Technical news update 19/11/2019

Taxation and trusts 

• OTS review of how tax is paid – new policy paper
• Financial services and Brexit – FCA update
• Trivial Benefits in kind
• New FCA rules on switching to a more affordable mortgage
• Tax on cryptoassets – new guidance
• Gift to a Jersey charity exempt from inheritance tax under EU law
• The extension of Civil Partnership status to opposite-sex couples – regulations approved
• Offshore collective investment funds – HMRC letter to taxpayers
• Christa Ackroyd loses IR35 appeal
• OTS review of tax for smaller businesses – an update
• Digital Services Tax – more international progress 

Investment planning

• US interest rates – a third cut, but now the pause
• Spend, spend, spend…
• The October Inflation numbers

Pensions 

• Money and Pensions Service begin pensions guidance nudge trial
• Brexit and State Pensions further updates to DWP Guidance
• Pension Policy Institute on The Future of Defined Benefit Pension schemes
• The Pensions Regulator News

 

TAXATION AND TRUSTS 

OTS review of how tax is paid – new policy paper

(AF1, RO3) 

This OTS report explores ways to simplify tax for self-employed people and residential landlords. 

The Office of Tax Simplification (OTS) has made three recommendations to focus on further, more detailed, work: 

1. Exploring the potential for HMRC to offer a fully integrated Individual Tax Account, providing an end-to-end tax reporting and payment service. The OTS believes that such a development could make it easier for people to see and keep track of their taxable income, to know what tax may be due and to make regular contributions towards their tax liability. 

2. Exploring whether it might help self-employed people and landlords of residential property if some third parties made direct reports to HMRC, with that information then being visible in an Individual’s Tax Account. 

3. Exploring in more detail which types of self-employment business or rental business would most benefit from being able to report data periodically and pay tax through an integrated Individual Tax Account, what data individual taxpayers would need to be able to send to HMRC for this to work effectively (whether through Making Tax Digital or in other ways) and the key steps and timescales that would be involved. 

You can read the full OTS report here. 

Source: OTS Policy paper: Tax reporting and payment arrangements review – dated 31 October 2019.

Financial services and Brexit – FCA update

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

The FCA has issued another update now that the UK’s exit from the EU has been delayed. 

As the EU and the UK have agreed to extend the date for the UK’s departure from the EU, the FCA has confirmed that it will be extending the date by which firms and funds should notify it for entry into the temporary permissions regime (TPR), from 30 October to 30 January 2020. 

Fund managers will have until 15 January 2020 to inform the FCA if they want to make changes to their existing notification. 

Firms should continue to comply with existing regulatory requirements, including those relating to MiFID transaction reporting and EMIR (European Market Infrastructure Regulation) trade reporting requirements. The arrangements described in its press release of 11 October are suspended and the FCA says that it expects firms to continue to report as normal. 

Firms can call the FCA Brexit information line (0800 048 4255) if they are unsure what changes they need to make as a result of the extension or have any further questions. 

Source: FCA News: The FCA will be extending the date by which firms and funds should notify it for entry    into the temporary permissions regime (TPR) to 30 January 2020 – dated 30 October 2019.

Trivial Benefits in kind

(AF1, RO3) 

HMRC’s latest Employer Bulletin includes useful updates on PAYE matters impacting your employer clients. Of particular interest in this edition is an update about Trivial Benefits. Trivial Benefits are useful as they are exempt from tax and National Insurance as employment income. 

What counts as a Trivial Benefit? 

All of the following conditions must be satisfied. If any of these conditions is not satisfied then the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions: 

• the cost of providing the benefit must not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person); 

• the benefit is not cash or a cash voucher; 

• the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements); and 

• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services). 

The exemption applies equally to benefits provided to the employee or to a member of the employee’s family or household (i.e. spouse/civil partner, children and their spouses/civil partners, parents, domestic staff, dependants and guests). 

Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household) the exemption is capped at a total cost of £300 in the tax year.

(A company is a close company, broadly, if it is under the control of five or fewer participators and their associates, or under the control of directors who are participators and their associates.) 

A common issue is where employers and employees misunderstand the rules on the exemption from tax and National Insurance for Trivial Benefits, which apply to the provision for employees of ‘a benefit’. A benefit can be the provision of one item or event, or the provision of a series of items or events which together constitute a single benefit. Where a series of benefits is treated as a single benefit, the £50 limit may be breached, meaning the relief is not available.

For example: 

Employer A gives an employee a gift card which costs the employer £10 to provide. The employer tops up the gift card on seven further occasions, at a cost of £10 on each occasion. Although the benefit is topped up on separate occasions, there is a single benefit of the provision of the gift card. The total cost to the employer of providing the benefit over the period of employment is £80. Therefore, the benefit is not exempt as a Trivial Benefit.

So, what might appear to be several individual benefits can actually be a single benefit provided over the tax year.

Season tickets can also be problematic. 

For example: 

Employer B provides a season ticket for a football club (where the cost of the ticket averages out at £40 a match). If the employer gives their employee access to the ticket once during a tax year, then that benefit is trivial and is not taxable under the rules. 

However, if the same employee has access to the season ticket twice or more during a year, the benefit of the access to the ticket is a single benefit and is not trivial, as the benefit would then breach the £50 limit. 

It is the provision of that access that makes it a benefit. Once the cost of provision exceeds £50 it takes it out of the Trivial Benefits exemption.

Other common areas of error are in relation to the repeated provision of connected staff entertaining, or access to app-based services such as the provision and payment for taxis. 

More examples to help understand the exemption, and avoid losing out, are included in HMRC’s Employment Income Manual (EIM 21864 to EIM 21871 inclusive).

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

Source: HMRC Guidance: Employer Bulletin - October 2019 – dated 16 October 2019

New FCA rules on switching to a more affordable mortgage

(ER1, LP2, RO7) 

The Financial Conduct Authority (FCA) has confirmed that it has removed barriers that stop some mortgage customers from finding a cheaper mortgage deal.

There are an estimated 200,000 mortgage prisoners in the UK – generally these are consumers who can’t switch to a more affordable mortgage because of changes to lending practices during and after the 2008 financial crisis and subsequent regulation that tightened lending. These borrowers are often trapped on high variable rates, unable to re-mortgage to a cheaper deal because they no longer fit the profile of a 'good' borrower.

In March, the FCA published a consultation document ‘Mortgage customers: proposed changes to responsible lending rules and guidance’, with the intention of helping to remove potential barriers to consumers switching to a more affordable mortgage.

Following on from that consultation, the FCA has now published its promised Policy Statement setting out the new rules, which allow lenders to use a different and more proportionate affordability assessment for customers who meet certain criteria, such as being up to date with payments under their existing mortgage and not looking to move house, or borrow more (except to finance certain fees). 

The FCA has also confirmed that customers of inactive lenders and firms not authorised for mortgage lending (who are unregulated) will have to be contacted and told that it has become simpler and easier for them to switch to another lender. 

The FCA has made some changes to its original proposals in light of feedback received to its consultation, which include simplifying the definition of a more affordable mortgage and allowing eligible consumers to finance intermediary fees, as well as product or arrangement fees, through the new mortgage. 

The simplified definition of a more affordable mortgage is now a test of whether the new mortgage has a lower total expected cost and lower interest rate, over the deal period or whole term if there is no deal period, than the current mortgage. Also, the typical monthly payment under the new mortgage must be lower than the monthly payment paid in every one of the last 12 months under the current mortgage.

The new rules came into force on Monday, 28 October. 

The new rules: 

• Mortgage lenders can choose to carry out a modified affordability assessment (‘modified assessment’) where the consumer: 

• has a current mortgage; 

• is up to date with their mortgage payments; and 

• does not want to borrow more, other than to finance any relevant product, arrangement or intermediary fee for that mortgage; 

• is looking to switch to a new mortgage deal on their current property. 

• Inactive lenders, and administrators acting for unregulated entities, must review their customer books and develop and implement a communication strategy for relevant consumers (this will include contacting consumers to highlight the rule changes, explaining that they may be able to switch as a result of the rule changes and directing them to relevant information). 

• Mortgage lenders that use the modified assessment must tell consumers the basis on which their affordability has been assessed and provide additional disclosures about potential risks. 

• Mortgage lenders are required to report which sales have involved the modified assessment when they submit Product Sales Data (PSD) to the FCA.

Changes that the FCA will not be making are: 

• allowing the modified assessment to be used where the consumer is looking to switch to a new mortgage deal on a new property (i.e. home movers); and 

• requiring a ‘more affordable’ mortgage to have a lower reversion rate than the rate the consumer is currently paying. 

It will now be down to lenders to use the more proportionate affordability assessment for customers who meet the criteria. The FCA has said it will measure how many eligible consumers (who are up to date with payments and not looking to borrow more) switch to a more affordable mortgage and how many firms use the modified assessment. 

The FCA will separately review the extent that consumers of both inactive lenders and unregulated entities have switched to a more affordable mortgage with an active lender, based on the modified assessment. It wants to estimate how many of these consumers may have been unable to switch as their circumstances have put them outside lenders’ risk appetites. 

Source: PS19/27: FCA News: FCA confirms help for mortgage prisoners – dated 28 October 2019.

Tax on cryptoassets – new guidance

(AF1, AF2, JO3, RO3) 

Over more recent years we have seen the popularity of cryptoassets grow. Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be: 

• Transferred;
• Stored; or
• Traded electronically. 

HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report (CATF). The CATF has identified three types of cryptoasset: exchange tokens; utility tokens; and security tokens. 

HMRC’s new guidance does not apply to the issue of tokens under initial coin offerings or other similar events. It deals specifically with the tax treatment of exchange tokens (for example, bitcoin). HMRC says that the tax treatment of security tokens and utility tokens will be addressed in future guidance.

Summary of HMRC’s new guidance 

If a company or business is carrying out activities which involve exchange tokens, they are liable to pay tax on them. Such activities include: 

• buying and selling exchange tokens;
• exchanging tokens for other assets (including other types of cryptoasset);
• ‘mining’ (see below); and
• providing goods or services in return for exchange tokens. 

The type of tax will depend on who is involved in the business and the activities it carries out (including whether these count as a trade).

Filling in tax returns 

The calculation of an individual’s or a company’s taxable profits will be undertaken in pounds sterling. However, as exchange tokens (including bitcoin) can be traded on exchanges which may not use pounds sterling, if the transaction does not have a pound sterling value (for example, if bitcoin is exchanged for ether), an appropriate exchange rate must be established in order to convert the transaction to pounds sterling. 

The value of any profit or gain (or loss) will need to be converted into pounds sterling for the purpose of filling in a tax return. Any profit or gain must be calculated by converting to pounds sterling using the appropriate rate at the time of each transaction. Reasonable care needs to be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. Individuals and companies must also keep records of the valuation methodology.

A company may make an election to designate a non-sterling currency as its functional currency. In these circumstances the transactions need to be converted to the functional currency using the appropriate rate at the time of each transaction. At the end of the accounting period the necessary steps will need to be completed to complete the tax return in pounds sterling. 

Trading in exchange tokens 

The question of whether a trade is being carried on is a key factor in determining the correct tax treatment. Whether the buying and selling of exchange tokens amounts to a trade depends on a range of factors including: 

• degree and frequency of activity;
• level of organisation; and
• intention (including risk and commerciality). 

If a person’s or business’s activities amount to a trade, the receipts and expenses will form part of the calculation of the trading profit. If a trade is carried on through a partnership (or is treated for tax purposes as being so), the partners will be taxed on their share of the trading profit of the partnership.

If the exchange tokens are held as part of an existing trade, profits of a revenue nature will need to be included in the trading profits. For example, if a company carrying on a trade accepts exchange tokens as payment from customers, or uses them to make payments to suppliers, the tokens given or received will need to be accounted for within the taxable trading profits. If the activities do not amount to a trade, businesses must still check if other legislation applies.

Mining 

Mining is where an individual uses a computer(s) to carry out computational tasks as part of the underlying digital ledger and can receive cryptoassets as payment. Where the individual is not trading, such fees are treated as miscellaneous income. 

Cryptoassets can be awarded to miners in return for verifying additions to the distributed ledger. Whether such activity amounts to a taxable trade (with the cryptoassets as trade receipts) will depend on the particular facts - taking into account a range of factors such as: 

• degree and frequency of activity;
• level of organisation;
• risk; and 

For example, using a home computer while it has spare capacity to mine tokens would not normally amount to a trade. However, purchasing a bank of dedicated computers to mine tokens for an expected net profit (taking account of the cost of equipment and electricity) would probably constitute trading activity.

If the mining activity does not amount to a trade, the value (at the time of receipt) of any cryptoassets awarded for successful mining will generally be taxable as miscellaneous income, with any appropriate expenses reducing the amount chargeable. If the activity does amount to a trade, any profits must be calculated according to the relevant tax rules. 

If the miner keeps the awarded assets, they may have to pay capital gains tax or corporation tax on chargeable gains when they later dispose of them.

Corporation tax 

When calculating their corporation tax, companies must take into account all of the exchange token transactions they have carried out. As HMRC does not consider any of the current types of cryptoasset to be money or currency, any corporation tax legislation which relates solely to money or currency does not apply to exchange tokens or other types of cryptoasset. For example: 

• the foreign currency rules (section 328 of the Corporation Tax Act 2009); 

• the Disregard Regulations relating to exchange gains and losses (Statutory Instrument 2004/3256); or 

• designated currency elections (section 9A of the Corporation Tax Act 2010). 

If the activity concerning the exchange token is not a trading activity, and is not charged to corporation tax in another way (such as the non-trading loan relationship or intangible fixed asset rules) then the activity will be the disposal of a capital asset and any gain that arises from the disposal would typically be charged to corporation tax as a chargeable gain. 

HMRC seems slightly doubtful on its position regarding loan relationships.  However, it confirms that exchange tokens do not create a loan relationship. It also confirms that exchange tokens that qualify as intangible fixed assets can be treated the same as other intangible assets under the corporation tax rules.

Investments 

If a company holds exchange tokens as an investment, they are liable to pay corporation tax on any gains they realise when they dispose of them. If a sole trader (or an individual partner in a partnership) holds exchange tokens as an investment, they are liable to pay capital gains tax on any gains they realise.

The guidance sets out which costs can be allowed as a deduction when calculating a gain or loss, how pooling must be applied instead of tracking the gain or loss for each transaction individually, and two exceptions to the pooling rules for companies. It also covers capital losses, claiming for an asset that’s lost its value, Blockchain forks and Airdrops. 

The remainder of HMRCs guidance also covers VAT, stamp duty and stamp duty reserve tax. 

Other points in the guidance 

Venture capital schemes 

HMRC says that it has received applications from innovative early-stage companies seeking tax-advantaged investment status under venture capital schemes using cryptoassets and distributed ledger technology. 

HMRC’s view is that the company, investor and proposed investment must meet the conditions of the scheme opted for. The schemes do not include any cryptoasset-specific conditions, and HMRC’s approach is to review cryptoasset or distributed ledger technology cases in the same way as any other business.

HMRC’s guidance covers: Meeting the qualifying conditions of a venture capital scheme; asking for assurance from HMRC in advance; and tax reliefs.

Paying employees in cryptoassets

If an employer pays exchange tokens as earnings to an employee, those exchange tokens count as money’s worth and are subject to income tax and National Insurance contributions on the value of the asset.

How to account for the income tax and National Insurance contributions depends on whether the exchange tokens are readily convertible assets. In particular, exchange tokens are readily convertible assets if trading arrangements exist, or are likely to come into existence, the effect of which is to enable the tokens to be converted into their monetary value.

The guidance sets out more information on this.

HMRC also confirms that employers cannot make a contribution to a registered pension scheme with exchange tokens. This is because HMRC does not consider such assets to be currency or money.

Please see here for the full HMRC guidance for companies and other businesses.

As the tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used, HMRC will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place (rather than by reference to terminology). HMRC adds that a different tax treatment may apply in cases of tax avoidance.

Gift to a Jersey charity exempt from inheritance tax under EU law

(AF1, JO2, RO3) 

The Supreme Court has held that a gift to a Jersey trust qualified for the charitable exemption from IHT on the basis that it would contravene EU law if the relief was denied. 

Outright gifts made to qualifying charities, either during lifetime or on death, are exempt from inheritance tax (IHT) by virtue of s23 IHTA 1984. The definition of a qualifying charity for these purposes includes the condition that the charity must be located in, and subject to the jurisdiction of a court in, the UK or an EU Member State. 

In the recent case of Routier and Anor v HMRC [2019] UKSC43, the deceased, Mrs Coulter, left her UK estate to a charitable trust registered in Jersey, the country of her domicile. As Jersey is not a member of the EU, the charity did not meet the conditions for relief and relief was accordingly refused.

Mrs Coulter's executors challenged HMRC's decision, but having lost in the England & Wales High Court in 2014, they then took the case to the Court of Appeal in 2016.

The Court of Appeal (EWCA) agreed that the exemption did not apply and then considered whether the limitation of the IHT exemption represented an unlawful restriction on the free movement of capital between EU Member States and third countries. The EWCA found that, while Jersey should be treated as a third country for the purposes of the relevant EU legislation; HMRC is entitled to refuse to grant relief on gifts to non-UK charities unless there is a mutual assistance agreement between the UK and the country in which the charity is based. As there was none at the time of Mrs Coulter’s death, the EWCA held that the restriction was not unlawful. 

However, Mrs Coulter’s executors appealed to the Supreme Court which unanimously decided in their favour, agreeing that Jersey was a third country, that the principle of free movement must be applied and that the refusal of relief under s.23 IHTA 1984 was a restriction on that free movement. Reversing the EWCA decision, the Supreme Court further found that the requirement for a charity to be subject to UK law or the jurisdiction of a UK court for s23 to apply was overridden by EU law - which takes precedence over UK law when inconsistencies arise. If the “gloss” put on the definition of a charity by the UK courts was ignored, there was no requirement under s23 for a charity to be subject to UK law in order to benefit from the exemption. 

While on the face of it the outcome of this case provides reassurance to taxpayers who plan to leave legacies to overseas charities, the usefulness of the decision may be short-lived in the light of Brexit, after which breaches of EU law will presumably cease to be relevant to UK IHT. 

Source: STEP UK News Digest 17^th October 2019; UK Supreme Court 16^th October 2019 Routier and another v Commissioners for HMRC [2019]   UKSC43

The extension of Civil Partnership status to opposite-sex couples – regulations approved

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

The Civil Partnership (Opposite-sex Couples) Regulations 2019 have now been approved by Parliament.

The regulations will commence by 2 December. These regulations will allow the first opposite-sex civil partnerships in England and Wales to take place on 31 December, given the usual 28-day notice period.

However, for now, only same-sex couples will be able to convert their civil partnerships to marriage and vice versa.

Conversions

Civil partnerships were introduced for same-sex couples by the Civil Partnership Act 2004. In 2013, the Marriage (Same Sex Couples) Act 2013 legalised same-sex marriage in England and Wales; and the Marriage and Civil Partnership (Scotland) Act 2014 legalised same-sex marriage in Scotland. 

The 2013 Act enables same-sex couples in a civil partnership to convert that partnership into marriage. This was to allow such couples to enter a type of relationship that had not previously been available to them, without first having to dissolve their civil partnership. This right is still available to same-sex couples, even if they formed their civil partnership after the introduction of same-sex marriage. This was to allow for cases where one partner changes gender, as they would not have been able to remain in a same-sex civil partnership and would instead have had to convert that relationship to a marriage.

A consultation document was published in the Summer ‘Civil Partnerships: Next Steps and Consultation on Conversion’, seeking views on whether opposite-sex couples should be able to convert their marriage into a civil partnership and vice versa. It also considered whether any changes should be made to the existing right to convert a same-sex civil partnership to a marriage. However, due to the tight timescales, the Government is maintaining the current position, so that only same-sex couples will be able to convert their civil partnerships to marriage. The Government believes this approach avoids making short-term changes that might have to be undone when the longer-term position on conversion rights is decided, following the consultation.

The consultation states that any longer-term changes on conversion are unlikely to come into force until ‘later’ in 2020, given the need to await the outcome of the consultation and the time needed to make the necessary legislative and operational changes. However, in the final debate on the regulations in the House of Lords it was confirmed that further regulations will be made early in 2020 in relation to the operational processes for conversions to take place.

Scotland and Northern Ireland

On 25 June, the Scottish Government announced that they would introduce legislation extending civil partnerships to opposite-sex couples, and a Bill was introduced in the Scottish Parliament on 1 October. The Scottish Government’s Bill provides for opposite-sex civil partnerships registered in England and Wales to be recognised in Scotland as marriages, initially, and as civil partnerships when those relationships are available in Scotland.

In Northern Ireland, section 8 of the Northern Ireland (Executive Formation etc) Act 2019 places a duty on the Secretary of State to make regulations so that couples in Northern Ireland are eligible to form same-sex marriages and opposite-sex civil partnerships no later than 13 January 2020. The duty came into force on 22 October, after the Northern Ireland Executive did not reform, and Parliament is working closely with the Northern Ireland Office towards the deadline.

Note that the Government has said that it has no intention of extending eligibility to form a civil partnership to family members (such as siblings).  

All of the tax consequences of a civil partnership, as we currently know it, will extend to an opposite-sex civil partnership - for example, the inheritance tax (IHT) transferable nil rate band and residence nil rate band, exempt IHT transfers and no gain / no loss transfers for capital gains tax.

The regulations also amend a whole raft of existing law, including some applicable to public sector pension schemes, occupational pension schemes generally, social security provision, the Pension Protection Fund and the Financial Assistance Scheme, to ensure that references to married couples and civil partners work in the new context.

The extension of formal civil partnership status to opposite-sex couples will definitely deliver a benefit to the survivors of pension scheme members. The exact nature of survivors’ benefits is subjective and varies by scheme and by category of survivor. The key point though is that survivors’ benefits, whatever their exact form, will be available to a wider range of individuals. Whilst this is good news for the survivors in opposite-sex civil partnerships, the corollary is that there will be additional cost and potential funding implications for the schemes affected.

These regulations should act as a spur to occupational pension schemes to review their provisions regarding survivor pensions, which have had, since 2005, to cover those in same-sex civil partnerships. Whilst the regulations do not take the opportunity to remove the post 5 December 2005 pensionable service limitation that was struck down by the July 2017 Supreme Court judgement in Walker v Innospec and others, schemes should ensure that any such limitation is removed from their rules. Also, see the Government response to the 2019 Survivor Benefits Review in relation to the Supreme Court judgment in Walker v Innospec and others here. 

Source: The Civil Partnership (Opposite-sex Couples) Regulations 2019 - motion to approve in House of Lords – dated 5 November 2019.

Offshore collective investment funds – HMRC letter to taxpayers

(FA4, LP2) 

Clients whose tax affairs are dealt with by HMRC’s Wealthy & Mid-Sized Business unit will be receiving letters from HMRC asking them to check that they have correctly declared money received from offshore (overseas) collective investment funds. These letters will include a factsheet that gives more details.

HMRC has supplied the Chartered Institute of Taxation (CIOT) with a briefing note with some background information about the mailing, and a sample letter that taxpayers included in the mailing can expect to receive. 

HMRC’s briefing note and sample letter both centre around offshore funds that have been approved by HMRC as Reporting Funds and Non-Reporting Funds, and how an investor should report income and gains from such funds on their 2018/19 tax return. 

The letter also sets out how a taxpayer can amend their 2018/19 tax return if they have already submitted it, but now think that it is not correct based on this HMRC guidance. 

According to HMRC, its letter is an educational piece giving individuals advice on how to complete their tax return and which pages they need to visit to ensure they report this income correctly, although HMRC acknowledges that some ‘customers’ may be concerned about being contacted.

HMRC also adds that it has taken steps to create and update internal learning and support resources so that its caseworkers are better equipped to handle any issues that may arise in this area. 

You can see HMRC’s briefing note here and its sample letter here.

Christa Ackroyd loses IR35 appeal

(AF1, RO3) 

Another BBC presenter loses an IR35 case against HMRC. This was a case where the presenter was deemed to be under the ‘control’ of the end client.

The Christa Ackroyd case - Christa Ackroyd Media Ltd v The Commissioners for Her Majesty’s Revenue and Customs: [2019] UKUT 0326 (TCC)

In 2018, the First-tier Tribunal (FTT) published its decision that this BBC presenter was caught by IR35. The BBC (the end client) had the right to control what services Christa Ackroyd would provide (via her personal services company Christina Ackroyd Media Limited). 

Ackroyd appealed on the grounds that the FTT had erred in law in reaching the conclusion that the BBC had a sufficient degree of control over the provision of services by her to satisfy the control requirement necessary for an employment relationship (IR35).

However, the Upper-tier Tribunal has now decided the FTT was right to back HMRC in deeming the BBC presenter inside IR35 due to control.

Ackroyd had no line manager and was not subject to appraisals by the BBC which, her QC pointed out, lacked ‘effective sanctions’ to control her. However, the BBC had ultimate editorial control to first call over her services for up to 225 days a year. The BBC could require her not only to work on a particular day, but also it could direct what work she did.

As we have written previously, a number of organisations and supporting freelancers and contractors are requesting a halt to the roll out of the IR35 reforms.

The Association of Taxation Technicians (ATT) has just called for the reforms to be delayed by 12 months, due to the recent cancellation of the 6 November Budget, their argument essentially being that the delay to the Budget and Finance Bill will mean businesses will have to wait longer for the final legislation, potentially leaving them with a greatly reduced timeframe in which to adapt to the changes.

However, the legislation has already been drafted and HMRC has also produced a large amount of guidance material, as set out in its latest Agent Update.

HMRC says it will launch an enhanced version of the CEST (Check Employment Status for Tax) tool before the end of the year, adding that it will stand by the results given by the current tool provided the information entered is accurate and it is used in accordance with its guidance.

Sources: HMCTS/UTT: Christa Ackroyd Media Ltd v The Commissioners for Her Majesty’s Revenue and Customs: [2019] UKUT 0326 (TCC) – dated 25 October 2019; Contractor UK: Contractor UK News: 'Controlled' Christa Ackroyd loses IR35 appeal to HMRC – dated 29 October 2019.

OTS review of tax for smaller businesses – an update

(AF2, JO3) 

In May, the Office of Tax Simplification (OTS) published a paper focusing on ways to simplify the everyday experience of businesses dealing with tax, particularly for smaller businesses – which, for the purposes of this review, the OTS described as being businesses with fewer than 10 employees and an annual turnover of less than £2 million. 

The review covered events such as: 

• starting up in business,
• registering for and paying tax,
• taking on a first employee, and
• dealing with more complex tax matters as the business grows. 

Just before Parliament was dissolved, Jesse Norman MP responded on behalf of the Chancellor to say that the Government had accepted the majority of the OTS’s ten core recommendations. This table sets out the Government’s response to each of the recommendations and what action is being taken by HMRC.

For example, in relation to the OTS request that HMRC review tax payment processes across core taxes and regimes, with a view to aligning and streamlining them, it has given the following response: 

“Accept – HMRC will align and streamline payment processes across different taxes. HMRC has made organisational changes that are supporting a programme of work to do this, working to a payment strategy delivering a consistent and straightforward set of HMRC payments processes.”

The letter adds that officials will continue to update the OTS on progress on its eighteen additional recommendations. Of course, any progress may depend on the result of the 12 December Election.

Source: OTS Correspondence: Chancellor responds to OTS report on simplifying everyday tax for smaller    businesses – dated 5 November 2019.

Digital Services Tax – more international progress 

(AF2, JO3)

The UK Government is introducing the Digital Services Tax (DST) from April 2020, to ensure certain digital businesses pay tax reflecting the value they derive from UK users. However, further progress is being made at an international level. 

The Government has been consulting on draft legislation to introduce a new Digital Services Tax (DST). However, the DST was always intended to ultimately be a temporary tax, to be replaced by a comprehensive global solution.

The OECD has now published draft proposals for a global minimum business-tax rate aimed at preventing multinationals, especially in the digital economy, moving their profits into low-tax jurisdictions. 

The so-called Pillar Two proposal is part of the OECD's base erosion and profit shifting (BEPS) initiative. It has emerged from a collaboration of more than 130 countries, the Inclusive Framework on BEPS, formed in January 2019 to develop ideas on a ‘without prejudice basis’. This means it does not represent a consensus view of these countries, but only a first draft to invite feedback. The level at which the minimum tax rate will be set is to be discussed by the participating countries once the proposal's other key elements are fully developed. 

Comments are requested by 2 December, and the OECD says that it will particularly welcome views on three aspects of the plan: 

• the use of financial accounts as a starting point for determining the tax base; 

• the extent to which a multinational enterprise can combine income and taxes from different sources in determining the effective (blended) tax rate on such income; and 

• stakeholders' views on any carve-outs and thresholds that might be considered as part of the proposal. 

For more information on the OECD/G20 BEPS Project, please see: www.oecd.org/tax/beps/ 

The legislation implementing the UK’s DST is currently due to take effect from 1 April 2020. 

Sources: STEP News: OECD proposes international minimum business-tax rate– dated 11 November 2019.

INVESTMENT PLANNING 

US interest rates – a third cut, but now the pause

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The US Federal Reserve has announced its third consecutive 0.25% reduction in the Fed Funds rate since it first started cutting rates in July 2019. The rate is now down to 1.50%-1.75%, the same level it was between June and September 2018, when the Fed was raising rates. Three consecutive meetings, three consecutive cuts, so is a fourth on the cards for the next Fed meeting in December? 

For now, the answer is no. In his opening remarks at the Fed’s press conference, Jay Powell, the Fed’s Chairman, said that “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective”. The market has interpreted that as hitting the pause button: futures prices are now putting the odds on a Christmas rate cut at less than 20%. 

The news came on the day that the first estimate of US third quarter GDP numbers was issued, showing an annualised rate of 1.9%. This beat market expectations and was only marginally less than the 2.0% achieved in the second quarter. However, the data hinted at potential problems ahead, as growth was driven by consumer expenditure (up 2.9%) while business investment contracted by 3.0%. 

The S&P 500 index closed at a record high after the Fed’s announcement. Investors seem to agree with Mr Powell’s vision of a “sustained expansion of economic activity”. 

Spend, spend, spend…

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The Resolution Foundation has published a report looking at the potential increase in State spending suggested by the current Election announcements from the main parties.

 

We are going into the forthcoming Election with outdated economic projections which the Treasury is unwilling to see updated. This is dangerous territory, as it gives vote-hungry politicians the chance to paint rosy images of future expenditure without a counterbalancing picture of current financial projections.

The Resolution Foundation has taken a look at those spending plans, as revealed so far, in a new report, ‘The shape of things to come - charting the changing size and shape of the UK state”. Its main points are: 

• Since its peak following the global financial crisis, not only has the size of the State changed (as shown in the above graph), so too has its shape. 

• The change of shape is highly relevant to what happens next on the expenditure front. Since 2010, day-to-day spending on favoured departments and functions – eg NHS, foreign aid, schools and defence – has been protected and/or prioritised, leaving the burden of funding cuts focused on unprotected areas. A classic example is the Local Government Budget, where real terms expenditure per head has been cut by 77% between 2009/10 and 2019/20. The report calculates that the change means that, by 2020/21, 40% of day-to-day Government departmental expenditure will be on Health and Social Care, up from 31% in 2009/10. And that is before taking account of any Election promises… 

• Away from departmental expenditure, in the area defined as ‘annually managed expenditure’, there has been a similar skew towards spending on State pensions. Under the welfare expenditure heading (36% of total Government expenditure in 2018/19), the slice taken by State pensions will have grown from 37% in 2007/08 to 44% by 2020/21 – despite the increases in State Pension Age. An ageing population and the Triple Lock are mainly to blame. 

• The report notes that while the size of the UK state ‘remains relatively modest by international standards…pre-election plans look like they will be quickly replaced by new ones that push the size of the UK state somewhat higher – whoever forms the next government’. Until the manifestos emerge, the extent of the increase is unclear. On the Conservative side the picture is muddied by leadership campaign pledges which may not make the manifesto. On the Labour front, we do not yet know how much will be added to the £70bn+ extra spending contained in the 2017 manifesto, which will probably be the framework around which its 2019 successor will be structured. 

• The Resolution Foundation echoes the thought of the Office for Budget Responsibility when it says, “Given where we are post-Spending Round 2019, it is clear that the fiscal framework that guides the government’s approach is no longer in effect”. Both the Conservatives and Labour parties look set to introduce a new, looser framework that permits higher borrowing, possibly (as in the Labour 2017 manifesto) turning the focus on the current budget deficit (which is the overall deficit excluding investment expenditure). However, that leaves the question open about the overall level of Government debt as a percentage of GDP. Unless this is allowed to rise (from today’s 84.7% of GDP), slow economic growth in the UK will act as a constraint on the amount the deficit can be widened each year. 

The question of how all the spending promises of the coming weeks will be met may only start to be answered truthfully in the first Budget after the election. Mr McDonnell’s focus in his Andrew Marr interview on 10 November on the top 5% of income tax payers (who were reckoned to contribute an extra £6.4bn in the 2017 Labour’s ‘Funding Britain’s Future’ document) looks to be only a starting point. 

Sources: OBR 29/10/19 Resolution Foundation 4/11/19

The October Inflation numbers

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The CPI for October showed an annual rate of 1.5%, 0.2% down from September. The market had expected an unchanged 1.7%, according to Reuters. The CPI is at its lowest level since November 2016. Across September to October prices dropped by 0.2%, whereas they rose by 0.1% a year ago (roundings account for the 0.1% year-on-year difference).

The CPI/RPI gap narrowed by 0.1% to 0.6%, with the RPI annual rate dropping 0.3% to 2.1%. Over the month, the RPI was down 0.2%.

The Office for National Statistics’ (ONS’s) favoured CPIH index was also down 0.2% for the month at 1.5%. The ONS notes the following significant factors across the month: 

Downward 

Housing and household services. The largest downward contribution (of 0.18%) came from this category. The drop can be fully attributed to gas and electricity prices, which fell by 8.7% and 2.2%, respectively, between September and October 2019. This movement partially reflected the response from energy providers to the Office of Gas and Electricity Markets’ (OFGEM’s) six-month energy price cap, which came into effect from 1 October 2019. Gas and electricity prices had both risen by 2.0% between the same two months a year ago. 

Furniture, household equipment and maintenance. There was a large downward contribution (of 0.06%) to the change in the annual rate from this category, which had been an upward component last month. Overall prices fell by 1.1% between September and October this year compared with a fall of 0.1% a year ago.

Recreation and culture. This category produced a 0.04% downward contribution as prices rose between September and October 2019, but by less than a year ago. The main downward contribution came from games, toys and hobbies; books; and cultural services, which were partially offset by a small upward contribution from late-booked package holidays, where prices rose by more than a year ago (a Thomas Cook effect?)

Food and non-alcoholic beverages. There was a small downward contribution from this category, mostly from vegetables (including potatoes) and fruit where prices fell this year but rose a year ago. There were small, partially offsetting upward movements across the food division and from non-alcoholic beverages, where prices overall fell by less than a year ago. The annual (CPI) inflation rate in this category is now 1.3%.

Upward 

Clothing and footwear. The largest upward contribution came from this category (0.08%). The biggest contributor was ladies’ clothes and footwear, where prices rose this year compared with falls a year ago. 

Transport. Overall, there was a small upward contribution (of 0.02%) from transport, where upward movements from air, sea and rail fares and new cars were partially offset by a downward movement from fuels and lubricants. 

Alcoholic beverages. There was a small upward movement with upward contributions coming from bottles of whisky, vodka and lager, where prices rose this year but fell a year ago. These movements were partially offset by a small downward movement from sparkling wine, where prices fell this year but rose a year ago.

In six of the twelve broad CPI groups, annual inflation decreased, while three categories posted an increase and the remaining three were unchanged. Alcoholic beverages and tobacco became the category with the highest inflation rate, showing a 3.5% annual rise.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was unchanged at 1.7%. Goods inflation fell 0.5% to 0.5%, while services inflation was up 0.1% to 2.6%. 

Producer Price Inflation was 0.8% on an annual basis, down 0.4% on the output (factory gate) measure. Input price inflation fell to -5.1% year-on-year, a 2.1% drop from August – a slightly bigger fall than the market had expected. The main driver here – as ever - was oil prices. 

These inflation figures were lower than expected, suggesting that the impact of the OFGEM utility price cap may have been underestimated. With earnings increasing at 3.6% a year according to statistics released on Tuesday 12 November, real earnings growth is looking healthy, despite the continuing flow of miserable productivity data. 

At the last Monetary Policy Committee meeting, the Bank of England indicated that it would consider cutting interest rates if the economy remained weak (growth in Q3 is estimated at 0.3% after a 0.2% decline in Q2). These latest figures make it easier for the Bank to consider such action at its next meeting, which happens a week after the Election. 

Source: ONS 13/11/19

 

PENSIONS 

Money and Pensions Service begin pensions guidance nudge trial

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The Money and Pensions Service (MaPS) are working with the Behavioural Insights Team to trial two different approaches to direct savers towards Pensions Wise when they first access their pensions savings or enquire about their options. 

The trials are being conducted by three providers Aviva, Hargreaves Lansdown and Legal & General Investment Management and will cover 4,300 conversations.

The two approaches being trialled are either where the provider offers to book a Pension Wise appointment for the customer or where the customer is transferred to MaPS to make an appointment.

These will be tested against the existing signposting to Pension Wise which is prescribed in the regulations.

The trial aims to help the FCA and DWP deliver their commitment to provide individuals with a stronger nudge towards pensions guidance when they look to access their savings. 

The number of Pension Wise appointments increased from 61,000 in 2015/16 to 167,000 in 2018/19 and the growth in demand is expected to continue.

The MaPS press release is available here

Brexit and State Pensions further updates to DWP Guidance

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The Department for Work and Pensions (DWP) has updated its guidance, on pensions and benefits in the event of a no deal Brexit.

Previous updates, issued in September 2019 confirmed that those in receipt of a UK State Pension will continue to get their UK State Pension in April 2020, April 2021 and April 2022 if they live in an EEA state or Switzerland and they’re a UK national or an EEA or Swiss national.

The new update extends the uprating to April 2023 and beyond for those who live in Ireland, Switzerland, Norway, Iceland and Liechtenstein and are UK nationals or a national of one of these countries. 

Pension Policy Institute on The Future of Defined Benefit Pension schemes

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As most private sector defined benefit pension schemes mature and become cash flow negative, more are considering what the Pension Policy Institute (PPI) refer to as their “endgame” strategy. Schemes must consider how they will meet their obligations without impacting the core business of the employer sponsor.

Traditional approaches have included bulk annuities and investment reform. However, the market is evolving and other options such as merging schemes or transferring liabilities to a third party are receiving growing interest. The PPI estimate that the buy out market is expected to reach £770 billion by 2030. 

The press release and executive summary are available here.

The Pensions Regulator News

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Safer pensions for 16 million savers – 5 November 2019 

The Pension Regulator (TPR) state that 16 million pension pots are now better protected thanks to the new requirement for master trusts pension schemes to be authorised.  

The new safeguards were introduced on 1 October 2018 and all existing schemes had to meet new standards or otherwise close.  The final existing scheme has now been authorised. There are now 37 authorised master trusts, down from the 90 schemes that were available before the new rules were introduced.

To gain authorisation schemes had to prove they were run by fit and proper people, had sufficient financial reserves, and robust plans and systems in place. 

Authorised trusts will continue to be supervised and will have to submit an annual supervisory return. 

Any new master trusts will have to be authorised by TPR before opening for business and will be subject to intensive supervision in the first years of business.

Read more on the TPR website

22 years of pension savings gone in 24 hours – 8 November 2019 

TPR are working with the Financial Conduct Authority (FCA) on a joint ScamSmart campaign to encourage people to protect their lifetime of savings,

The average amount lost to scams in 2018 was £82,000 which the regulators estimate could take 22 years for a saver to build in a pension.

New research showed almost one in four people (24%) surveyed admitted to taking less than 24 hours to decide on a pension offer. 

The research also showed the more highly educated the person the more likely they are to fall for a pension scam.  Those with a university degree are 40% more likely to accept an offer of a free pension review from a company they have not previously dealt with. They were also 21% more likely to take up an offer to access their pension early. 

Read more on the TPR website

Trustee admits defrauding charity pension scheme – 11 November 2019

Patrick Mclarry admitted taking funds from the pension scheme Yateley Industries for the Disabled and using them to buy homes in France and Hampshire for himself and his wife.  He pleased guilty of defrauding the scheme out of more than £250,000. 

Mclarry was both chief executive and chairman of the charity as well as a director of the corporate trustee of the scheme when he committed the fraud.  He took the money between March 2012 and February 2013 and tried to cover his tracks by forging documents, lying to TPR investigators and refusing to hand over vital evidence.  

The Judge Andrew Barnett told McLarry “It is a serious matter and the only outcome is a substantial prison sentence.”

TPR will now seek a confiscation order to force Mclarry to hand back all of the money he took from the pension scheme. 

Read more on the TPR website