Technical news update 24/09/2019

Publication date:

24 September 2019

Last updated:

25 February 2025

Author(s):

Technical Connection

Update from 5 September to 18 September 2019.

Taxation and trusts

Spending round 2020/21
Probate delays and HMRC
Recent parliamentary questions and answers – pre-packaged administrations
IR35 for private sector workers – new HMRC guidance
IPPR proposed reforms to income tax and capital gains tax
IPPR proposed reforms to income tax and capital gains tax – second thoughts
FATCA – issues for British citizens born in the US
FCA: The fight against skimmers and scammers
Review of the Disguised Remuneration Loan Charge
Deeds can be made electronically (in theory at least)
The OTS review of how tax is paid
Liberal Democrats conference: Tax policies

Investment planning

The August Inflation numbers
US Interest rates – another cut, but maybe the last for now

Pensions

PPF publishes updated PPF 7800 index - September 2019
The Pensions Regulator news
NHS pension scheme: pension flexibility consultation document issued
PPF begins to make increased payments to members affected by long service cap
FCA: The fight against skimmers and scammers

TAXATION AND TRUSTS

Spending round 2020/21

(AF1, AF2, JO3, RO3)

Sajid Javid presented his promised Spending Round for 2020/21 on 4 September. It didn’t contain any announcements on legislative change – those will come in the next Budget.

With an Election looming, the Chancellor’s speech was sufficiently political to have the official transcript littered with “[political content redacted]”. Early on, Mr Javid spoke of “turning the page on austerity” and there was certainly a different stance on expenditure, at least (theoretically) for the next financial year.

The main points to note from the Spending Round are:

There will be a real increase in day-to-day (i.e. departmental) spending of £13.8bn. That equates to a 4.1% real terms increase, the fastest rate of growth for 15 years. According to the Institute for Fiscal Studies (IFS), this represents an £11.7bn top up on previous 2020/21 spending plans.

The Home Office, Mr Javid’s previous department, will see a 6.3% increase. £750m of this will go to the first year of the planned recruitment of 20,000 new police officers.

English schools will enjoy a £1.8bn real increase, with £400m going to further education.

A 5% real terms increase is promised for the Ministry of Justice, which might mean there is some leeway on the introduction of the delayed higher English probate fees.

“…councils will have access to new funding of £1.5 billion for social care”, a sticking plaster while the Government’s long-deferred social care Green Paper is awaited.

The Chancellor noted in his speech that Government borrowing was 1.1% of GDP and said that “…even with the extra spending we are still meeting the current fiscal rules”. This was a somewhat creative interpretation as the 1.1% referred to 2018/19 and on current performance 2019/20 borrowing is set to exceed the OBR’s 1.3% projection made in March. There were no new OBR numbers; if there had been, then Mr Javid may not have been able to keep within the fiscal rules without some tax increases.

The Chancellor has effectively spent the fiscal headroom created by his predecessor, leaving himself – or his successor – without a buffer in the event of additional spending arising from a no-deal Brexit.

Sources:

HM Treasury: Spending Round 2019 – dated 4 September 2019;
IFS Press release: Chancellor ends austerity for public services – but risks breaching current fiscal rules - dated 4 September 2019.

Probate delays and HMRC

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

HM Courts and Tribunals Service (HMCTS) issued a blog in late August apologising for the probate delays that have occurred since March. That blog explained that in measuring average delays, HMCTS exclude any time it spent waiting for further information or documentation it had requested (“stops”). The blog quoted the example of having to query names on the Will that did not match precisely with those on the application or the death certificate.

One area the blog did not cover was the involvement of HMRC. The process of obtaining probate where completion of a full IHT return (IHT400) is necessary requires:

The executors/administrators to submit form IHT421 as part of the IHT return paperwork to HMRC; and

HMRC to put its stamp on IHT421 and send it to the appropriate probate office once it has completed its work.

The problem this can create was shown in another case which we saw recently:

Probate documentation was received by the (Winchester) Probate Registry on 19 June.

IHT paperwork was received by HMRC on the same day.

All then went silent until a chase was issued to Winchester on 30 August.

Winchester replied promptly saying that they were awaiting IHT421 from HMRC and suggested the executors should contact HMRC (0300 123 1072) to check what was happening.

After the usual battle with the telephone menu system and a ten minute wait, an HMRC official answered the phone and, having first said the relevant papers had not been received, found the file. In his words it had been “overlooked”.

A discussion revealed that the same Spring surge which had created the backlog at Probate Registries had also hit HMRC, leading to delays. In this case, the official flicked through the paperwork during a pause in the telephone conversation and announced that the case did not need any referral upwards and that he would issue the necessary paperwork to Winchester.

HMCTS has been widely criticised for delays because it is the body which issues grants of probate. However, it may be that not all the blame rests with them. If there are weeks of silence on a case involving an IHT 400, a call to HMRC may be a wise move.

Thousands sign up to the help to save scheme

According to a recent press release published by HMRC over 132,000 people have signed up to the Government-backed savings account Help to Save – depositing more than £31.4 million.

The press release explains the scheme in more detail but, broadly, the account offers working people on low incomes a 50% bonus on what they save –rewarding them with 50p for every £1 they put away. This means that over four years a maximum bonus of £1,200 is available on savings of up to £2,400.

The Economic Secretary to the Treasury, John Glen, said:

“Saving shouldn’t be seen as a luxury but as an essential part of planning for the future.

That’s why I launched the Help to Save scheme last year, and it’s been great to see so many people using it to put money aside for themselves and their loved ones.

Around 3.5 million people could benefit from the scheme, so if you’re eligible but haven’t yet opened an account, you should take a look. Saving comes with a 50% government bonus, and even a small amount could help you to be more prepared for the future.”

To check eligibility, apply and get more information savers can visit the GOV.UK Help to Save page.

Source: HMRC/HMT Press release: Thousands sign up to Help to Save to earn 50p for every £1 saved – dated 30 August 2019.

Recent parliamentary questions and answers – pre-packaged administrations

(AF2, AF3, FA2, JO3, JO5, RO4, RO8)

3 September 2019 – Insolvency: Written question – 281706

Question by Grahame Morris MP

To ask the Secretary of State for Business, Energy and Industrial Strategy, if she will make an assessment of the potential for pre-packaged administrations to be open to abuse as a way of passing on pension liabilities to the Pension Protection Fund.

Response by Kelly Tolhurst MP (Parliamentary Under-Secretary - Department for Business, Energy and Industrial Strategy)

‘A pre-packaged sale in administration, whereby the sale of all or part of the business is arranged prior to the company entering formal insolvency and realised on or immediately after the appointment of the administrator, is a valuable business rescue tool. Pre-pack sales help to avoid a deterioration of the value of the company’s business between appointment of the administrator and sale, meaning there is more money available for creditors, including the pension scheme. In most cases where pre-packs are used, the only alternative would be the collapse of the business and the loss of all employees’ jobs.

The government is aware of concerns about the transparency of pre-pack sales, particularly where a business is sold to a person connected with the old company. It is currently evaluating whether legislative measures are necessary to regulate pre-pack sales to a connected person, following a review of a package of voluntary industry measures implemented in 2015 to improve creditor confidence in pre-packs. As part of the review the government liaised with the Pension Protection Fund, which made clear in its response to concerns raised by the Chair of the Department of Work and Pensions Select Committee, that it does not fundamentally take issue with pre-packs but where there are concerns, these are referred to the Pensions Regulator for investigation’.

Source: Parliamentary business: Insolvency -Written question – 281706 – answered 3 September 2019.

IR35 for private sector workers – new HMRC guidance

(AF1, RO3)

The Government has published new guidance on the April 2020 changes to off-payroll working rules (IR35).

From 6 April 2020, all medium and large-sized private sector clients will be responsible for deciding if the rules apply. This moves the onus for IR35 decisions away from the worker to (medium and large) private sector engagers.

This already applies to public sector authorities. However, from 6 April 2020, there are extra responsibilities that will affect public sector authorities.

If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

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

Source: HMRC Guidance: April 2020 changes to off-payroll working for intermediaries – dated 22 August 2019.

IPPR proposed reforms to income tax and capital gains tax

(AF1, RO3)

The Institute for Public Policy Research (IPPR) describes itself as the “the UK’s leading progressive think tank”. It has in the past had considerable influence on the Labour Party and is often seen as a sounding board for policy ideas. As we start the conference season (the TUC’s began on Sunday), the IPPR has published a new report, “Just tax: Reforming the taxation of income from wealth and work”. Although we say new, part of it draws heavily on proposals published a year ago in the final report of the IPPR’s “Commission on Economic Justice”.

The IPPR report focuses on two areas, capital gains tax and income tax:

Capital gains tax

The IPPR effectively wants to abolish the separate tax regime that exists for capital gains. This would mean:

The current £12,000 annual exemption would disappear. In its place would be “a de minimis allowance, such as £1,000, to prevent an overly burdensome tax declaration process”.

Gains above the de minimis level would be taxed as income, implying rates of 20%, 40% and 45% (but see below for the IPPR’s income tax proposals). The IPPR also suggests that at a later stage, National Insurance contributions (NICs) could also be applied, either directly or through its proposed income tax changes.

The IPPR acknowledges that “There is a risk that taxing capital gains unadjusted for inflation could reduce the real value of gains, discouraging saving”. It therefore examines – without recommending – either indexation relief or a rate of return allowance (RRA), based on 10-year gilt yields. The latter was also proposed in the Mirrlees Review in 2011. Back then 10-year gilts yielded 2.4% against 0.6% today. The IPPR explicitly does not recommend that losses created by indexation/RRA can be offset against other gains.

Capital gains tax would be applied to all fixed interest bonds, removing the current exemption for qualifying corporate bonds and presumably (unmentioned) gilts (although are not specifically mentioned).

The capital gains tax exemption on death would be removed.

Entrepreneurs’ relief would be abolished, along with a number of other “miscellaneous reliefs’, such as the Enterprise Investment Scheme. However, main residence relief would stay.

The IPPR gives the following estimates for additional tax raised, after an attempted adjustment for the inevitable and likely substantial behavioural effects:

Income tax

This section is a reworking of last year’s plan, with wider-ranging proposals:

The IPPR’s starting point is “a fundamental reform of the income tax system, taxing all sources of income (earnings, dividends and savings) together and equally under a single tax schedule, with a gradually rising marginal tax rate as income rises”. Goodbye dividend allowance, personal savings allowance, starting rate band…

The inconsistences between the income tax and NIC rules would be removed by scrapping both regimes and creating a single new regime with one set of allowances and rates which is applied to all The subtext is that investment income, capital gains and (unmentioned) pension income would all become subject indirectly to NICs.

The equivalent of the current personal allowance would be fixed at the primary NIC threshold (£8,632 in 2019/20).

The current schedule of flat marginal tax bands should be replaced with a marginal tax rate that rises gradually for the whole of the income distribution, between lower and upper thresholds, structured in three distinct zones: The first zone would see the marginal rate of tax start at 2% and rise to 32% for annual incomes of £21,000; For incomes between £21,000 and £50,000, the marginal rate rises from 32% (equivalent to the current 20% income tax and 12% NICs for basic rate taxpayers) to 44%; and the third zone would run from 44% at £50,000 to 50% at £100,000. The same 50% marginal rate of tax would then apply to any excess income.

Under this proposed structure, which yields no additional tax revenue, 80% of income tax payers (income up to £44,800) would be better off, according to the IPPR calculation. The unspoken corollary is that 20% would be worse off, with those receiving investment income worst hit.

The IPPR models two different zone structures to raise extra revenue. In the higher version, bringing in an extra £15bn a year, over half of income tax payers would be worse off – a reminder that to obtain a meaningful amount of revenue means more than simply squeezing the top 5%.

At the end of August the Financial Times (FT) ran a series looking at the costs of Labour’s plans, based on the Party’s 2017 manifesto with updated numbers and allowing for promises made since. The FT concluded that Labour would need to find at least £26bn a year in new taxes, over and above the increases proposed in 2017. The IPPR paper might explain why John McDonnell has not so far contested the FT’s calculations…

Source: Report by the IPPR called Just Tax: Reforming the taxation of income from Wealth and Work published in early September

IPPR proposed reforms to income tax and capital gains tax – second thoughts

(AF1, RO3)

As pointed out in the preceding article, the Institute for Public Policy Research (IPPR) proposals for income tax and capital gains tax would create higher tax bills for many, but some of the logic behind them is worth closer examination.

The IPPR report, (see the preceding article) contains two main tax proposals:

Capital gains should be taxed as income, with the annual exemption reduced to a de minimis £1,000 and most reliefs abolished, other than for principal private residences. The IPPR calculated this could raise £65bn between 2021/22 and 2024/25, assuming no indexation allowance or rate of return allowance (RRA) was built in.

All income (including dividend and savings income – and capital gains) should be taxed at the same rates. These rates should combine income tax and NICs and rise gradually from 2% at £8,600 (replacing the personal allowance) to 50% at £100,000. This structure would be revenue-neutral, but would create 80% winners and 20% losers, with the crossover at about £45,000 of income.

Examining the IPPR proposals from the perspective of how we have arrived at the current UK tax system shines an interesting light on the IPPR’s radical ideas:

Taxing capital gains at income tax rates This idea has already been tried over a period of 20 years. When Nigel, now Lord Lawson, cut the top rate of income tax to 40% in the Conservative government’s 1988 Budget, he replaced the traditional 30% CGT rate with income tax rates (then 25% and 40%) , but left indexation allowance in place. Gordon Brown supplemented the indexation allowance with taper relief in the late 1990s, while keeping tax rates matching those of income tax.

In 2008 another Labour Chancellor chose to simplify what had become horrendous CGT calculations by scrapping both the indexation allowance and taper relief in favour of a single CGT rate of 18%. Two years later George Osborne added a 28% rate for higher and additional rate taxpayers, bringing back an indirect link to income tax levels. With various rate tweaks since, that basic structure has remained in being.

Removing the CGT exemption on death The IPPR seems to have overlooked the fact that the Office of Tax Simplification (OTS) examined just this option in the second part of its simplification review, published in July. The OTS said that “The main potential disadvantage is that, assuming there were no changes to existing Capital Gains Tax allowances, many more people would be brought into a charge to tax on death than are currently subject to Inheritance Tax.” Based on 2015/16 data, such a change would increase the number of estates paying tax from 24,500 (IHT) to 55,000 (CGT) and raise £1.3bn, assuming principal private residence relief applied. With the IPPR’s proposed £1,000 de minimis figure, reporting numbers and tax raised would both be higher.

Combining income tax and NICs This is a proposal that has such obvious appeal that it is regularly floated. In 2001, Gordon Brown made a useful start by bringing the threshold for NICs into line with the personal allowance. This simplification only lasted until 2008. From then on, the political spotlight fell on “taking people out of tax” (but not NICs…) and the primary threshold and personal allowance drifted ever more apart. Today there is a gap of £3,868 between the two. By the time income tax bites, an employee will have already paid £464 of NICs.

In his 2010 review of the UK tax system for the Institute for Fiscal Studies (IFS), Sir James Mirrlees said that ‘Maintaining separate systems yields little benefit…integration would underline the illogicality of most of the current differences between the two taxes’. In the following year’s Budget, George Osborne announced a consultation on a long-term merging of the two. Five years later the OTS published a paper on ‘The closer alignment of income tax and national insurance’. The seven recommendations the paper made remain just that.

A merging of income tax and NICs raises many difficult issues. The IPPR solved one by saying the same rates would apply to all income, although it notably mentioned only savings and dividends as examples. The word ‘pension’ does not make it to the IPPR document, but it is one that politicians, as opposed to think tank members, would be extremely sensitive to. In the 2017 Election, 77% of those age 60-69 and 84% of those aged over 70 voted against a national average of 69%.

There is another political aspect which harks back to the personal allowance focus: the Great British Public has a poor understanding of NICs and generally does not see it for what it is, ie a form of earned income tax. This has allowed successive Chancellors to play a smoke and mirrors game: income tax receipts rose by 82% between 2000/01 and 2018/19, while NICs receipts increased by 125%.

Tax rates and bands There can be very few informed people who would argue that the current system of tax bands and tapering or cliff edge allowances represents a rational design. Today’s income tax structure is the result of various Chancellors’ ‘clever’ tweaks, often seemingly designed with obfuscation in mind and then left to fester. The tapering of the personal allowance is a classic example, where the near doubling of the allowance since 2010 has expanded the size of the band in which a 60% marginal rate can apply from £12,950 to £25,000.

The IPPR solution is a system of incrementally increasing tax rates, although the proposed scale is not fully detailed. The IPPR argues that this approach would avoid ‘tax cliffs [which] can induce distortionary behaviour’. While there is some truth in this assertion, the tax cliff is more theoretical than real when considering earned income because of the matching of the upper earnings limit for NICs with the higher rate threshold (currently at £50,000).

The significant cliff edges are due to those Chancellor tweaks, like the tapered personal allowance, high income child benefit charge and annual allowance taper. It is also noteworthy that all of these have no inbuilt indexation element, so potentially capture more taxpayers each year. Removing such distortions could be achieved without the introduction of 49 different rates of tax (2% through to 50%), which is what the IPPR is proposing.

It is not surprising that many of the IPPR’s proposals have already been considered and/or been tried out over the years. Nevertheless, there is a strong case for making the UK tax system more coherent. Given a blank sheet of paper, it is hard to imagine anyone would have designed today’s UK system.

FATCA – issues for British citizens born in the US

(AF1, RO3)

A recent Guardian article highlights issues faced by British citizens born in the US, who risk having UK bank accounts frozen.

The Guardian article states that tens of thousands of British citizens born in the US but who left when only a few months or years old risk having their bank accounts in Britain frozen because of intense pressure by the US tax authorities on UK banks.

According to the paper, an increasing number of Britons – many of whom have never spent a day of their working lives in the US – are being chased by their banks, which are insisting that they hand over their American tax identification numbers or risk having their assets frozen.

British banks are trying to comply with FATCA (the Foreign Account Tax Compliance Act), and potentially face huge fines from US regulators if they continue to serve US citizens but fail to share information with the Internal Revenue Service (IRS), the US taxation authority. FATCA requires foreign financial firms with US operations – including UK banks – to report information about US taxpayers to the IRS via HMRC. Banks and investment platforms need to uncover information about any remaining dual nationals in their customer base before the end of 2019, when a grace period for banks expires.

FATCA was intended to clamp down on international tax avoidance. However this leaves, says the Guardian, thousands of so-called accidental Americans, who were born in the US but left as toddlers, in a near-impossible situation. Those born before 1986 were never allocated a tax identification or social security number or warned that they would be liable for US taxes for the rest of their lives.

The US is the only country in the world, besides Eritrea, that taxes non-resident citizens on their global income.

According to the Guardian, one estimate mentioned in the European Parliament last year suggested that there are between 300,000 and 500,000 accidental Americans in the EU, and although it is not clear how many are in the UK, numbers are thought to be similar to France, where 40,000 citizens are affected.

In February, the European Banking Federation called for the US Treasury to extend the grace period for Banks beyond 2019, and ideally to adopt a permanent one. We will update you if there are any further developments.

Sources:

Guardian: British citizens born in US risk having UK bank accounts frozen – dated 25 August 2019/amended 27 August 2019;
International Investment: FATCA could push French banks to close up to 40,000 accounts – dated 14 August 2019.

FCA: The fight against skimmers and scammers

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

Charles Randell, Chair of the Financial Conduct Authority (FCA), delivered a speech at the Cambridge Economic Crime Symposium setting out how investment fraud can be better addressed.

The speech covered:

the Economic Crime Plan to beat investment fraud;

embedding fraud prevention in the development of new savings and investment policies;

reducing confusion around what is and isn’t regulated and protected by the FSCS to promote responsible saving; and

a call for non-financial firms that enable fraud to step up their contribution to the fight against it.

Mr Randell said that the FCA is investing further in intelligence and data analytics, increasing the number of people tackling investment fraud and continuing to raise public awareness of scams.

He added that the FCA must be ready to use all the tools it has against both skimmers (unscrupulous and exploitative financial firms) and scammers (financial criminals), including criminal prosecutions where appropriate, and to use them quickly and robustly. He describes the moral difference between the two as only one of degree.

According to Mr Randell, the Crime Survey for England and Wales for 2018/19 put the total volume of fraud affecting individuals at 3.8 million cases, around one third of the total volume of 11.2 million crimes. The figures for financial crimes against businesses are on top of that. And Office for National Statistics (ONS) research shows that fewer than one in six incidents of fraud are reported to either the police or Action Fraud. The scale of loss to the private sector from fraud every year is estimated at over £140 billion.

The Economic Crime Plan calls for better sharing and use of information and greater capabilities to disrupt financial crime in both the public authorities and the private sector. However, Mr Randell called on private sector organisations to play a bigger part, saying that the National Audit Office found that there was a focus on the banking sector in tackling online fraud but that other companies, including telecommunications and internet companies, had not yet adequately recognised their responsibilities in this fight.

The Financial Services and Markets Act 2000 gives the FCA power to prosecute a number of criminal offences. These include carrying on unauthorised business and issuing unapproved financial promotions, as well as misleading statements and market manipulation in relation to certain investments. And the FCA can also bring private prosecutions for other offences including fraud. In addition to its criminal prosecution powers, the FCA has a range of civil powers, including power to impose penalties for market abuse or breach of its rules, and power to prohibit individuals from working in positions of influence in the regulated financial sector.

However, many scams involve financial products which the FCA doesn’t regulate under the Financial Services and Markets Act 2000. For example, the issue of retail minibonds.

Accepting that the boundary between what the FCA does regulate and what it doesn’t is highly complex and difficult for the public to understand, Mr Randell said the FCA’s strategy for tackling investment fraud has three main parts:

The FCA focuses on the firms it authorises and, in particular, on their regulated activities. The FCA supervises what they do and it takes enforcement action in cases of serious misconduct.

The FCA alerts consumers to the risks of scams - which in most cases involve people it doesn’t authorise or involve unregulated investments.

The FCA takes action to shut down unauthorised investment businesses when it can, although in many cases the perpetrators are overseas. What can be done to make things better?

Mr Randell suggested three questions need to be discussed about the policy framework:

Should policymakers integrate plans to combat scamming and skimming in all new savings and investment policies?
How can we reduce the risk of confusion about what’s regulated and protected and what isn’t?
How can we make the corporate enablers play their part?

Citing the introduction of the Pension Freedoms in 2015, only a year after they were first announced, Mr Randell said that all policymakers, including the FCA, need to learn lessons for the future from experience, one of which is that a very major change of policy like that needs a substantial period of planning and testing so that all the necessary safeguards against skimming and scamming are integrated before it is launched.

He set out action the FCA is taking against the sale of specific types of high risk investment to retail investors, such as its proposed changes for peer-to-peer lending, its ban on high risk bets on investments, and its ban on bets on cryptocurrencies. However, on activities to disrupt harmful minibond issuance, he said that because the activity is not currently regulated and much of the issuance is conducted by firms the FCA don’t authorise, there is a limit to what it can do in this space.

Mr Randell said that the confusion about the FCA’s own regulatory boundary is multiplied by confusion about other overlapping boundaries: for example, what’s accepted or not accepted into an ISA, an Innovative Finance ISA or a Self-Invested Personal Pension plan and what’s protected and not protected by the Financial Services Compensation Scheme.

He referred to a recent speech by Mark Neale, the former CEO of the FSCS, in which he pointed out that in the last four years, the FSCS has paid out over £580m in compensation related to bad advice to transfer money from occupational pension schemes to invest in risky and illiquid, often unregulated assets. He said we need to consider whether these issues are best addressed by further restrictions on the sale of high cost, risky and illiquid investments, by changing the scope of FSCS coverage, or both.

However, whilst the FCA agrees with the need to stop FCA-authorised firms from advising consumers to buy unsuitable investments, it believes it’s not quite as simple as imposing a straight ban on the sale of unregulated investments by FCA-authorised firms.

The FCA believes it needs to ensure that regulation guides people to better savings choices, through policies such as investment pathways, and perhaps by further reducing the ‘bewildering array of products’ that can be presented to them.

Mr Randell said that the FCA has made it clear that providers of SIPP wrappers need to exercise due diligence on the investments accepted into the plans, but that he believes it’s right to question why the taxpayer should foot part of the bill for these investments through pension tax relief.

On risky and fraudulent investments being accepted into Innovative Finance ISAs, Mr Randell said that people are confused when one part of the State encourages an investment, while another public authority says it’s highly risky, and he commended the review of Innovative Finance ISA policy commissioned in the wake of the failure of London Capital & Finance.

In addition, he suggested that the financial promotions regime is ripe for re-examination, saying that a well-functioning financial promotions regime would label a high-risk unquoted and unregulated investment as exactly that, and say clearly that it’s not the right investment for all of your life savings. And phrases like ‘secured’ or ‘asset-backed’ could be banned as they are often highly misleading since the so-called security or asset-backing can be worthless.

But, he added, unless the issue or approval of financial promotions is made a regulated activity, with only appropriately qualified and governed authorised firms permitted to do this, with clear standards for issue or approval of the promotion, and with adequate reporting to and supervision by the FCA, he’s not confident that the financial promotions regime can provide much better protection than it does at present – which is not enough.

Mr Randell concluded by saying the FCA can and must get better. He also called for internet giants to step up to “the responsibilities which go with their huge power”.

You can find the full text of the speech here.

Source: FCA news: The fight against skimmers and scammers – dated 5 September 2019.

Review of the Disguised Remuneration Loan Charge

(AF1, RO3)

An independent review of the Disguised Remuneration Loan charge has been commissioned by the government.

Broadly, a disguised remuneration loan charge applied to anyone who received a loan through a disguised remuneration tax avoidance scheme (usually based on an employee benefit trust), on or after 6 April 1999, and didn’t repay their outstanding loan by 5 April 2019 or had not agreed a settlement with HMRC. The government is clear that disguised remuneration schemes don’t work and their use is unfair to the 99.8% of taxpayers who did not use these schemes. However, the government recognises that concerns have been raised about the loan charge policy as a mechanism for drawing a line under these schemes.

The review will focus on the impact of the loan charge on individuals who have directly entered into disguised remuneration schemes. While the review is underway, the loan charge will remain in force in line with current legislation. HMRC will provide more information on how it will affect individuals involved in due course.

The review is expected to conclude by mid-November so this should hopefully give affected taxpayers more certainty before the 2020 self-assessment deadline.

Source: https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review

Deeds can be made electronically (in theory at least)

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

In its latest report published on 4 September the Law Commission gives an almost green light to electronic deeds (subject to addressing some important practicalities).

As part of the Programme of Law Reform in England and Wales the Law Commission (LC) has been looking into the use of technology in the law of contract. This included two aspects of the electronic execution of documents:

The use of electronic signatures to execute documents where there is a statutory requirement that a document must be “signed”.

The electronic execution of deeds, including the requirements of witnessing and attestation and delivery.

Despite the various statutory provisions relating to electronic signatures already in place the LC recognised that there is a lot of uncertainty about what is and what is not valid. In August 2018 the LC published its initial findings which confirmed that electronic signatures can be used to sign formal legal contracts under English law.

The LC then went on to propose various steps to improve and simplify the law in this area (as well as bringing it into the 21st century) - this was the subject of the consultation launched on 21 August 2018 which ended in November 2018. In its final 124 page report just published the LC states that, in 'most cases', electronic signatures can be used as a viable alternative to handwritten ones, notably that ‘an electronic signature is capable in law of executing a document (including a deed) provided that the person signing intends to do so and that any further required formalities, such as a witness, are satisfied’.

The subject of “electronic deeds” is of particular interest to those involved with trusts and associated deeds, such as deeds of appointment of trustees or deeds of assignment. It is well settled that a trust of a life policy can be set up without a wet signature, usually by means of a trust request at the time the policy is applied for. However, when it comes to trust-related documents which require to be made by way of a deed, there has been considerable uncertainty. This is because there are statutory requirements that must be met for a deed to be legally valid.

On the subject of deeds, the LC states that their “view is that the requirement under the current law is that a deed which must be signed "in the presence of a witness" requires the physical presence of that witness”. This therefore would eliminate, for the time being at least, witnessing by video-links, something that had been considered during the consultation.

In the end, despite the general green light, the LC makes several recommendations to address some of the practicalities of electronic execution and the rules for executing deeds. These include:

Setting up an industry working group, to consider practical and technical issues around electronic signatures and provide best practice guidance for their use in different types of transaction.

Video witnessing for deeds – the industry working group should look at solutions tothe practical and technical obstacles that exist to video witnessing. Following this work, the government should consider legislative reform to allow for this.

A future review of the law of deeds, to consider broad issues about the effectiveness of deeds and whether the concept remains fit for purpose and
specific issues which have been raised by stakeholders. The review should include deeds executed on paper and electronically.

The LC also says the government may wish to consider codifying the law on electronic signatures in order to improve accessibility to the law.

One important point is that the LC’s report excludes wills as well as registered dispositions under the Land Registration Act 2002, which are the subject of separate reform proposals.

It has to be said that there is a lot of scepticism in the profession, which is not simply an aversion to change but a concern that the rush to digitalise everything possible is potentially fraught with danger. One example often quoted is the increased number of frauds in the Land Registry following the abolition of paper titles.

There has also been much opposition to the proposals to fully digitalise the granting of powers of attorney for fear that this would would increase the risk of malpractice. For example, according to the Law Society ‘the removal of physical signatures removes an essential safeguard against abuse of a highly vulnerable sector of society’.

In conclusion, while the LC has made considerable progress, we are yet to see a definitive answer on how a fully digital deed can be executed in a legally certain way.

Source: Report issued on 4 September by the Law Commission entitled ‘Electronic Execution of Documents’.

The OTS review of how tax is paid

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The OTS has produced two short online surveys to gather information from the self-employed and landlords of residential property about their experience and views on the current system and potential areas of improvement.

The OTS would like to hear from anyone who is self-employed, and submits an annual self-assessment tax return. The survey can be accessed here.

The OTS would like to hear from anyone who receives residential property income, and submits an annual self-assessment return (rather than those who hold property through a company). The survey can be accessed here.

The OTS says that all responses will be anonymous.

These surveys will remain open until 20 September 2019, after which the OTS intends to publish an initial paper in the Autumn. It is possible this could then be followed by a more extensive review.

Source: OTS consultation: OTS tax reporting and payment surveys – dated 27 August 2019.

Liberal Democrats conference: Tax policies

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There may be a new parliament with a Queen’s Speech due on 14 October (Supreme Court notwithstanding), but nobody believes that Mr Johnson’s proposals are anything but a manifesto starting gun for a November/December Election. What the parties say in their Autumn conferences this year therefore matters more than normal – party policy could very soon morph into government policy.

The Liberal Democrats kicked off the talking season in Bournemouth. Their conference had three motions which touched on tax and related issues:

F7: Business Tax Reform: Fair for Business and Fair for Society

The LibDems would stop the mainstream corporation tax rate decrease from 19% to 17% due from 2020, which they regard as “an unjustified tax giveaway”. Instead they would return the rate to 20%. On the other hand, the party rejects the Labour proposal for a 26% corporation tax rate as “a penal increase which would undermine investment…”.

Longer term, the LibDems want to replace corporation tax with “a new British business tax”, which would feature:

A “long-term stable rate of tax on business profits, with a predictable future path of tax policy”. The logic behind this is to slow down tax changes, taking “more time for proper consultation, and more time for implementation”.

“A simpler tax system, making it easier for businesses to comply and for the government to administer, with lower administration costs, reduced opportunities for tax avoidance, and more resources devoted to tackling tax avoidance and tax evasion.” The LibDems believe that there should be a “simpler tax calculation based on accounting profits with a minimal number of adjustments”. How this would be achieved is unclear – no doubt the OTS would be interested to learn.

A reform of the “place of establishment rules” aimed at preventing multinationals shifting profits out of the UK to low-tax jurisdictions. “Public utilities and outsourced providers of public services” would be prevented from attributing profits made in providing public services in the UK to other jurisdictions. This sounds like an attempt to stop the use of offshore vehicles commonly used by private equity owners of many UK utilities.

“A new standardised approach to incentives” to eliminate opportunities to artificially manipulate the tax system. This would “ensure established profitable businesses cannot reduce their taxes to zero”. At the opposite end of the scale, support would be expanded for early-stage businesses.

“A business tax system that encourages… investment.” This would feature simplified capital allowances, an increase in the Annual Investment Allowance and higher writing down allowances “to encourage more investment by the largest businesses”.

Greater transparency on both sides. There would be clarity over the cost of tax incentives provided to business, while large businesses would be required to disclose the tax they pay in each of the jurisdictions in which they operate. The latter is an OECD recommendation which has met unsurprising resistance from multinationals.

F10: A Fairer Share for All

This motion, based on Policy Paper 136, focuses on social policy and calls for increased expenditure in several areas:

An extra £5bn per year to “make the benefits system work for people who need it” and reduce the waiting time for the first benefits payment from five weeks to five days.

“A £50 billion capital Rebalancing Fund, allocated to and administered by devolved authorities, to address the historic investment disparities between… nations and regions.” This would “be spent over five years outside London and the South East”.

A range of benefit reforms, including the end of the benefits cap, increasing the child element in the benefits system, separating employment support from benefits administration and scrapping the 18-24 elements in the benefits system.

Setting “a 20 per cent higher minimum wage for people on zero-hour contracts at times of normal demand to compensate them for the uncertainty of fluctuating hours of work”, echoing a proposal in the Taylor Review.

Although not mentioned in the LibDem coverage of this motion, Policy Paper 136 covers “A Fairer approach to taxation” in section 5. The proposals here include:

All income and capital gains should be taxed identically, “regardless of origin… [to] remove the incentive for the wealthy to shift employment income into other forms…in order to pay less tax”. This directly echoes the proposals recently put forward in the IPPR’s paper (see the earlier articles in this issue).

Again echoing the IPPR, the paper proposes NICs on capital gains and scrapping the annual exemption. There would be a ‘rate of return’ or indexation allowance, something which the IPPR floated, but did not explicitly endorse.

Capital gains tax would apply on death, removing the current exemption.

The dividend allowance would also disappear but, somewhat in contradiction of its universal tax rate proposal, lower dividend tax rates would be maintained “to reflect corporation tax already paid”.

The personal allowance, which would cover all income and gains, would stay at the current level of £12,500.

Inheritance tax would be replaced “with a system that would ensure that the vast majority of people pay less tax on transfers of wealth, but under which the very wealthiest in society pay a bit more.” The new system would “encourage bequests to be spread more widely to benefit more people – particularly those who have not already inherited”. It would also “prevent people avoiding inheritance tax through pre-emptively gifting wealth or property to relatives”. Once more this sounds like an earlier IPPR set of proposals for a lifetime gifts tax (see the earlier articles in this issue).

F15: Stop Brexit to Save the NHS and Social Care

This motion, based on Policy Paper 137, resurrects a 2017 LibDem manifesto proposal to add 1p to all rates of income tax to fund £6bn of extra NHS spending.

The tax elements of the LibDem’s conference motions – which have received very little attention – are close to those put forward by the IPPR. Although the IPPR proposals are not (yet) Labour Party policy, the symmetry does suggest that if the election produces a anyone-but-Boris coalition government, the tax landscape could change significantly.

Source:

Liberal Democrats website – Conference Motions – Autumn 2019 - F15: Stop Brexit to Save the NHS and Social Care
Conference Motions – Autumn 2019 - F10: A Fairer Share for All
Conference Motions – Autumn 2019 - F15: Stop Brexit to Save the NHS and Social Care

INVESTMENT PLANNING

The August Inflation numbers

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The CPI for August showed an annual rate of 1.7%, down 0.4% from July, twice the size of the drop the market had expected, according to Reuters. The CPI is now at its lowest level since December 2016. Across July to August prices were up 0.4%, whereas a year ago they rose by 0.7% – rounding accounts for the extra 0.1% decrease.

The CPI/RPI gap widened by 0.2% to 0.8%, with the RPI annual rate dropping 0.2% to 2.6%. Over the month, the RPI was up 0.8%.

The ONS’s favoured CPIH index was down 0.3% for the month at 1.7%. The ONS notes the following significant factors across the month:

Downward

Recreation and culture The largest downward contribution (of 0.15%) to the CPIH drop came from this volatile category, where prices fell 0.6% between July and August. This decline more than reverses the upward contribution to CPIH of 0.08% seen between June and July this year. Within the group, the greatest effect (0.09% to CPIH) came from games, toys and hobbies (particularly computer games including downloads), where prices overall fell by 5.0% between July and August 2019 compared with a smaller fall of 0.1% between the same two months a year ago. Once again, the OS pointed to the composition of bestseller games charts as the culprit.

Clothing and footwear, In this category prices rose by 1.8% this year compared with a larger rise of 3.1% a year ago. The main effect came from clothing, particularly children’s clothing. Prices of clothing and footwear usually rise between July and August as Autumn ranges emerge after the Summer sales season. The rise was smaller this year, which the ONS thinks may have been influenced by the proportion of items on sale, which fell by less between July and August this year than between the same two months a year ago. Hard times on the High Street, in other words.

Upward

Food and non-alcoholic beverages This category produced the largest, upward contribution (0.03%), with prices rising by more between July and August 2019 than between the same two months of 2018. The effects were relatively small from all categories within this heading, with the largest upward ones coming from bread and cereals, and meat (principally cooked ham). CPI inflation in this category is now running at 1.8%.

In eight of the twelve broad CPI groups, annual inflation decreased, while two categories posted an increase. Communication was again the category with the highest annual inflation rate, showing a 3.6% annual rise.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was down 0.4% at 1.5%. Goods inflation fell 0.4% at 1.3%, while services inflation was down 0.3% at 2.2%.

Producer Price Inflation was 1.6% on an annual basis, down 0.3% on the output (factory gate) measure. Input price inflation fell to -0.8% year-on-year, a reversal from+0.9% in July. The main driver here – as ever - was oil prices (before Saudi Arabia’s weekend problem...)

These inflation figures are lower than expected, due mainly to games prices and extended clothing sales. With earnings growth reported last week to be running at 4.0% (3.8% excluding bonuses), the Bank of England will be grateful to see inflation heading down faster than anticipated. In any event, the imminent Base Rate decision is set to stay on hold while the end game of Brexit rumbles on.

Source: ONS 18/09/19

US Interest rates – another cut, but maybe the last for now

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We noted in our earlier Bulletin that the US Federal Reserve’s July 0.25% cut in the Fed Funds rate was the first for over a decade. Now, another 0.25% cut has been announced, taking the rate down to 1.75%-2.00%. Two consecutive meetings, two cuts – is this setting a trend or pandering to the bellicose demands of Donald Trump?

The latter was certainly unimpressed, as he tweeted after the announcement, “Jay Powell [the Fed’s Chairman] and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”. But then Mr Trump is focused on next year’s presidential election rather than the subtleties of central bank monetary policy.

As for those central bankers, the cut in rates was not a unanimous decision. Seven of the ten voting members of the Federal Open Market Committee (FOMC) were in favour, but two wanted no cut, while one sought a 0.5% drop. That divergence of view was also apparent in the famous ‘dot plot’ (see below) which shows each FOMC member’s view of future interest rates. 10 out of the 17 members expect rates to end 2019 at or (for 5) above the newly minted 1.75%-2.00% range. Look to the end of 2020 and the consensus is near enough that there will be no change.

Mr Trump will not be amused by such forecasts, but might (off line) take comfort in the Fed’s statement that “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective”. In other words, as we said in July, where the Fed goes from here is ‘data-dependent’. It is arguable that The Donald can control that data to some degree by how he pursues his various trade wars.

The Fed’s latest cut has been described as a “hawkish cut”, which is a fair description given that it looks to have drawn a line under any further rate reductions this year. There is also a case for saying that what the Fed does on rates now is becoming less relevant. At the market close on the day of the Fed’s announcement, US government bond rates between 6 months and 10 years were all either within the 1.75%-2.00% set for the Fed Funds rate or, for 3-7 years, marginally below it.

Source: The Wall Street Journal 17 September 2019

PENSIONS

PPF publishes updated PPF 7800 index - September 2019

(AF3, FA2, JO5, RO4, RO8)

Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe.

September 2019 Update Highlights

The aggregate deficit of the 5,450 schemes in the PPF 7800 Index is estimated to have increased over the month to £162.9 billion at the end of August 2019, from a deficit of £90.7 billion at the end of July 2019.
The funding level decreased from 95.0 per cent at the end of July 2019 to 91.5 per cent.
Total assets were £1,755.6 billion and total liabilities were £1,918.5 billion.
There were 3,652 schemes in deficit and 1,798 schemes in surplus.
The deficit of the schemes in deficit at the end of August 2019 was £273.5 billion, up from £218.8 billion at the end of July 2019.

The PPF 7800 index is published on the second Tuesday of every month, and the PPF publishes The Purple Book each year.

The Pensions Regulator news

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TPR launches prosecution against director – 9 September

A company director is being prosecuted for failing to provide information about investments made by Southbank Capital Limited. The investments relate to money and or assets originating from 16 pension schemes. Michael Woolley has been summonsed to appear at Brighton Magistrates Court on 13 November to face a charge of neglecting or refusing to provide information without a reasonable excuse.

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