Personal Finance Society news update from 17 August to 30 August
2016 on taxation, retirement planning and investments.
Taxation and Trusts
TAXATION AND TRUSTS
HMRC consults on proposals to fine accountants and IFAs
who enable the use of tax avoidance schemes
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
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
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,
- 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
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
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
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
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
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
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:
- An overview for small businesses, the
self-employed and smaller landlords
- Bringing business tax into the digital
- Simplifying tax for unincorporated
- Simplified cash basis for unincorporated property
- Voluntary pay as you go
- Tax administration
- Transforming the tax system through the better use
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
- 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
- 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
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
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
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 Change.org.
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
(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  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
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
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
(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
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
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
(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
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
- climate change and managing the transition to a low carbon
- banking culture and conduct and how this can impact on
- 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.