Technical news update 17/12/2019

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Taxation and trusts 

• Labour makes WASPI pledge
• New fuel rates for company cars
• Cryptoassets are to be treated as property
• The Gate Slams Shut
• Trivial Benefits in kind 

Investment planning 

• A borrowing reminder for the politicians
• MSCI increases China weighting in Emerging Markets Index 

Pensions 

• The Pensions Regulator News
• DWP proposed pension and benefit rates published
• New research suggests pensions advice websites create bias

 

TAXATION AND TRUSTS 

Labour makes WASPI pledge

(AF3, FA2, JO5, RO4, RO8) 

It was stated in the Labour Party’s 2019 manifesto that it ‘will work with [WASPI] women to design a system of recompense’ to cover ‘the losses and insecurity they have suffered’. 

Three days after publication of the manifesto, Labour issued a press release promising compensation of ‘up to £31,000, with an average of £15,000’ to 3.7m WASPI women, with redress paid over a five year period. 

The Labour proposal is not a full wind back to a state pension age (SPA) of 60, a point left unclear in the initial media coverage. To do that, i.e. reverse the Pensions Act 1995, would cost (in 2018/19 terms) more than £180bn over the period 2010/11 to 2025/26, according to a DWP paper issued in June 2019. In addition, a £33.8bn outlay would be required to compensate men for the SPA move beyond 65. 

The press release stated that ‘The amount paid for each ‘lost week’ would depend on the year of birth: women born between 6 April 1950 and 6 April 1960 would be paid some redress: £100 per week up to 5 April 1955 and tapered down for those born after 5 April 1955’. How the taper operates is unexplained, but presumably it is a reduction of £20 per week for each year of birth later than April 1955, ending at zero for those born after 5 April 1960. The total cost (before tax) is estimated at £58bn, but Labour suggests ‘…it could be paid in instalments, e.g. £11.5 billion per annum, if paid over 5 years’. 

On funding this figure – an extra 14% on top of the already planned spending increases – the only comment is that ‘…the state will be expected to find the money, just as it would do if the Government lost a court case, rather than a policy decision’. No sum – net or gross - was provided for in Labour’s policy costing document. 

Cynics will note that the highest election turnout is amongst the pensioner section of the population…

Sources: Labour Press Release 23/11/19

New fuel rates for company cars

(AF1, AF2, JO3, RO3) 

HMRC has announced the new fuel rates for company cars applicable to all journeys from 1 December 2019 until further notice.  The rates per mile are based on fuel prices and adjusted miles per gallon figures. 

For one month from the date of the change, employers may use either the previous or the latest rates. They may make or require supplementary payments, but are under no obligation to do either. Hybrid cars are treated as either petrol or diesel cars for this purpose. 

Rates from 1 December 2019: 

Engine size	Petrol	LPG	Engine size	Diesel
1,400 cc or less	12p	8p	1,600 or less	9p
1,401cc to 2,000cc	14p	9p	1,601cc to 2,000cc	11p
Over 2,000cc	21p	14p	Over 2,000cc	14p

 Rates from 1 September 2019: 

Engine size	Petrol	LPG	Engine size	Diesel
1,400 cc or less	12p	8p	1,600 or less	10p
1,401cc to 2,000cc	14p	10p	1,601cc to 2,000cc	11p
Over 2,000cc	21p	14p	Over 2,000cc	14p

Advisory Electricity Rate 

The Advisory Electricity Rate for fully electric cars is 4p per mile.  Electricity is not a fuel for car fuel benefit purposes. 

Source: HMRC Guidance: Rates and thresholds for employers : 2019-2020 – dated 27 November 2019

Cryptoassets are to be treated as property 

Cryptoassets (like crypto currency and bitcoin) are to be treated as property under English law, according to the England and Wales High Court. 

The Legal statement on cryptoassets and smart contracts, published on 18 November, was based on an investigation by the UK Jurisdiction Taskforce (UKJT), which is chaired by Lord Justice Geoffrey Vos who is the Chancellor of the High Court. Following a six-month consultation, launched in May 2019, the UKJT received 140 responses from businesses, academics and the legal sector. Its objective was, said Lord Justice Geoffrey Vos, to provide “…much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial services industry.” 

The UKJT found that the fact that cryptoassets have other features, such as being intangible, decentralised, ruled by consensus, or the fact that they use a distributed transaction ledger and cryptographic authentication, does not preclude them from being property. Nor are cryptoassets disqualified from being property as “pure information”, or because they might not be classified as intangible “things in possession” (tangible property that can be the subject of physical possession and so physical control) or as “things in action” (such as partnership interests and interests in funds), in the traditional legal phrases. 

The UKJT’s Legal Statement, that cryptoassets have all the indicia of property, has important consequences for succession, the vesting of property in personal bankruptcy, the rights of liquidators in corporate insolvency and, in cases of fraud, theft and breach of trust. 

The UKJT added that “It matters [that a cryptoasset is capable of being property] because in principle proprietary rights are recognised against the whole world, whereas other— personal—rights are recognised only against someone who has assumed a relevant legal duty. Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by creditors, and when someone seeks to recover something that has been lost, stolen or unlawfully taken. They are also relevant to the questions of whether there can be a security interest in a cryptoasset and whether a cryptoasset can be held on trust.”

However, the UKJT report also set limits on the legal properties of cryptoassets. 

As they are virtual they cannot be physically owned, so they cannot be the object of a bailment, a pledge or a lien. Only some types of security can be granted over them, such as mortgages or equitable charges. The UKJT also makes it clear that cryptoassets are not documents of title, documentary intangibles or negotiable instruments, and are not instruments under the Bills of Exchange Act 1882. 

Also, the UKJT warns that “a cryptoasset cannot meaningfully be treated as property unless it is possible in principle to determine who owns it, and how ownership is transferred.” 

The UKJT believes that the starting point is that a person who has acquired knowledge and control of a private key by some lawful means would generally be treated as the owner of the associated cryptoasset, in much the same way that a person lawfully in possession of a tangible asset is presumed to be the owner. (A ‘private key’ is a critical piece of information used to authorize outgoing transactions on the blockchain network. Whoever has the knowledge of this key can spend the associated funds.) 

However, ownership also depends on the circumstances and on the rules of the relevant system. One example given by the UKJT is that a person may hold the key on behalf of another, e.g. an employer or client, or as a custodian or intermediary, in which case ownership would be determined by established rules of agency or trust. 

The UKJT believes that private cryptographic keys can act as signatures to transactions in which cryptoassets are transferred between parties and that they can also be used as a valid signature to electronic documents generally, saying: 

“There are numerous cases which make clear that an electronic signature can satisfy a statutory signature requirement, including in relation to a statute that is now almost 400 years old. In light of this, it is hard to envisage any statutory signature requirement which could not be met by using a private key.” 

The legal position on recognition of electronic signatures has recently been confirmed by the Law Commission. 

Whilst in dealing with cryptoassets it is generally assumed by those outside of the legal profession that they are dealing with property, for the legal profession this has not been the case. This is partly because of previous case law which has deemed that information cannot itself be property. It is therefore welcome news that the legal treatment of cryptoassets has been brought into line with their public perception. 

The next step in the process will require the Law Commission of England and Wales to assess whether any legislation is needed. Meanwhile, users of cryptoassets can assume that they will be treated in line with the UKJT Legal Statement under English and Welsh law. 

Sources:

• UK Jurisdiction Taskforce (Legal statement on cryptoassets and smart contracts, PDF) – dated 18 November 2019;
• STEP News: E&W judicial authority states cryptoassets are to be treated as property – dated 21 November 2019;
• Eversheds Sutherland: Cryptoassets: these are to be treated in principle to be property – dated 18 November 2019.

The Gate Slams Shut

(AF4, FA7, LP2, RO2) 

M&G, in its capacity of a major retail property fund manager, has placed a block on fund redemptions. 

Earlier this year the FCA increased monitoring of daily cash outflows from property funds. At the time the concern was the impact of Brexit – then theoretically due (for the first time) on 29 March. Two and a half years previously, the Referendum vote had prompted widespread ‘gating’ (dealing suspension) of the leading property funds for up to about six months. 

On 4 December, M&G became the first fund manager to suspend dealings in its property fund as the latest Brexit deadline looms. In its press release, M&G blames three factors for its action: 

1. “unusually high and sustained outflows”; 

2. “Brexit-related political uncertainty”; and 

3. “ongoing structural shifts in the UK retail sector have made it difficult for us to sell commercial property” 

The suspension took effect from midday on 3 December (11.00 for orders placed directly with M&G). M&G says that it will be monitored daily and, as FCA rules currently require, formally reviewed every 28 days. In response to the 2016 round of fund suspensions, the FCA eventually set out new standards for dealings in illiquid funds in PS/19/24 published in September 2019, but these are not due to take effect until 30 September 2020. 

M&G is to some extent a special case as it has historically had a higher exposure to the retail property sector than many of its peers. Retail has been the worst performing of the three main property sectors, hard hit by Brexit uncertainty, the trend towards internet shopping and retailers seeking IVAs or simply going bust. M&G’s latest factsheet shows that 41.7% of its property assets were retail-related, ranging from supermarkets to shopping centres. Tellingly, the same factsheet shows that at the end of October the fund held only 5% in cash. 

In 2016, Standard Life led the way on suspending fund dealings and was rapidly followed by most of the other big players – Aviva, Threadneedle, Henderson, Aberdeen (now merged with Standard Life), Canada Life and M&G. While all these managers show more liquidity than M&G in their latest factsheets, some hold under 7% of their funds in cash. All must be concerned that M&G’s actions will trigger a rush to redeem, as will be the FCA. As a consequence, further suspensions appear likely. 

The latest IA statistics show that about £1,286m of retail monies have left the UK Direct Property fund sector in the first nine months of this year with the last month of inflow being October 2018. Across the last 12 months to September 2019 the value of the sector has shrunk 18.4%, from £20.1bn to £16.4bn. 

Source: M&G Press Release dated 4 December 2019

Trivial Benefits in kind

(AF1, RO3) 

HMRC’s bulletins cover common issues where employers and employees misunderstand the rules on the exemption from tax and National Insurance for Trivial Benefits. 

Briefly, the cost of the benefit must not be over £50, the benefit must not be in the form of cash or a voucher redeemable for cash, it must not be provided as part of salary sacrifice arrangements or any other contractual obligation, and the benefit must not be provided in recognition of particular services. 

For more information, please also see our earlier Bulletin. 

HMRC Tip 1 – Other contractual obligation 

Contractual obligations can take a variety of forms, so the phrase should be read widely to include anything the Courts would deem as a contractual agreement, for example:

• A side letter to the main contract document;
• A staff handbook;
• A letter of appointment;
• A redundancy agreement;
• An employer union agreement;
• Any legitimate expectation. 

A ‘legitimate expectation’ might apply even where there is not a strict contractual obligation. For example, employees may be provided with a cream cake every Friday. Although there is no contractual obligation, there would be a legitimate expectation – those employees expect to be provided with a cream cake every Friday. 

There is further guidance regarding contractual obligations in EIM12976. Although this relates specifically to “termination payments”, HMRC accepts that this also applies to the trivial benefits exemption. 

HMRC Tip 2 – Digital platforms 

If an employer pays for an ‘app’ which enables their employees to access discounted products or services which the employee then pays for, the benefit provided by the employer is not the actual product or service supplied by the digital platform, for example, the provision of medical advice or the hailing of a taxi. The benefit is the access to the ‘app’ itself. 

For the exemption to apply, the total cost of providing the ‘app’ must be no more than £50, as well as meeting all the rules detailed below. 

If, however, the employer pays for the products or services obtained by their employees, the total cost should be considered for the purposes of ‘the benefit’. For example, if medical advice obtained through an app is charged to the employer at £49 per session, once an employee obtains more than one session of medical advice in the year, the benefit for that employee is no longer ‘trivial’ for the purposes of applying this exemption. This is because the cost of the benefit will exceed £50. There is further guidance at EIM21865. 

The same applies to a taxi-hailing ‘app’. If the employer provides an employee with access to the service and pays for all trips, once deductible business trips are removed, the cost of the remaining trips should be added together, including any cost associated with the provision of the ‘app’ and the total treated as ‘the benefit’. Remember, it is the cost of ‘the benefit’ over the year that should be used to decide whether the exemption applies. This is the point made in Examples D, E and F of the HMRC guidance referred to above. 

HMRC Tip 3 – Particular service 

If a benefit has been provided to an employee as a reward for services, or because it is in recognition of something they have had to do as part of their employment duties, then the benefit will not qualify as a Trivial Benefit. 

As an example, an employer may require some of its employees to work through their lunch hour and provide them with lunch. The meal has been provided because of the work they are undertaking. The benefit does not satisfy the trivial benefits condition, so the exemption will not apply. Further guidance and examples be found in EIM21868. 

To read HMRC’s latest Employer Bulletin, please see here. 

Source: HMRC Guidance: Employer Bulletin - December 2019 – dated 4 December 2019

INVESTMENT PLANNING 

A borrowing reminder for the politicians

(AF4, FA7, LP2, RO2)

 

This fiscal year has been a difficult one for the number crunchers at the Office for National Statistics (ONS) who calculate Government borrowing numbers. As we have mentioned before, there have been significant adjustments for various reasons, some anticipated, some not. It is a slightly similar story this month, as the ONS has made a £5.2bn downward revision to borrowing in the first half of the year, largely stemming from lower estimates of public spending. Those revised estimates are reflected in the graph above. 

Despite the revisions, the latest Public Sector Net Borrowing Requirement (PSNBR) data shows that in the first seven months of 2019/20 total borrowing amounted to £46.3bn, £4.3bn (10.2%) more than in 2018/19 (on a like-for-like basis of calculation). Note that this is not the borrowing number which either Labour or the Conservatives say that they will use in their new fiscal rules. Their shared new target will be running a zero current budget deficit. That is basically a measure of day-to-day Government expenditure and is calculated as PSNBR less net investment expenditure. As at October, the current budget deficit was £16.9bn. 

For the month of October 2019 alone, the ONS says that the Government borrowed £11.2bn, £2.3bn up on 2018 and £1.9bn above market expectations. Indeed, Reuters said that it was higher than the forecast of any of the economists they polled. 

In its commentary on the latest data, the Office for Budget Responsibility (OBR) notes that: 

• Total central government receipts for October rose by just 0.1% year-on-year, although the year-to-date figure was up 3.1%, higher than the OBR’s (adjusted) March forecast of 2.6%. 

• Central government spending was up 3.5% in the month and 4.1% year-to-date against an adjusted OBR March forecast for the year of 3.3%. The OBR points to “the more generous NHS settlement and the large rise in employer contribution rates for public service pension schemes” as reasons for the overshoot. 

• On a rolling 12-month basis, borrowing “somewhat exceeds” the OBR’s full year 2019/20 forecast. 

• Total Public Sector Net Debt (PSND) was down by 1.1% of GDP at 80.4% (£1,798.5bn). The fall was a touch of smoke and mirrors: £4.9bn came in from the sale of Bradford and Bingley mortgages by UK Asset Resolution in April and £6.8bn from early repayments of the Bank of England’s Term Funding Scheme loans since the start of the financial year. 

These numbers should give the politicians some pause for thought. Don’t forget that September’s non-Budget added an extra £11.7bn to spending in 2020/21. Even that lowered target of a nil current budget deficit looks difficult. 

Source: ONS: Public sector finances, UK: October 2019 – dated 21 November 2019

MSCI increases China weighting in Emerging Markets Index

(AF4, FA7, LP2, RO2) 

We have written before about the increasing importance of China in the MSCI Emerging Markets Index (EMI), which provides a benchmark for about $1.9tn of assets. The story so far has been one of China’s weighting in the EMI steadily increasing. However, that has now come to what is probably a temporary standstill. 

At the end of November, MSCI announced “the successful completion of the third and final phase of the 20% partial inclusion of China A shares” in its indices. The EMI now has a 4% weighting in A shares. 472 shares are included, of which 244 are large cap companies and the remainder medium cap. Once offshore listed Chinese shares are added (eg Alibaba, Sinopec), 34% of the EMI is now China (see pie chart below). 

MSCI has always adopted something of a carrot and stick approach with China, pushing the authorities to bring the Chinese stock market practices more into line with their international counterparts. MSCI is now upping pressure for reform by stating that any further inclusion of China A shares in its indices will depend upon progress in four areas highlighted by users of its indices: 

• Access to hedging and derivatives instruments International institutional investors need hedging facilities for risk management, but China has been reluctant to expand the derivatives market, fearing increased volatility will result. 

• Settlement cycle China currently operates on a T+0/T+1 settlement cycle whereas most markets operate currently on a T+2/T+3 settlement cycle. The short timescale has caused “significant operational challenges and risks” for institutional investors. 

• Trading holidays of Stock Connect: Stock Connect is a trading system linking the Chinese mainland stock exchanges in Shenzhen and Shanghai with Hong Kong’s stock exchange. Most institutional investors use Stock Connect to acquire their China A shares via Hong Kong. However, there is a “misalignment between onshore China and Stock Connect holidays”. 

• Availability of Omnibus trading mechanism in Stock Connect China does not currently allow brokers and fund managers to place a single order on behalf of multiple client accounts, which such institutions say is critical to facilitate best execution and lower operational risk.

MSCI EMI Composition 29/11/2019

 

The 34% weighting for China highlights why movements in the MSCI EMI can at times seem to be driven by Donald Trump’s Twitter feed. 

Source: MSCI Press Release 26/11/19

PENSIONS

The Pensions Regulator News

(AF3, FA2, JO5, RO4, RO8) 

TPR publishes investment governance guidance 

Following on from their July consultation, The Pensions Regulator (TPR)’s suite of guides to assist trustees in complying with the Competition and Markets Authority’s remedies in relation to investment governance issues, as set out in the CMA’s Order, has been finalised. 

 There are four guides: 

1. Choose an investment governance model that sets out the matters that trustees should understand when deciding on investment governance, with the guidance focusing on two models – investment consultancy and full fiduciary management.
2. Tender for fiduciary management services whose purpose is to provide trustees with practical information and key matters to consider when putting together a competitive tender exercise to appoint a fiduciary manager, as required by the CMA Order when appointing fiduciary managers in relation to 20% or more of scheme assets.
3. Tender for investment consultancy services which is a ‘good practice’ guide to help trustees apply the principles of tendering when selecting investment advisers – there being no legal requirement to do so under the CMA Order.
4. Set objectives for your investment consultant which helps trustees understand their duty under the CMA Order to set objectives for providers of investment consultancy services. 

TPR’s response to the consultation reveals that it has made a number of adjustments to the guides reflecting some of the comments received.  In particular, in the last guide it is now clearer that advice from an actuary should only fall to be treated as investment consultancy services where in fact that actuary is providing investment advice, which could happen where the scheme does not have a separate investment adviser. However, the guide does continue to use the term “investment consultancy services” to cover services that may well not be subject to the CMA Order requirement. 

The new duties set out in the CMA Order take effect from 10 December 2019. However, this Order should be replaced by DWP regulations around the turn of the year, with these coming into force on 6 April 2020. And they in turn will require the Regulator to review this guidance suite so that in future it talks to the DWP regulations rather than the CMA Order. 

DWP proposed pension and benefit rates published

(AF3, FA2, JO5, RO4, RO8)

The DWP has placed a copy of its proposed pension and benefit rates for 2020/21 in the libraries of both the House of Commons and the House of Lords. The document confirms that next April the Basic State Pension will rise to £134.25 per week whilst the full rate of the New State Pension will rise to £175.20 per week. Both these figures were announced by Thérèse Coffey on 4 November. 

Other figures contained within the document include that the Basic State Pension for a couple rises to £214.70 per week, the State Pension Guarantee Credit will rise to £173.75 pw for an individual and £265.20 pw for a couple. The maximum savings credit, available only to those reaching State Pension Age before 6 April 2016, rises to £13.97 pw for an individual and £15.62 pw for a couple. 

The accompanying letter makes it clear that this is not a fully comprehensive list as the DWP is still awaiting confirmation from HMRC of the Lower Earnings Level for NIC purposes and the National Living Wage. 

New research suggests pensions advice websites create bias

(AF3, FA2, JO5, RO4, RO8) 

The University of Stirling has set out details of research it has undertaken in a Press Release. According to the research, people who have used an official online life expectancy calculator, such as that provided by the Government's Pension Wise service, are less likely to buy an annuity. The study of 2,000 individuals found that whilst 73% of people in a control group chose to purchase an annuity, this figure fell to 65% after they had used a life expectancy calculator first. 

Dr David Comerford, a Behavioural Economist at Stirling Management School, commented: “While the Government’s Pension Wise website seeks to provide information to assist people, the failure to adequately test the effects of the content and tools on the site, such as the life expectancy calculator, has created an unintended bias. Supported by our research findings, it is our recommendation that all such advisory sites and tools are adequately tested on an experimental basis before being fully launched to the public and, in the meantime, that the life expectancy calculator is removed from the Pension Wise website.”