Technical news update 02/07/2019

Quick links

Taxation and trusts

• HMRC has published updated guidance on charities and trading
• The disguised remuneration loan charge – HMRC issues an updated briefing
• Labour Party plans for inheritance tax
• “No fault” divorce
• Support for Mortgage Interest benefit – rule change
• The institute for Fiscal Studies looks at Boris’s tax plans
• National Statistics give the candidates for Prime Minister financial food for thought
• The new EU mandatory disclosure rules
• Capital gains tax communications research by HMRC
• Employment Allowance - eligibility reforms 

Investment planning 

• US interest rates heading downwards
• The May inflation numbers

Pensions 

• Pension schemes newsletter 111
• Workplace pension participation and savings trends 2008 – 2018
• DWP Analysis relating to State Pension age changes from the 1995 and 2011 Pensions Acts
• The Pensions Regulator (TPR) publishes updated DC investment guidance
• New ROPS notifications list posted

 

TAXATION AND TRUSTS

HMRC has published updated guidance on charities and trading

(AF2, JO3) 

Around 160,000 charities are registered with HMRC. In its 2018 Budget, the Government announced an increase to the small trading tax exemption limits for charities. These changes, to the charities non-primary purpose trading exemption limit, came into effect from 6 April 2019 for income tax and from 1 April 2019 for corporation tax. 

HMRC has now published updated guidance which sets out the new limits and provides a useful basic summary of the type and level of profits a charity can make without incurring a tax charge. 

A charity will not pay tax on profits it makes from trade if: 

• it is making money to help its aims and objectives, known as ‘primary purpose trading’; 

• its level of trade that is not primary purpose falls below the charity’s small trading tax exemption limit; or 

• it trades through a subsidiary trading company. (Such a company would potentially pay tax instead.) 

A charity must pay tax on any other profits. 

A charity’s primary purpose is stated in its governing document. A charity will not pay tax on profits it makes from trading that: 

• is part of its primary purpose, for example, an independent school charging students tuition fees for their education, or a care home charging residents for accommodation and care; or 

• helps its primary purpose, for example, a college selling students text books or a museum running a cafe for visitors. 

A charity may have to pay tax on the profits from trading that has nothing to do with its primary purpose. However, if its turnover from this type of trading is below the charity’s small trading tax exemption limit, it will not need to pay tax. An example of this is when a university rents student accommodation to the general public during the summer break. The university may pay tax on profits from the rent because its primary purpose is to educate. 

A charity’s small trading tax exemption limit is based on its gross annual income, as follows:

Charity’s gross annual income	Maximum permitted small trading turnover
Under £32,000	£8,000
£32,001 to £320,000	25% of the charity’s total annual turnover
Over £320,000	£80,000

One or more charities can set up a subsidiary trading company to trade on their behalf. A charity may find this useful if it: 

• makes profits on trading that is not linked to its primary purpose; 

• makes a profit that comes close to or is higher than the small trading tax exemption limit; 

• wants to protect its assets from any trading losses; or 

• wants to have a separate organisation to carry out all its trading activities. 

Source: HMRC updated Guidance: Charities and trading – dated 6 June 2019.

The disguised remuneration loan charge – HMRC issues an updated briefing

(AF1, RO3) 

HMRC has recently published an updated briefing providing information about disguised remuneration avoidance schemes and the charge that has been introduced to tackle their use. 

Disguised remuneration schemes, broadly, typically involve an employer paying an employee indirectly through a third-party company, often in the form of an offshore trust. Rather than paying a salary, which would attract income tax and National Insurance contributions, employees are loaned money by the trust on terms that mean it is unlikely ever to be repaid. 

A disguised remuneration loan charge applies to anyone who received a loan through a disguised remuneration tax avoidance scheme, on or after 6 April 1999, didn’t repay their outstanding loan by 5 April 2019, and either hasn’t agreed settlement, or isn’t in the process of agreeing settlement with HMRC. 

HMRC’s briefing advises that people who anticipate having difficulty paying what they owe under the 2019 loan charge will be able to agree a manageable payment plan with HMRC depending on individual circumstances. There is no limit, and people will be given as long as they need to pay what they owe. 

It also sets out more information on the loan charge and outlines advice for those subject to the charge. 

Scheme users who haven’t settled or haven’t reached a settlement agreement with HMRC within the agreed timeframes will have to report and pay the loan charge. 

Where a scheme user was an employee and their employer still exists and is in the UK, HMRC collects the loan charge from the employer through the PAYE system. 

Where a scheme user was not an employee, or their employer was offshore or no longer exists, the individual user will need to pay any outstanding loan charge liability or agree a payment plan by 31 January 2020. 

All individuals who have outstanding disguised remuneration loan balances, and have not reached a settlement, must provide information on their loans to HMRC by 30 September 2019. They will also need to file a tax return for 2018/19 by 31 January 2020. 

There is further guidance on reporting and accounting the disguised remuneration loan charge on GOV.UK. If they are unsure of which circumstances relate to them, scheme users should contact HMRC using the details provided above. 

The HMRC note states it can help those who are genuinely unable to make a full payment of tax owed on time. It can agree payments by instalments and will carefully consider an individual’s ability to pay on a case-by-case basis. There is no maximum limit on how long someone can be given to pay what they owe, and this will be based on HMRC’s assessment of income and expenditure. 

A dedicated HMRC team is focused on working with those who are not able to pay the charge on disguised remuneration loans by the payment deadline and supporting them to agree a manageable payment plan. 

HMRC’s note also states that it will not force anyone to sell their main home to pay their disguised remuneration debts or the loan charge; and that it does not want to make anybody bankrupt. Insolvency is only ever considered as a last resort and will only be considered where users are either at risk of accruing further tax debt or where they actively avoid paying what they owe. 

Source: HMRC Policy paper: HMRC issue briefing - disguised remuneration charge on loans – dated 7 June 2019.

Labour Party plans for inheritance tax

(AF1, RO3) 

‘Jeremy Corbyn plotting major tax raid on parents' gifts to children’. 

So read the headline in the Saturday 15 June edition of the Daily Telegraph. There were similar stories in the Sunday Express and Sunday Times, both of which were picking up on the Telegraph’s seeming scoop. 

The Telegraph’s story suggested that lifetime gifts would be taxed as income above a threshold of £125,000, raising an extra £9.2bn in tax. If all that sounds strangely familiar, that is because the idea is over a year old. The proposal first appeared in the Intergenerational Commission’s report published in May 2018. It then re-emerged, unashamedly borrowed, in a paper published by the Institute for Public Policy Research (IPPR) in September 2018. 

The latest re-emergence is in a discussion paper, ‘Land for the Many’, published in early June by the Labour Party and edited by George Monbiot. As the title suggests, the main focus of the paper is land reform, including proposals that: 

• “A Labour government should set an explicit goal to stabilise house prices”; 

• Residential tenancies should be open-ended; 

• The replacement of council tax with “a progressive property tax”; 

• The phasing out of Stamp Duty Land Tax for those buying homes to live in themselves; 

• An increase in capital gains tax for second homes and investment properties; 

• The replacement of business rates with a Land Value Tax; 

• The creation of a new English Land Commission to undertake a review of tax exemptions given to landowners; and 

• The replacement of inheritance tax (IHT) with a lifetime gifts tax levied on the recipient, raising an additional £9.2bn a year.

Look at that list and it is perhaps surprising that IHT’s replacement should attract all the press attention. This is the more so, when the subject is covered in about half a page of a 76-page document and directly refers to the Resolution Foundation/IPPR work. The only obvious new suggestion was “a tax be introduced for equity withdrawals, which is a key means of avoiding inheritance tax”.

In something of an understatement, the paper notes that “Since implementing a lifetime gifts tax may take time, Labour’s plans to reverse the Conservative government’s recent inheritance tax break for main residences is an important interim step”. 

Despite the somewhat frenetic press coverage, the reheated ideas from Monbiot et al are not Labour Party policy but part of the process of developing the contents of the Party’s manifesto for the next election. Nevertheless, the Monbiot paper is another reminder that the current generous regime for lifetime gifts may not survive, even if it avoids collateral damage from the OTS simplification process.

Source: Labour Party June 2019

 “No fault” divorce

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8) 

On June 13 the Secretary of State for Justice introduced the Divorce, Dissolution and Separation Bill into the House of Commons. 

Once the Bill is enacted, individuals in England and Wales will be able to obtain a divorce merely by filing a statement of irretrievable breakdown of the marriage or civil partnership, without any need to demonstrate that the other spouse's conduct is intolerable, or to prove separation for two years. 

The main aim of the changes is to reduce conflict and help children and families by making the process less acrimonious. This is a reform of the 50-year-old divorce laws and ensures that the process better supports couples to move forward as constructively as possible. 

Specifically, the Divorce, Dissolution and Separation Bill will: 

• Replace the current requirement to prove either a conduct or separation ‘fact’ with the provision of a statement of irretrievable breakdown of the marriage or civil partnership (couples can opt to make this a joint statement). 

• Remove the possibility of contesting the decision to divorce, or dissolve a civil partnership, as a statement will be conclusive evidence that the marriage/civil partnership has broken down. 

• Introduce a new minimum period of 20 weeks from the start of proceedings to confirmation to the Court that the conditional order should be made, allowing greater opportunity for reflection and, where couples cannot reconcile and divorce/dissolution is inevitable, agreeing practical arrangements for the future. The current minimum timeframe of six weeks will be retained between the conditional order (currently the ‘decree nisi’) and final order (currently the ‘decree absolute’). 

The Bill seeks to align the ethos underlying divorce law with the Government’s approach elsewhere in family law - encouraging a forward-looking non-confrontational approach wherever possible, thereby reducing conflict and its damaging effect on children in particular. 

The Secretary of State for Justice stated 'Where a marriage or civil partnership regrettably breaks down and is beyond repair, the law must deal with that reality with the minimum of acrimony by creating the conditions for people to move forward and agree arrangements for the future in an orderly and constructive way.' He added 'The requirement for one person to blame the other...can introduce or worsen conflict at the outset of the process, conflict that may continue long after the legal process has concluded.' 

It is proposed that the Act will come into force by commencement order after Royal Assent. 

Sources: STEP Industry News: England and Wales no-fault divorce Bill introduced to parliament (dated 13^th June); Ministry of Justice; The Divorce, Dissolution and Separation Bill 2017-19

Support for Mortgage Interest benefit – rule change

(AF1, ER1, LP2, RO3, RO7)

People receiving Support for Mortgage Interest (SMI) benefit will now be able to transfer this support to their new property when moving home.  Before this change, with effect from 6 April 2018, the DWP would only make loan payments, secured on the mortgaged property, to cover the interest, instead of making mortgage interest payments.  This DWP loan had to be repaid on home sale, transfer or on death which meant those receiving such a loan were required to repay the balance once a property was sold or transferred, provided there was enough equity after the mortgage had been paid off. They would then be asked to reapply for the loan on their new property. 

However, a Government spokesperson has confirmed, on 12 June this year, that anyone with an SMI loan secured against their property will now be able to request that their loan balance be transferred to their new home when they move. 

This means that disabled people and others receiving an SMI loan will now be able to transfer this support to their new property when moving home, rather than having to repay the loan and reapply. 

This policy shift is intended to ensure that those looking to move home to secure better employment will not face barriers to progressing in work. It should, say the DWP, have a particular benefit for those who move into a new property due to a disability or health condition, as they will continue to receive uninterrupted support towards their mortgage payments. 

The ability to transfer an SMI loan balance will also apply to those who have previously received this form of support but are no longer claiming benefits. 

SMI benefit is available to claimants in receipt of Income Support, Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance, Universal Credit or Pension Credit. The DWP has also published two videos explaining SMI and setting out how to apply. 

Source: DWP Press release: Minister announces new transfer option for mortgage interest support – updated 17 June 2019.

The institute for Fiscal Studies looks at Boris’s tax plans

(AF1, RO3) 

The Institute for Fiscal Studies (IFS) has now examined Boris Johnson’s proposal (since downgraded to an aspiration) for an £80,000 higher rate tax threshold and another, shared with Jeremy Hunt, to raise the starting point for National Insurance contributions (NICs). The IFS paper makes the following points: 

Raising the higher rate threshold and the NICs upper limit 

• The net cost of these combined changes would be around £9bn for the UK as a whole. 

• As Scotland sets its own tax bands (the current higher rate threshold is £43,430) but does not control NICs, the immediate result of the change would be to leave higher earning (£50,000+) Scottish taxpayers worse off by up to £3,600 a year. Under the Barnett formula for allocating money to Scotland, Westminster would have to increase the grant it pays by more than the increased Scottish NICs revenue. 

• Around 3.2m people in work (including 0.4m in self-employment) would gain from the policy. So too would 0.4m retired pensioners and a small number of working age people who are not in employment but have significant unearned income. The gain on average would be £2,500 per household for 3.4m households.

• Three quarters of the fall in tax liabilities would go to those in the top decile of the income distribution. All but 3% would go to those in the top three deciles. 

Raising the primary and secondary NICs limit 

• If just the employee and self-employed limits are changed (ie. the employer’s limit is untouched), raising the threshold by £1,000 (to £9,632) takes 600,000 workers out of NICs altogether and costs about £3bn a year. Including employers’ NICs would add another £1.5bn. 

• Raising the threshold to £12,500 would cost £11bn a year if just the employee and self-employed thresholds are raised, or £17bn if employers are included. 2.4m workers would be taken out of NICs. 

• At the £12,500 threshold, 16m households gain from the change, with the largest proportional gains going to those in the middle to upper part of the income distribution. The poorest gain little because a larger share of their income originates from benefits, rather than earnings. Pensioners see no gains as they are outside the NICs regime. 

The costs of these proposals deserve to be addressed by the candidates, but so far there is little evidence this will happen. As with the Republicans in the USA, the Conservatives appear to be losing their interest in fiscal prudence.

Source: IFS 25/6/19

National Statistics give the candidates for Prime Minister financial food for thought

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8) 

The May borrowing figures were worse than last year’s and came with a warning about the effect of student loan accounting changes, due in September. 

The Office for National Statistics’ (ONS) estimate for May 2019 Government borrowing was £5.1bn, £1.0bn up on 2018/19 and the same amount above market expectations. Central Government receipts for the month rose by 3.5%, but as the Office for Budget Responsibility (OBR) notes in its commentary, this was more than offset by a 4.2% rise in Government spending. 

Viewed on a fiscal year-to-date basis the total borrowing so far amounts to £11.9bn, £1.8bn (18%) higher than in 2018/19. Two months into the financial year, any extrapolation of the numbers is foolish. As if to underline the point, the OBR notes that April’s receipts benefited from a RBS special dividend that added £0.8bn to Government coffers. However, the OBR indicates that the pattern looks in line with its March projection that 2019/20 borrowing will be around £29bn, compared with an upwardly revised figure of £24.0bn for 2018/19. 

Both those figures ignore the change to accounting for student loans due in September, which the ONS has explained in more detail in guidance published alongside the May public sector finances statement. The ONS has now firmed up on its numbers and puts the impact as a borrowing increase for 2018/19 of £10.6bn. Thus, the revised £24.0bn deficit mentioned above would be £34.6bn under the new accounting system. 

That change should give food for thought to Boris Johnson and Jeremy Hunt as they talk of tax cuts and increased spending without any meaningful indication of how either will be funded. The Chancellor’s £26bn no-deal Brexit war chest is sometimes suggested as a source, but about 40% of that will disappear when the student loan accounting rules kick in. The Treasury was aware of the impending reform when the last Budget was announced but ignored its impact as the ONS had not finalised the treatment. 

The change to student loan accounting is just that – a tweaking of the numbers by the national bean counters. It does not mean the Government will suddenly be seeking another £11bn a year from the gilts market. What it does do is provide a more accurate picture of Government finances, one which is difficult to square with the apparent largesse of the Prime Ministerial candidates. 

Source: ONS Public Sector Finances, UK May 2019 published on 21 June 2019.

The new EU mandatory disclosure rules

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8) 

The European Union (the EU) has introduced an additional level of disclosure designed to detect potentially aggressive tax planning with an EU cross-border element that is designed to avoid disclosure. 

The requirements come from the “DAC6” European Directive (DAC6), which needs to be implemented in UK legislation by 1 July 2020. However, DAC6 provides for implementation with retrospective effect from 25 June 2018. These rules therefore catch arrangements which are being used now. 

The purpose of DAC6 is to enable tax authorities to obtain early knowledge of such arrangements so that they can take prompt action where appropriate to counteract them. 

By increasing the level of transparency, this also aims to change culture and behaviour more generally and so deter intermediaries and their clients from promoting or using such arrangements. 

This article provides an overview of DAC6. It focuses on the ‘hallmarks’ concerning the Common Reporting Standard (CRS) and beneficial ownership, which will impact on adviser intermediaries and their clients. 

Mandatory disclosure of cross-border arrangements 

DAC6 provides for mandatory disclosure of certain cross-border arrangements by intermediaries, or taxpayers, to their local tax authorities who must then exchange this information with other Member States within the EU. 

Some Member States (such as Poland) have already introduced rules. Other jurisdictions, such as Italy, Lithuania, Sweden, Cyprus and the Netherlands have also already submitted draft legislation for consultation. 

In the UK, HMRC is consulting with the interested parties to determine how DAC6 will be implemented in the UK. In a recent Agent Update, HMRC said that DAC6 will be implemented in regulations by 31 December 2019. HMRC also intends to hold a formal consultation on these draft regulations. 

Despite not knowing yet how DAC6 will be implemented in the UK, intermediaries and clients need to be aware that there are transitional rules that require disclosure of reportable transactions which have been entered into after 25 June 2018, with 31 August 2020 being the final date for disclosure of reportable arrangements from this transitional period. 

It is also possible that HMRC may go above and beyond the minimum threshold of DAC6 and implement the DAC6 rules with a longer retrospective period in line with recommendations by the OECD. This may require retrospective disclosure of arrangements implemented on or after 29 October 2014. 

Which arrangements will be caught? 

To be disclosable under DAC6, arrangements must involve either more than one EU Member State, or an EU Member State and a third country where, broadly, not all participants in the arrangement are tax resident in the same jurisdiction. 

The arrangements must also have a specified characteristic or feature (‘hallmark’) that presents an indication of a potential risk of tax avoidance. 

The most relevant hallmarks, for clients and the intermediaries advising them, are likely to be the specific hallmarks concerning automatic exchange of information and beneficial ownership. 

Automatic exchange of information 

A cross-border arrangement will be caught if it may have the effect of seeking to avoid the CRS reporting obligations or if it takes advantage of the absence of such legislation or agreements.

DAC6 states that such arrangements include at least the following elements: 

• The use of financial investments that are not caught by the CRS but have features that are substantially similar to those that are caught (for example, the use of certain types of e-money and derivative contracts). 

• The transfer of funds to a jurisdiction which is outside the scope of the CRS. 

• The reclassification, transfer or conversion of assets into those that are outside the scope of the CRS. 

• Arrangements that purport to eliminate reporting, such as back-to-back investment arrangements. 

• Arrangements that undermine or exploit weaknesses in due diligence procedures used by financial institutions, including the use of jurisdictions with inadequate or weak enforcement or transparency requirements. 

It is generally thought that further guidance will be required to determine which arrangements reduce CRS reporting but where there is no intention to avoid reporting. 

Apparently, an arrangement does not have the effect of circumventing the CRS solely because it results in non-reporting under the relevant CRS legislation, provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS legislation. 

For example, it is not uncommon for a US citizen who is resident in a Member State to establish a trust in Delaware for US estate planning purposes. 

Whilst the US have not implemented the CRS, if the relevant information is exchanged under FATCA (the US equivalent of the CRS) with the jurisdiction of tax residence of the reportable taxpayer, it will not have the effect of circumventing the CRS. 

Another example is if a client sets up a discretionary trust for the benefit of his/her children and descendants, and the trust instrument defines the beneficiaries by referring to them as a class rather than by name. In some countries, where the beneficiaries are defined as a class, it is only beneficiaries who receive distributions who are reportable under the CRS. 

It seems unlikely that this amounts to circumventing the CRS since this is specifically provided for in the CRS guidance. However, until further guidance in relation to DAC6 is given, the position is unclear. 

Beneficial ownership 

A cross-border arrangement will also be caught if it satisfies a second hallmark which is that the arrangement involves a non-transparent legal or beneficial ownership chain with the use of persons, legal arrangements or structures: 

• that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; 

• that are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures; and 

• where the beneficial owners of such persons, legal arrangements or structures are made unidentifiable. 

It is thought that this hallmark is aimed at: 

• the use of nominee shareholders with undisclosed nominators; 

• indirect control beyond formal ownership; 

• arrangements that provide a person with access to assets or income without being identified as the beneficial owner; and 

• legal or formal arrangements that have the effect of depriving the legal owner of the economic benefit of the asset or income in favour of a third party such that the third party has the benefit of the asset without being recognised as the beneficial owner. 

The scope of this hallmark is potentially very wide. Further guidance will be required to understand how the hallmark will apply in practice. 

Who reports? 

The primary reporting obligation falls on the “intermediary”. 

An “intermediary” is any person who is resident in a Member State that designs, markets, organises, makes available for implementation or manages the implementation of a reportable cross-border arrangement. 

For example: tax advisers, accountants and lawyers advising clients on reportable cross-border arrangements. There is no exclusion for in-house advisers. 

This is a wide definition that is likely to catch many service providers such as banks, family offices, trustees, corporate service providers and notaries who may assist with such arrangements.  

However, it may not catch situations where the intermediary’s role is limited, for example, if it is solely one of administration or compliance. This is because it depends on the circumstances, information available and expertise of the person in question. It may be unreasonable to expect the service provider to know that the arrangement is reportable if, for example, they are simply dealing with the necessary filing formalities as part of a transaction or carrying out routine banking transactions. 

When to report? 

The first reportable transactions will be those that have had the first implementation step between 25 June 2018 and 1 July 2020, with 31 August 2020 being the final date for disclosure from this transitional period. 

From 1 July 2020, the arrangements become reportable within 30 days from (whichever comes first): 

• the day after the reportable cross-border arrangement is made available for implementation; 

• the day after the reportable cross-border arrangement is ready for implementation; or 

• when the first step in the implementation of the reportable cross-border arrangement has been made. 

Member States will exchange reportable information by entering reports they receive in a central EU database, which can then be assessed by every other Member State. This information will not be available for public use. 

HMRC and HM Treasury expect that the UK will implement DAC6, in spite of Brexit and are planning on that basis, saying however “The UK would need to implement the directive during any implementation period in an EU withdrawal agreement.” Given that these new regulations will be implemented, it is important that intermediaries review any advice or services given to clients within the EU and with cross-border arrangements since 25 June 2018 to ensure that they do not trigger a notification requirement under the new disclosure regime. They need to take account of the fact that disclosure is required if the arrangement has the effect of circumventing CRS reporting or obscuring beneficiary ownership, whether or not that was intended.

Capital gains tax communications research by HMRC
(AF1, RO3)

HMRC commissioned research to explore how customers look for, and would prefer to receive, information about the forthcoming policy change for property disposal.

From 6 April 2020, a payment on account of capital gains tax (CGT) will need to be made when a residential property is sold or otherwise disposed of – this would include where the property is gifted to someone else or into trust.

Payment will be due within 30 days of the completion of the disposal. The change will mainly affect those who dispose of a second home or rental property where the capital gain would be subject to CGT. The change will not therefore apply where the gain is not chargeable to CGT - for example, where the gain is covered by the principal private residence relief.

The research, which was carried out by the Employment, Welfare and Skills (EWS) team within the Ipsos MORI’s Social Research Institute, aimed to understand how customers look for information about CGT, how well they understand the policy change, and how they expect HMRC to communicate this change.

The research consisted of interviews with customers considering property disposal, including those who had recently paid CGT, and with intermediaries. In this context, customers included a few who were not UK resident as well as UK residents, and intermediaries included estate agents, solicitors and accountants.

The research found that a significant number of ‘one-off’ taxpayers (i.e. those who sold, say, an inherited property) were least likely to be informed about CGT because they did not use formal support, for example an accountant, for guidance. Those that did use formal support only did so on an occasional or informal basis to answer a specific question. 

“Multiple disposal” customers (i.e. those who owned and rented out multiple properties, so were landlords) had greater experience and knowledge of CGT. These types of individual were more self-sufficient, calculating their own CGT liability and sometimes consulting accountants for a sense-check of these calculations before filing self-assessment returns.

Solicitors and accountants told HMRC that while they inform customers about the CGT payment deadlines, a number of “one-off” disposal taxpayers had missed deadlines as a result of not being clear about their responsibilities. 

Another issue was encountered by solicitors taking on new clients who discovered that their client was not aware of the requirement to pay CGT and had failed to pay when disposing of previous properties. This was most common among taxpayers without representation, who would then face the dilemma of potential penalties and fines for late payments. 

There was also criticism of HMRC’s policy change document, which respondents were asked to review, with the general consensus that it ‘was aimed at professionals because of the liberal use of financial terminology and references to tax legislation’. 

Overall many taxpayers said that there had been a lack of communication from HMRC and the policy change should be communicated as soon as possible especially given that the property disposal process can often be lengthy and could involve complex discussions around tax with advisers. 

Sources: HMRC Research and analysis: capital gains tax communications research – dated 24 June 2019; STEP News: UK taxpayers to be given special warning of 30-day CGT payment deadline - dated 24 June 2019

Employment Allowance - eligibility reforms
(AF1, AF2, JO3, RO3) 

On 25 June, HMRC published consultation on forthcoming changes to the Employment Allowance. 

It’s useful for advisers to understand how the Employment Allowance works, particularly as it can be an important factor in planning around profit extraction for shareholding director clients using salary, dividend and pensions combinations. 

Employment Allowance 

The Employment Allowance was first announced in Budget 2013, as an entitlement of £2,000 a year for businesses, charities and amateur sports clubs towards their employer Class 1 National Insurance liability. 

At Summer Budget 2015, it was announced that the Employment Allowance would be increased by £1,000, to a maximum amount of £3,000 per tax year, from April 2016, and an exclusion was introduced for single - director companies.  

For 2019/20, eligible employers are able to reduce their employer Class 1 National Insurance contributions by up to £3,000 for the tax year. 

One of the current restrictions is that the Employment Allowance cannot be claimed if the director is the only employee paid above the £8,632 threshold. However, if a company employs, for example, husband and wife directors where both earn above the £8,632 threshold, the Employment Allowance remains available - see HMRC’s guide ‘Single-director companies and Employment Allowance: further guidance’. 

This means that they could, for example, both take a salary of £12,500, to potentially use their respective personal allowances and reduce their National Insurance bill to £Nil by benefiting from the Employment Allowance. 

What’s changing? 

From April 6 2020, the Employment Allowance will be administered as de minimis State Aid (see below) in order to ensure compliance with the EU State Aid rules. 

This means that access to the Employment Allowance will be restricted to employers with an annual employer National Insurance liability of less than £100,000 (and where employers are connected, eg as part of a group, the threshold will apply to their aggregated liability). This will be based on the liability of the immediately preceding tax year. 

However, in order to receive the Employment Allowance, such employers will need to confirm annually that they have space in their relevant de minimis State Aid ceiling(s) to include the full annual amount of the Employment Allowance, regardless of whether or not they will use the full amount of the Employment Allowance against their employer Class 1 National Insurance liabilities over the tax year. Although, where such employers are not carrying out an economic activity, they will not have to comply with the State Aid regulations.  

HMRC’s note states that the compliance requirements will be as minimal and straightforward as possible and that the impact on small businesses will be monitored through the technical consultation to ensure that the measure does not have any unintended consequences. 

Where employers become connected during a tax year and before becoming connected they were all (individually, or in their previously connected grouping) eligible for the Employment Allowance they will remain eligible for the remainder of that tax year, but their eligibility will be reassessed as a collective for future claim years.  

Where an employer becomes connected during a tax year to a company or group of companies who have exceeded the limit for the Employment Allowance because their collective employer Class 1 National Insurance liability in the previous year was £100,000 or more, the employer joining that group will no longer be eligible for the Employment Allowance in the tax year in which they become connected to the group.  

Employers will have to claim the Employment Allowance every year in order receive the relief as it will no longer be carried forward from one tax year to the next tax year. Those engaging in economic activity will also have to notify HMRC every year to confirm that their previous year’s employer Class 1 National Insurance liabilities were under £100,000 and to inform HMRC which State Aid sector(s) they operate in (agriculture, fisheries and aquaculture, road transport and industrial, or transport) and of any other State Aid received or allocated for the tax year and the two previous years. For employers who are connected to other employers, they will need to provide to HMRC the total amount of State Aid received collectively across all connected companies for this same period. 

Next steps 

The consultation will close on 23 August 2019 and HMRC will publish a final version of the regulations and guidance in October 2019. 

State Aid 

State Aid is defined as support in any form (financial or in kind) from any level of Government – central, regional or local – which gives a business or another entity a benefit in the single market that could not be obtained during the normal course of business. The rules are in place to ensure open and fair competition and to prevent subsidies causing unfair distortions within the single market. 

As long as the UK is part of the EU, State Aid rules have direct effect without the need for domestic implementing legislation. The rules are enforced by the European Commission.

If the UK leaves the EU without a deal, the Government has said it will create a UK-wide subsidy control framework to ensure the continuing control of anti-competitive subsidies. The EU State Aid rules will be transposed into UK domestic legislation under the European Union (Withdrawal) Act and the Competition and Markets Authority will take on the role of enforcement and supervision for the whole of the UK. The UK Government’s intention is that the new State Aid regime will work for the whole of the UK, including the devolved administrations. 

Restricting the availability of the Employment Allowance to employers whose employer Class 1 National Insurance liabilities for the previous tax year were less than £100,000 means that those employers will receive a financial advantage compared with employers whose employer Class 1 National Insurance liabilities exceeded this in the previous tax year. HMRC’s note says, somewhat tentatively: “It is therefore considered that this may be regarded as the provision of a State Aid.”  

In order for HMRC to confirm an employer is eligible for an Employment Allowance for a tax year, and to enable HMRC to monitor compliance with European State Aid law, the employer will have to confirm either that the State Aid rules apply to them – or that they are not undertaking economic activity (so that State Aid rules don’t apply to them). 

The vast majority of smaller businesses should continue to be eligible for the Employment Allowance - HMRC’s note suggests that around 93% of all businesses will remain eligible for the Employment Allowance. However, it remains to be seen just how “minimal and straightforward as possible” the impact of these changes will be on those businesses. 

Source: HMRC consultation: Draft legislation - Employment Allowance eligibility reforms – dated 25 June 2019. 

 

INVESTMENT PLANNING 

US interest rates heading downwards

(AF4, FA7, LP2, RO2) 

The US central bank’s latest interest rate meeting has pointed to the likelihood of interest rate cuts in the near future. 

Last December the US Federal Reserve delivered a somewhat unwelcome, if not unexpected, Christmas present in the form of the fourth interest rate increase of the year. As we reported at the time, the Fed’s consensus for 2019 was that there would be two more rate rises, taking the year-end rate to 2.75%-3.00%. 

Six months on, the view from the Fed has reversed significantly. Rate rises are off the agenda and there is a market expectation of an interest rate cut next month which the Fed has done nothing to dampen. Indeed, the press release issued after the latest Fed meeting on 19 June gave encouragement to the idea. 

As ever with utterings from the Fed, it is all a question of nuance. The press release issued after the previous meeting at the beginning of May stated: 

‘The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate...’ 

Wind forward eight weeks and while the latest release looks remarkably similar to its predecessor, there were subtle changes (our italics): 

‘The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate…’ 

“Uncertainties” – code for the US/China trade dispute – have crept in and the need to “be patient” has been replaced by a requirement to “closely monitor”. The consequences of the Fed’s shifting attitude were revealed in the so-called dot plot, which shows the Fed’s rate-setters’ assessments of future rates and is issued every three months, alongside the Fed’s meeting press release in that month. 

This was the dot plot issued on 20 March:

And this is what emerged on 19 June:

In March, the bias (6 dots) for the remainder of the year was towards an increase from the then (and now) 2.25%-2.50% band. Three months on and there is only one 0.25% increase dot, but seven for a 0.5% reduction (and one for a 0.25% reduction). 

The Fed did not move rates this time around because it is waiting to see what happens between Donald Trump and Xi Jinping at the G20 summit in Tokyo this week. The fallout from that will be a major factor in what the Fed does in its next meeting, scheduled for the last two days of July. 

To date the equity markets have been buoyed by the prospect of rate cuts (aka ‘the Fed put’). However, if the Fed does cut 0.5% off its rates in July, as some pundits suggest it might, markets could start to worry that the Fed knows something they do not. 

Source:  Federal Reserve issues FOMC statement – dated 19 June 2019.

The May inflation numbers

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8) 

The CPI for May showed an annual rate of 2.0%, down 0.1% from April, in line with the market consensus. Across April to May prices rose 0.3%, 0.1% less than between April 2018 and May 2018. The CPI/RPI gap widened slightly by 0.1% to 1.0%, with the RPI annual rate remaining at 3%. Over the month, the RPI was up 0.3%. 

The Office for National Statistics (ONS)’s favoured CPIH index was also down 0.1% for the month at 1.9%. The ONS notes the following significant factors across the month: 

Downward 

Transport Whereas last month transport was the major source of the 0.2% CPI increase, this time around it produced by far the largest downward contribution. Overall prices fell by 0.3% between April and May this year compared with a 1.5% rise between the same two months a year ago. The main downward effect came from transport services: fares fell by 3.8% overall between April and May this year, with the April prices influenced by Easter and the associated school holidays falling in the middle of the month. In 2018, when Easter fell in early April before the price collection dates, fares rose between April and May by 2.0%. The contribution from transport services came from all categories – air, sea, rail and road –with the single largest contribution from air transport. The swing serves as a reminder that monthly inflation changes can be driven by the interaction between holiday dates and data collection timing. 

Within transport overall, there were also smaller downward contributions from the purchase price of vehicles (second-hand and new cars) and motor fuels. Petrol prices rose by 4.2p a litre between April and May 2019 against 4.6p a year ago. Similarly, diesel prices rose by 2.8p against 4.7p a year ago. 

Alcoholic beverages and tobacco A small downward contribution came from alcoholic beverages and tobacco, with prices of cigarettes little changed this year but rising a year earlier. 

Upward

Recreational and cultural goods and services The largest upward contribution came from this category where prices rose by 0.5% between April and May 2019 compared with a rise of 0.1% between the same two months of 2018. Within this group, the largest upward effect once again came from games, toys and hobbies, partially from computer games but also from more traditional toys and games. There was a small, partially offsetting, downward effect from package holidays, which fell in price this year but rose in 2018.

Restaurants and hotels This category also produced an upward contribution, with prices for accommodation services, particularly overnight hotel accommodation, rising by more than a year ago.

Food and non-alcoholic beverages This category produced a small upward contribution as prices rose this year but fell a year ago (particularly for meat). Nevertheless, the overall inflation rate for this category is half of the headline 2.0% rate.

Furniture, household equipment and maintenance In this category prices rose this year by more than a year ago, with the main upward contribution coming from furniture and furnishings. 

In eight of the twelve broad CPI categories, annual inflation increased, while two categories posted a decrease, underlining how the big fall in transport costs worked through to the overall figure – transport counts for 15.3% of the CPI. Whereas last month transport was the category with the highest annual inflation rate at 4.7%, this month it registered 2.8%, with the new inflation topping category being communication (4.9%). 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was down 0.1% at 1.7%. Goods inflation, at 1.5%, was up 0.1%, while services inflation fell 0.3% to 2.6%. 

Producer Price Inflation was 1.8% on an annual basis, down 0.3% on the output (factory gate) measure. Input price inflation fell sharply to 1.3% year-on-year, against 4.5% on April. The main driver here – as ever - was oil prices. 

These inflation figures are as expected. Against a backdrop of hints of monetary easing from the European Central Bank, and possibly even the US Federal Reserve, the figures have further weakened the likelihood of a Bank of England base rate increase in 2019. 

Source: ONS 19/06/19

 

PENSIONS

Pension schemes newsletter 111

(AF3, FA2, JO5, RO4, RO8) 

HMRC Pension Schemes Newsletter 111 covers the following:  

• Relief at source 
• Master Trusts supervision 
• Managing Pension Schemes service 
• Guaranteed Minimum Pension (GMP) equalisation - HMRC working group 
• Telling HMRC about pension tax charges on the SA100 tax return 
• Appendix 1 - guidance on receiving your Notification of Residency Status Report  

Areas of particular interest  

Master Trusts supervision 

TPR have published an updated list of authorised Master trusts which are: 

• The BlueSky Pension Scheme 
• The Crystal Trust 
• Legal & General WorkSave Mastertrust 
• Legal & General WorkSave Mastertrust (RAS) 
• LifeSight 
• Universities Superannuation Scheme 

Managing pension scheme service 

On 4 June 2019 HMRC added features to the Managing Pension Schemes service so that you can change: 

• the scheme establisher details 
• director details 
• trustee details

Workplace pension participation and savings trends 2008 – 2018

(AF3, FA2, JO5, RO4, RO8) 

The DWP has published their most recent finding on workplace pension savings in the document Workplace Pension Participation and trends of eligible employees 2008 - 2018.

This annual official statistics publication is the sixth edition in the series. These official statistics provide breakdowns of two key measures for evaluating the progress of automatic enrolment implementation: increasing the number of savers, by monitoring trends in workplace pension participation and persistency of saving; and increasing the amount of savings, by monitoring trends in workplace pension saving.

The main findings were:

• 72% of eligible employees have saved into a workplace pension in at least three of the last four years, the DWP’s measure of persistency of saving;
• The annual total amount saved by eligible savers stood at £90.4bn in 2018; and
• 87% of eligible employees were in a workplace pension in 2018.

DWP Analysis relating to State Pension age changes from the 1995 and 2011 Pensions Acts

(AF3, FA2, JO5, RO4, RO8) 

The State Pension age for both men and women will reach 66 by 2020, with further rises legislated to 67 by 2028 and 68 by 2046. This was brought in by legislation in 1995 and 2011 with the main purpose to equalise state pension ages for men and women as well as increase the age at which they can be accessed.

This analytical release contains new analysis that was produced by the Department for Work and Pensions (DWP) relating to State Pension age changes from the 1995 and 2011 Pensions Acts. It contains various types of analysis including:

• an estimate of the costs of reducing women’s State Pension age to 60 and men’s State Pension age to 65, over the period 2010/11 to 2025/26. This updates a previous cost estimate of the cost of reversing women’s State Pension age changes that was published in 2016.
• estimates of private pension wealth of men and women born between 1942 and 1966 by age and sex.
• employment rates of women born between 1950 and 1958.
• a time-series of private pension participation since 1997 split by sex, public/private sector and industry.

The Pensions Regulator (TPR) publishes updated DC investment guidance 

(AF3, FA2, JO5, RO4, RO8) 

The Pensions Regulator has updated its DC investment guidance to take account of legislative changes due to come into force in 2019 and 2020.   

These legislative changes include: 

• Trustees must make their Statement of Investment Principles (SIP) - a scheme’s investment strategy  
• From October 2020 trustees must produce an implementation report which explains how trustees have followed and acted on the investment policies outlined in the SIP. 
• The SIP must include the trustees’ policies on: 
• financially material considerations including environmental, social and governance matters such as climate change 
• stewardship of investments, such as exercising rights (including voting rights) and engaging with activities in respect to the investments 
• the extent to which members’ views, including ethical, social and environmental, are considered when planning investments 
• arrangements with asset managers 

The guidance has also been updated to include clarity around what is meant by financial material considerations, stewardship and provides more information about preparing an implementation statement. 

New ROPS notifications list posted

(AF3, FA2, JO5, RO4, RO8) 

On 15 June 2019, HMRC published a new list of schemes that have informed HMRC that they meet the updated conditions to be a Recognised Overseas Pension Scheme (ROPS).  This list only contains pension schemes that have asked to be included on the list.

There are now a total of 1683 schemes listed, from 28 countries, and an EU institution, the most recent update added 27 schemes (25 of these were based in Australia) and removed 1 scheme.