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My PFS - Technical news - 15/09/2015

Personal Finance Society news update from 26 August 2015 - 8 September 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

Facilitating tax avoidance

(RO3, AF1)

Tax evasion and crime contribute 44% (£15 billion) to the £34 billion tax gap.

The two HMRC campaigns, "No Safe Havens" and "Tackling Tax Evasion and Avoidance", have four key components in relation to the "evasion" part:

  1. Increased civil deterrents for offshore tax evasion
  2. Civil sanctions for facilitators of offshore evasion
  3. A new corporate criminal offence for failure to prevent the facilitation of offshore evasion
  4. A new criminal (strict liability) offence for offshore evaders

In relation to the third item above, banks, professional services firms and trust and company service providers will face particular risks once the UK government's proposed criminal offence for companies and partnerships whose 'agents' facilitate tax evasion comes into force.

Agents, including employees but also others who "act on behalf of" a company, already potentially commit a criminal offence if they facilitate tax evasion. However, this new criminal offence would also criminalise the company for which the agents are acting unless the company can show it has 'adequate procedures' in place to prevent that facilitation.

The offence would be committed by the company alone, not its senior management or board of directors personally.

The government is currently consulting on the details of the proposed new offence, which would be based on the provisions in the 2010 Bribery Act which made it a criminal offence for a commercial organisation to fail to prevent bribery by a person associated with it. Financial institutions should monitor this consultation closely: it closes on 8 October 2015.

Geographical application

The new offence would apply wherever the company is geographically located if the tax evaded is UK tax. More importantly for financial institutions, the offence will also apply to any company whose agents facilitate tax evasion overseas - so particular care will need to be taken around overseas operations.

'Agents' covered by the legislation include employees, contractors and other authorised intermediaries. The geographical location of the agent is irrelevant.

Examples of facilitating tax evasion

Examples of where an agent would be facilitating tax evasion could include:

  • operating a non-UK bank account for a UK resident where the relationship manager has not taken steps to satisfy him or herself that the account is being declared;
  • a bank or other financial business referring a customer to an authorised third party, which in turn establishes a structure to facilitate the evasion of UK tax;
  • setting up a non-UK trust with a bogus settlor in order to evade anti-avoidance rules; and
  • establishing a non-UK company to carry out a trade where the professional directors have little real control over the affairs of the company and the company is, in truth, controlled, and therefore taxable, in the UK.

If the agent of the bank or other financial firm can be shown to have facilitated the tax evasion, the firm itself would automatically also be guilty of an offence unless it could show that it had procedures in place to train and prevent its agents from facilitating such evasion, as is the case under the current Bribery Act regime.

Banks, professional services firms and trust and company service providers will need to develop a comprehensive set of procedures for their UK and non-UK facing operations ahead of the new criminal offence coming into force if they do not want to fall foul of the new legislation.

This is yet another reason for financial planners to remind their clients of the power and effectiveness of tried and tested "acceptable" (yet still effective) tax planning.

It will be particularly important, in the light of HMRC's understandable focus on offshore evasion, to reassure clients that just because a financial planning strategy has, say, an offshore fund or offshore bond as a component, does not mean that it will not work or be subject to HMRC attack.  Both of the products have clear UK legislation applying to them so their "ordinary use" in tax and financial planning should not in any way be seen as provocative.

Venture Capital Trusts - Dividend reinvestment

(AF4, RO2, CF2, FA7)

Some VCT managers are pulling their dividend reinvestment schemes at short notice. It could bode ill for the end of tax year offerings.

One of the features of venture capital trusts, which is rarely commented upon, is the automatic dividend reinvestment. Most, but not all, trusts offer this and there are three main forms:

  1. The dividend is automatically reinvested in new shares issued at net asset value. 
  2. The dividend is automatically reinvested in new shares issued at the market price (generally around 10%).
  3. The dividend is automatically used to purchase shares in the market, at market prices.

The first two options count as fresh share subscriptions and mean that the investor qualifies for the normal 30% income tax relief. This can be particularly attractive when the trust is making a relatively large special dividend payment.

However, after the three Northern VCTs announced special dividends in the Summer, they suspended their dividend reinvestment schemes at short notice, blaming the Summer Budget proposals and the need to consider "the possible impact of the proposals on … future investment activities". In late August, Maven followed suit in respect of its six VCTs. The managers used virtually the same reason as their counterparts at Northern.

The fact that VCTs are avoiding retention of cash bodes ill for the VCT end-of-tax-year season. In 2014/15 Northern did not raise any funds, having raised £50m the previous year and Baronsmead raised only £4m (in a matter of days) against £40m in 2013/14. Both managers said that they had enough cash and did not want to add to their trusts' liquidity.

It may well be that 2015/16 will also see reduced supply as managers assess the new regime, which will not be settled until EU state aid approval has been given and the Summer Finance Bill receives Royal Assent. Certainly, the HMRC projections published alongside the Budget show it expects this to be the case. These suggest that the impact of all venture capital scheme changes (VCT, EIS and SEIS) will benefit the Exchequer to the tune of £85m in 2016/17.

As that would mainly be reduced EIS and VCT subscription income tax relief, the implication is that about £285m less investment will be made than previously expected. The total VCT investment in 2014/15 was £429m. EIS figures are not yet available for last tax year, but for 2013/14 EIS raised £1,457m. However, the division of reduced investment is probably skewed towards VCTs as the changes are more likely to impact them rather than EISs.

It could be lean times for VCT investors in the run up to April. Attractive offerings may be small and sell out quickly.

Investment planning

Where the money is coming from

(AF4, RO2, CF2, FA7)

The latest government finance statistics showed a rosy picture for July. However, the way in which the government has filled its coffers has changed somewhat since the financial crisis.

July is generally a good month for public finances, with a self-assessment income tax payment due date coinciding with several important corporation tax instalment dates. The latest data from the Office for National Statistics (ONS) show that in July 2015 the inflow was good enough to mean that the public sector spent less money than it received in taxes and other income. The last time that happened was another July, back in 2012. The surplus this year was £1.3bn but, to put that in perspective, also in July 2015 the Office for Budget Responsibility issued a revised projection of a £69.5bndeficitfor 2015/16.

Alongside the ONS numbers, HMRC published its latest data for tax and NIC receipts. These give an interesting insight into how the pattern of tax income has changed since the financial crisis in 2007/08. The table below shows a selection of taxes (a full spreadsheet going back to 1990/2000 is available). Inflation between April 2007 and April 2014 amounted to 25.6% on the RPI basis or 22.5% using the CPI basis.





% Total receipts


% Total receipts

Income Tax















Corporation Tax





Fuel Duties




















Income tax, NICs and VAT are the three major taxes, accounting for the bulk of the Exchequer's total receipts - 73% in 2007/08 and 74.7% in 2014/15. However, the mix has changed in the past seven years. VAT receipts have jumped substantially, helped both by inflation and the 2010 2.5% increase in the main rate to 20%.

Neither income tax nor NICs have maintained their share of total tax receipts, both having suffered from the sub-inflation earnings growth of about 15% over the period. Income tax receipts also reflect the impact of the personal allowance hikes since 2007/08 (when the allowance was just £5,225, little more than half the 2014/15 level).

The corporation tax numbers are down because of reduced financial sector profits and a lower tax rate, although the picture looks slightly better if the £2.75bn of bank levy is added to the 2014/15 figure - there was no levy in 2007/08.

SDLT remains more important than capital gains tax and inheritance tax combined, even if it receives less attention. The performance of SDLT is all the more impressive when you consider that residential property transactions fell by 18.5% between 2007/08 and 2014/15 and average house prices were virtually unchanged across the period.

It may not feel like it, but since the financial crisis the UK tax system has moved more towards indirect taxes. In 2007/08 income tax, NICs and corporation tax represented 65.6% of total receipts, whereas in 2014/15 the corresponding figure was 61.4%. The bulk of that 4.2% drop has been made up by VAT.

August was not a sunny month

(AF4, RO2, CF2, FA7)

The holiday month was anything but relaxing on the equity markets, but just how bad was the hit?

August is traditionally a thin month on stock markets in the Northern hemisphere. The second-in-charge managers are left to run the show and trading volume normally drops: nobody wants to take big positions when it may be difficult to unwind them. In 2015 there is also the spectre of a major interest rate decision a few weeks into September.

August 2015 started flat. Indeed, 2015 as a whole had mostly been quiet in the US and UK markets. The Standard & Poors 500 epitomised the monotony: until the mid-August China crisis the index had spent 2015 in a range no more than 3.5% either side of its January starting level (largely between 2,000 and 2,100). In the UK, until mid-August the FTSE 100 had spent much of the year churning between 6,500 (it opened at 6,566) and 7,000.

The events of August moved both markets into correction territory (a fall of more than 10% from the previous high), although the S&P 500 ended the month only 7.4% below the all-time peak it set in May. Other markets were harder hit. A report in the FT said that 40% of world markets tracked by Absolute Strategy Research were in bear market territory (a fall of over 20%). The table below helps put the events of the month into more perspective.




August Change

Year to date Change

FTSE 100





FTSE 250





S&P 500





Euro Stoxx 50





Nikkei 225





Shanghia Comp





MSCI Emerging





The volatility of August will potentially be replaced by the September variety. The key date to watch is Thursday 17 September, when the Federal Reserve finishes its rate setting meeting and we will learn whether US rates are going up for the first time since June 2006.

July IA statistics 

(AF4, RO2, CF2, FA7)

The latest Investment Association (IA) statistics show net retail inflow in July 2015 was up a half on a year ago, with equity funds seeing their highest net retail inflow since April 2000.

As we reported last month, the delay in publication of the IA's monthly statistics can leave them looking distinctly at odds with current events. July's numbers, published on 3 September, hark back to a time before China started devaluing the renminbi and volatility returned to world markets. July was all about an end to the Greek crisis and a likely deferral of the Federal Reserve's long anticipated increase in interest rates. Calm seemed to be prevailing so investors felt more confident:

  • Net retail sales for the month were £2.980bn, almost double the previous month's and 52% more than in July 2014. The jump hides an increase of £1.026bn in gross retail sales (to £14.985bn), and a £0.421bn fall in retail repurchases (to £12.005bn).
  • Equity was by far the most popular asset class in terms of net retail sales, with a net inflow of £2,005m, up from £874m in June and just £72m in May. You need to go back over 15 years to see a higher equity net inflow - a point for contrarians to ponder! Mixed Asset was the second best-seller with net retail sales of £432m, the highest since April 2014.
  • The most popular sector in terms of net retail sales was UK Equity Income, a familiar favourite. Second, third and fourth most popular sectors were Europe excluding the UK, Targeted Absolute Return and Property.
  • Despite the bumper month, 25% of the IA's 36 sectors had net retail outflows. The Sterling Strategic Bond sector suffered the most, seeing £140m move out, with £95m disappearing from the UK Index Linked Gilts sector - only for the sector to be one of the best performers in August. In total, the Fixed Income sectors saw a third month of net retail outflows, albeit reduced to £34m from £198m in June.
  • The UK All Companies sector, which had suffered five consecutive months of net retail outflow from January to May, saw a second month of net inflows at a relatively large £281m.
  • The total value of tracker funds rose to £107.2bn, equivalent to 12.3% of overall IA funds, up from 10.7% of a year ago.
  • Institutional sales were a net £741m, reversing an outflow of £509m in June. Nevertheless, for the year to date the net institutional outflow amounts to £2.867bn.

It will be interesting to see how the numbers change for August

Retirement planning

Pension Ombudsman orders Department of Health to reconsider early pension request

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

Pension Ombudsman has published his decision (PO-1474) on 12 August 2015.  The Decision found in favour of the complainant; Miss Jacqueline Elliott against the Department of Health to reconsider early pension request in respect of benefits in the Local Government Pension Scheme (LGPS).

The Pensions Ombudsman (PO), Anthony Arter, has ordered the Department of Health (DoH) to reconsider the application of Jacqueline Elliott, after she claimed they wrongly rejected her request for an early unreduced pension under the "rule of 85".

According to this rule, members of the LGPS can apply to take their benefits from age 55 if the age at which they wish to take their pension, added to the length of service, is a minimum of 85 years. North East Lincolnshire NHS Care Trust Plus, Miss Elliott's former employer, had ceased to exist when she applied for early retirement but had transferred all responsibilities to the Department of Health.

Although Miss Elliott does not have automatic entitlement to unreduced early retirement benefits, since the rule of 85 is only used to determine whether reductions apply, Mr Arter found that the department did not properly consider her application when they turned it down.

QROPS transfers banned from public sector pension schemes

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

The Unfunded Public Service Defined Benefits Schemes (Transfers) Regulations 2015 (1614) have now been published. A loophole had been discovered which allowed unfunded public sector pension members to transfer their pension funds to an overseas pensions and access their pensions flexibly.

The loophole has now been closed with this piece of legislation.

Carry forward

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

HMRC have issued further guidance on the interaction between the special annual allowance rules for 2015/16 and carry forward. However, a question we have been asked which the latest HMRC guidance did not address directly has prompted us to revisit the topic.

The question was basically whether in the pre-alignment tax year (6 April 2015 to 8 July 2015) carry forward would be triggered once total contributions exceeded £40,000 in that period.

The original HMRC guidance issued alongside the Budget said "Everyone will have a total annual allowance of £80,000 for 2015 to 2016, plus any available carry forward. Individuals will then have an allowance of up to £40,000 for post-Budget savings plus remaining carry forward from 2014 to 2015, 2013 to 2014 or 2012 to 2013."

However, schedule 4 of the Finance Bill 2015 shows a subtle difference: everyone had an £80,000 annual allowance for the pre-alignment tax year (6 April 2015 to 8 July 2015) and has a nil annual allowance for the post-alignment tax year (9 July 2015 to 5 April 2016), with the maximum amount that may be carried forward from the pre-alignment tax year set at £40,000.

A corollary of this £80,000/£0 split is that in the pre-alignment year, carry forward is not triggered until the total pension input amount exceeds £80,000. There is no new legislation stating this, but it flows from the artificial increase in the annual allowance and the "used up" rule in s228A (6) of Finance Act 2004. That rule sets out the familiar principle that carry forward only applies when the current tax year's annual allowance is exhausted and then operates on a first-in-first-out (FIFO) basis.

As far as the post-alignment tax year is concerned, new s228C (8) (c) introduced by sch 4 amends s228A (6) so that for the post-alignment tax year only, the carry forward from the pre-alignment year is used up first, rather than the normal FIFO basis.

The point to note is that from this complexity is that carry forward available from 2012/13 will be lost unless the pension input amount exceeds £80,000 in total across the pre-alignment and post-alignment tax years.

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