, an annualised increase at the percentage rate in
regulation 3 of The Registered Pension Schemes (Uprating
Percentages for Defined Benefits Arrangements and Enhanced
Protection) Regulations 2006 - SI 2006/130; or
- the percentage increase in the RPI from April 2006 to the month
in which the benefit crystallisation event or permitted transfer
The 5% threshold is more than enough to avoid any problems for
the nearly all people with deferred DB benefits.
Fixed Protection in both guises is lost is there
'benefit accrual' at any time, ie it is an ongoing test. The FP
test is thus doubly different from that for enhanced protection
for more details). For deferred DB scheme benefits, the key is that
benefit accrual will occur if increases exceed the 'relevant
percentage', defined as:
- the annual rate used to increase the member's rights and which
was specified in the pension scheme's rules (or a predecessor
registered pension scheme) on 11 December 2012 (or the highest
percentage so specified for an arrangement where there is more than
one arrangement and they have different annual rates) plus the
relevant statutory increase percentage, or
- (if no annual rate was specified) the higher of:
- the normal statutory percentage increase; and
- the percentage by which the consumer prices index (CPI) for the
month of September in the previous tax year is higher than it was
for the same month in the year before (or nil if there had been no
increase or a fall) [our italics].
A fall in CPI is not an issue for the vast majority of deferred
DB scheme members. However, the September 2015 combination of
3%(ish) earnings growth and negative CPI inflation could create
some problems when it comes to calculating 2016/17 pension input
amounts foractiveDB scheme members, as there will be no uprating of
the opening value of their benefits at the start of the tax year
(the CPI adjustment cannot be negative - s235(3) Finance Act 2004).
The problem will be worst for those with a long period of
HMRC publish newsletter 73
(RO4, AF3, CF4, JO5, FA2, RO8)
Newsletter (no73) has been published.
The Newsletter covers:
- Scottish rate of Income Tax
- Annual Allowance
- Tapered Annual Allowance
- Pension Registration statistics
- Pension Flexibility (Protection)
- Scottish rate of income tax
HMRC have developed a new webpage for updates.
Annual Allowance charges for 2014/15
A reminder for advisers to remind their clients who have
exceeded the pension schemes annual allowance of £40,000 for 2014
to 2015 declare this on their Self-Assessment tax return. The
deadline for submitting the return is 31 January 2016 although
those scheme members who want to submit a paper Self-Assessment tax
return must do so by 31 October 2015.
Tapered Annual Allowance
Tapering of the Annual Allowance comes into
effect on 6th April 2016. All pension input
periods must be aligned with the tax year, even if the member is
not affected by the taper.
Pension Registration Statistics
For the period 6 April 2015 to 30 September 2015 HM Revenue and
Customs (HMRC) received in total 2,424 applications to register new
pension schemes. This is a 38% reduction compared to applications
received in the same period last year.
Of these schemes, 91% have been registered and HMRC has
currently refused registration for about 4% of applications. No
decision has yet been made on the remainder.
1) Taxation of lump sum benefits
HMRC explain that the tax charge on taxable lump sum death
benefits paid to individuals changed to the recipient's marginal
rate of income tax from 6 April 2016.
Normal PAYE rules will apply to these payments.
If the recipient has a P45 from a previous source/employment
dated on or after 6 April in the current year, the scheme
administrator should operate the code on the P45 on a Month 1
If a scheme administrator already makes payments to the
recipient and has a tax code for those payments, the tax code
should only be used for additional payments if the payments are
being made at the same time. If more than one payment in a month is
made and the same tax code is operated against each of those
payments it could give the benefit of the tax allowances and rate
In all other circumstances, scheme administrators should use the
emergency code on a Month 1 basis against the payment and HMRC will
issue a tax code to operate against future payments.
Where the beneficiary is receiving a lump sum payment that
extinguishes the fund, the scheme administrator must issue a P45
which will enable the recipient to claim any tax refund that might
be due in-year.
2) HMRC Flexibility Reminder
Those individuals that took advantage of the transitional
easements in the run up to 6th April 2015 are reminded that they
should have taken their PCLS by 6th October 2015. These
included those that took advantage of the buddy transfer
3) Transitional Protection
From April 2016 there will be two protection regimes available
Individual Protection 2016 (IP2016) and Fixed Protection 2016
(FP2016). There will be no application deadline for these
protections. However individuals will need to apply for protection
before they take their benefits as they will need the HMRC
reference number if they want to rely on the protection.
This means that those wanting to rely on IP 2016 or FP2016
should apply before they take any benefits on or after 6 April
2016. This is so that those benefits can be tested against the
higher Lifetime Allowance (LTA) provided by these protections
rather than the £1 million standard LTA. This applies even when the
benefits being taken are worth less than £1 million.
If the individual doesn't have the reference number then the
amount of the benefit crystallisation event will be expressed as a
percentage of £1 million, rather than the higher protected LTA.
HMRC are introducing a new online self-service for pension
scheme members to apply for protection and this service will be
available for members to use fromJuly 2016. Members will no longer
receive a lifetime allowance protection certificate, instead once
they have successfully applied for protection the online service
will provide them with a reference number which they will need to
HMRC are also introducing an online service for scheme
administrators to check the protection status of their scheme
members. They are exploring options for what this will look like
and will provide more information on this in due course.
There will be a period between the new protection regimes
becoming available in April 2016 and the introduction of the new
online self-service in July 2016. For this period HMRC will
introduce an interim process for pension scheme members who want to
take benefits before the introduction of the new online service.
Scheme members will be able to write to HMRC between April 2016 and
July 2016 and we will check the details of their protection and
respond to the member in writing. This can then be presented to the
scheme administrator in advance of the full application being made
after July 2016.
Individual Protection 2014
As a reminder individuals can still apply for Individual
Protection 2014 (to protect any pension savings built up before 6
April 2014 from the LTA charge (subject to an overall maximum of
£1.5 million). Applications are made online and can be made up
until 5th April 2017.
DWP publishes guidance on state pension top-up scheme
(RO4, AF3, CF4, JO5, FA2, RO8)
The DWP has published updated guidance on the new state pension
top-up scheme. The guidance is aimed at organisations and
businesses who give advice to people about pensions.
The DWP has also published a "State Pension top up" booklet,
which explains the new state pension top-up scheme for those who
may be entitled to it. In addition, there is also a booklet aimed
It has been available from 12 October 2015, and can provide
additional guaranteed pension income for life. Anyone
eligible to receive a State Pension before 6 April 2016 can obtain
a State Pension top up to increase their pension income by between
£1 and £25 per week. This is the case, even where an individual has
decided to defer receipt of the State Pension.
- a boost in retirement income up to £1,300 per year for
- pension payments protected against inflation
- inheritance for a surviving spouse or civil partner of between
50% and 100% of top up income
How it works
Applicants for a top up will need to make a lump sum
contribution by 5 April 2017. The amount of the contribution
depends on the age of the applicant and the amount of extra income