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My PFS - Technical news - 10/11/2015

Personal Finance Society news update from 21 October 2015 - 03 November 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

 

Taxation and Trusts

EU ruling on state subsidies

(AF1, RO3)

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 companies.

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 examination.

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 trades.

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.

 

 

Profit shifting

(AF1, RO3)

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 its employees.

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 per cent.

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 increased!

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 corporate profit.

 

 

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 to unwind.

 

 

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 status.

What next?

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 letter 'S.'

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

(AF1, RO3)

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 [2015] 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 2009.

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.

 

Investment planning

 

 

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 value.

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 about 0.8%.

 

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' Guaranteed Bond).

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. 

Pensions

 

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 protection.

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 year.

Period since leaving service

Years

Higher rate (5%)

%

Lower rate (2.5%)

%

1

1.2

1.2

2

3.9

3.9

3

6.2

6.2

4

11.7

11.7

5

15.2

13.1

6

13.6

13.6

7

19.3

 

8

23.9

 

9

28.4

 

10

31.9

 

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 1.1%.

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 greater of

  • 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 occurs.

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 (see PTM093510 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 service. 

 

HMRC publish newsletter 73

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

The latest 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.

Pension Flexibility

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 basis.

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 bands twice.

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 relaxation.

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 keep.

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.

Interim process

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 at advisers.

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.

It offers:

  • a boost in retirement income up to £1,300 per year for life
  • 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 they want.

Not already a member?

Members get access to a range of benefits, including quality CPD and discounts on CII exams.

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