Technical news update 27/08/2019

Taxation and trusts 

• The Chancellor has announced a “fast-tracked” one-year spending round
• Probate delays
• Quarterly Stamp Duty Land Tax statistics
• Cryptoassets – new FCA guidance
• Emergency Budget: another timing point
• Statistics on non-domiciled taxpayers in the UK
• Banking, insurance and other financial services in the event of a no-deal Brexit – updated guidance
• The 2% allowance for non-residential structures and buildings – new guidance
• The Investing in Women Code – new treasury policy paper
• IR35 for private sector workers – a reminder of the forthcoming new legislation

Investment planning 

• July inflation numbers
• The yield curve 

Pensions 

• FCA issue consultation on contingent charging for defined benefit transfers
• FCA and TPR warn again about pension scams
• No Deal Brexit - DWP Guidance updated
• The Pensions Regulator news: Recruitment agency to be prosecuted for trying to avoid giving its staff workplace pensions – 6 August
• PPF publishes updated PPF 7800 index - August 2019

 

TAXATION AND TRUSTS 

The Chancellor has announced a “fast-tracked” one-year spending round

(AF1, JO2, RO3)

On Thursday 8 August, the Treasury announced that there would be a “a fast-tracked one-year Spending Round to ensure departments can focus on delivering Brexit by October 31”. The Treasury’s statement goes on to say, “A one-year Spending Round completed in September will give Government the time and space to focus on delivering Brexit”, a suggestion of timescales which some may find hard to swallow. 

The one-year spending round raises several issues: 

• Normally spending reviews cover a period of three financial years, i.e. the next review should have covered 2020/21-2022/23. The statement says that “the next multi-year Spending Review will now be carried out in 2020”, although it carefully does not say whether the ‘multi’ refers to the following two or three years. 

• The question of revising Government borrowing rules – a pre-requisite for the Prime Minister’s ‘boosterism’ polices - appears to have been kicked down the road. The statement says that the Spending Round “will ensure the Government continues to keep borrowing under control and debt falling by meeting the existing fiscal rules [our italics]”. Those rules require: 

• total Government debt to fall each year as a proportion of GDP; and 

• yearly borrowing to be no more than 2% of GDP, after adjusting for the state of the economic cycle (i.e. ‘structural borrowing’). 

In theory that gives the Chancellor about £15bn headroom, although this could be stretched to £27bn if the change to accounting for student debt is ignored. There is no clue whether this will happen. Either way, for now there looks to be more than enough to fund the first year of the Prime Minister’s promise of higher police, NHS and school spending. However, a disruptive Brexit (happening after the spending round has ended) could wreck any plans based on a smooth exit (which remains the official forecasting stance). As the Institute for Fiscal Studies (IFS) notes, it would have made more sense to wait for the nature of the Brexit settlement to be known before setting departmental budgets. 

• A spending round rushed through in September would fit in with the early October Budget that was rumoured recently. 

On the subject of the Autumn Budget, there is another question looming for the constitutional lawyers: can the Government present a Budget after it has been forced (or decided) to set an election date? In theory, election purdah prevents any new government initiatives in the six weeks before polling takes place. Budgets have come near to elections twice recently – in 2015 and 2017 – but they both occurred before the election announcement. They then became subject to the non-contentious ‘wash-up’ procedure, with a subsequent post-election Budget dealing with what was omitted to get the original Finance Bill through in time. 

The Prime Minister’s senior aide, Dominic Cummings, has already suggested that Boris Johnson could ignore protocol and delay until after 31 October any election prompted by losing a confidence vote. Ignoring election purdah rules would fit in with such a stance. However, once a vote of confidence has been lost – which could happen in the first week of September – the Government (theoretical majority of one) may find it impossible to pass any Finance Bill. 

If you have the feeling that we are heading into unknown Budget territory, you are not alone.  

Sources:

• HM Treasury: Chancellor fast-tracks Spending Round to free up departments to prepare for Brexit – dated 8 August 2019.
• IFS: The September 2019 Spending Review: austerity ended, or perhaps just paused? – dated 9 August 2019.

Probate delays

(AF1, RO3) 

The time was that Government guidance on probate said that it would usually be granted within four weeks of submitting the necessary documentation. Now, if you visit the relevant webpage on gov.uk, the period mentioned is eight weeks. 

In May, the slowdown in the process prompted the Law Society to complain to HM Courts and Tribunals Service (HMCTS) about the “ongoing delays to the probate service”. HMCTS offered up an assortment of excuses in response, from “technical issues across...probate infrastructure” to a “new case data management system”. HMCTS also acknowledged that their political masters had added to workload pressures by announcing a future increase in probate fees. Following HMRC agreement that probate registries could accept applications without accompanying inheritance tax (IHT) forms the inevitable result was an increase in applications and queries. 

A chase-up meeting was held in June at which HMCTS requested that they only be contacted when delays exceeded eight weeks. The meeting also produced confirmation that “HMRC would not be able to apply a ‘credit’ or write off any interest that is due in relation to IHT payments”. IHT is due by the end of the sixth month after the month in which the person died (eg 31 July for a death in January).

 At the start of August the Law Society announced another meeting with HMCTS in September to review matters. Simultaneously, the Law Society asked for examples of delays of over six weeks. By coincidence we know of one case involving an estate worth approximately £420,000, with no IHT liability thanks to the residence nil rate band, that took over ten weeks to receive the grant of probate.  

The increase in probate fees has hit a Brexit black hole for the time being – HMCTS says “there are no changes to the probate fees or confirmation as to when or if they are likely to come in”. As happened last time, politics may kick this into the post-election long grass.

Quarterly Stamp Duty Land Tax statistics

(AF1, ER1, LP2, RO3, RO7) 

The HMRC Quarterly Stamp Duty Statistics bulletin provides statistics on residential and non-residential stamp duty land tax (SDLT) transactions valued at £40,000 or above. The data is split by property type, liability threshold and price band, including transactions paying higher rates of SDLT for additional dwellings and those claiming the first-time buyers’ relief. 

The key highlights are as follows: 

• Transactions increased by 6% from 253,900 in Q1 2019 to 267,900 in Q2 2019. Similar patterns have occurred over the same period of time for several years. 

• Q2 2019 receipts were £2,623m, 1% lower than in Q1 2019. This is due to a 19% fall in non-residential receipts and an 8% increase in residential receipts. 

• 52,600 transactions claimed first-time buyers’ relief in Q2 2019, making a total of 340,900 claims since the introduction of the relief. The estimated total amount relieved over that period is £804m. 

Currently, first-time buyers purchasing houses costing £300,000 or less do not pay stamp duty costs; and they pay reduced stamp duty on houses costing £500,000 or less. Interestingly, the number of those claiming first-time buyers’ relief has increased each year since it was introduced in November 2017. The figures also show that transactions which were subject to the higher rates of stamp duty increased by 3% to 52,700 this quarter. This period last year had a 1% fall. Compared to Q2 2018, it has fallen by 3% (1,800). 

Since Q1 2018, higher rate transactions have made up about 33% of all liable transactions which illustrates that for many the higher rates are not a deterrent for investing in property.

The figures also show that residential transactions have continued to increase whereas non-residential transactions have decreased. 

In summary: 

• Residential transactions increased by 7% to 240,300 this quarter. In the previous year there was also an increase of 5%. Residential transactions were 3% lower than in Q2 2018. 

• Liable residential transactions rose by 7% to 156,400 this quarter. Over the same period last year the rise was 4%. 

• Non-liable residential transactions rose by 6% to 83,900 this quarter. Over the same period last year the rise was 5%. 

• Non-residential transactions fell by 3% to 27,600 this quarter. Over the same period last year the fall was 2%. Non-residential transactions were 5% lower than Q2 2018. 

The split between the liable and non-liable transactions is dependent on the level of the SDLT threshold. 

The current SDLT threshold is £125,000 for residential properties and £150,000 for non-residential properties. 

Transactions are classed as not liable for SDLT because they are below the SDLT liability threshold, or because they have claimed relief.  

Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/821607/Quarterly_SDLT_2019Q2_Main.pdf

Cryptoassets – new FCA guidance

(AF1, RO3) 

The FCA has finalised its guidance on the types of cryptoassets that fall within its regulatory remit and the resulting obligations on firms and regulatory protections for consumers. The guidance also provides information on those cryptoassets that are outside the FCA’s perimeter, and what this means for firms and consumers.

The Financial Conduct Authority (FCA) has responded to feedback it received to its consultation around its Crypto Asset guidance document CP 19/3, explaining the changes it has made and setting out its final guidance.

As most respondents to the consultation supported its proposals, the FCA has said that the changes it has made are merely drafting amendments in a few areas to improve clarity and ensure that the policy intention is achieved.

The guidance sets out where tokens are likely to be:

• specified investments under the Regulated Activities Order;
• e-money under the E-Money Regulations;
• captured under the Payment Services Regulations; or
• outside of regulation.

The guidance applies to:

• firms issuing or creating cryptoassets;
• firms marketing cryptoasset products and services;
• firms buying or selling cryptoassets;
• firms holding or storing cryptoassets;
• financial advisers;
• professional advisers;
• investment managers;
• recognised investment exchanges; and
• consumers and consumer organisations.

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.

The Cryptoasset Taskforce (CATF) report identified three types of cryptoassets: exchange tokens (cryptocurrencies such as Bitcoin); utility tokens (a kind of digital voucher which can be redeemed for access to a specific product or service); and security tokens (which amount to a ‘specified investment’ as set out in the Financial Services and Markets Act 2000) These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or financial instruments under the EU’s Markets in Financial Instruments Directive II (MiFID II).

Following a commitment made in the CATF report, the FCA is consulting on banning the sale, marketing and distribution to all retail consumers of all derivatives (i.e. contracts for difference - CFDs, options and futures) and exchange traded notes (ETNs) that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The FCA has said that its final guidance will help to inform that consultation, as well as the Treasury’s consultation on whether further regulation is required in the cryptoasset market, and Treasury and FCA work on transposing the Fifth Anti-Money Laundering Directive (5AMLD).

Source: FCA News: PS19/22: Guidance on Cryptoassets – dated 31 July 2019.

Emergency Budget: another timing point

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

A paper from the Institute for Government has added further weight to the idea that there will be no Budget in September. 

The media has been paying much interest of late to the arcane practices of parliamentary procedure. The focus has been on what the Government can do – or choose not to do – by 31 October. 

The Institute for Government (IfG) has just published a paper, “Voting on Brexit”, that takes a detailed look at this area. The IfG’s conclusions are: 

• It is very unlikely the UK will be able to leave the EU with a deal on 31 October; 

• MPs can express opposition to no deal but that alone will not prevent it; 

• Backbenchers have very few opportunities to legislate to stop no deal; 

• A vote of no confidence would not necessarily stop no deal; 

• There is little time to hold a General Election before 31 October; and 

• A second referendum can only happen with Government support. 

One survival-to-Halloween tactic, which the IfG highlights, is for the Government to minimize the opportunities for MPs to disrupt key legislation or add Brexit-related amendments to Bills. This brings us on to a piece of statutory (not convention-driven) parliamentary timetabling which has relevance for the Autumn Budget. The IfG points out that if a “…budget were in September, the Finance Bill would need to pass its second reading before 31 October”. The reason for this is that a second reading of the Finance Bill must be passed within 30 days of the Budget statement. 

A Budget in the week beginning October 7, a rumour reported in the Sunday Times, would suit the government, as the 30 day deadline for the Finance Bill’s second reading would arrive after the default Brexit date of 31 October. 

The IfG paper is an interesting read – it will probably be the ultimate source of much of the press coverage on the topic.

Statistics on non-domiciled taxpayers in the UK

(AF1, RO3) 

HMRC has recently released statistics on those claiming non-domiciled status via their self- assessment (SA) returns. The release covers figures for tax year 2007/08 through to 2017/18. 

The figures show that in 2017/18 there were an estimated 78,300 individuals claiming non-domiciled taxpayer status in the UK on their SA tax returns, down from around 90,500 in the previous year – so a fall of around 13%, see Figure 1. 

It is estimated that non-domiciled taxpayers paid £7,539m in UK income tax, capital gains tax and National Insurance contributions in 2017/18. Given that the number claiming non-domiciled status decreased, it’s of no surprise that there was also a decline in taxes from the previous year’s estimate of £9,489m. 

According to the release, the decrease in the number of non-domiciliaries between 2016/17 and 2017/18 is explained by two reasons: 

1. Individuals switching to domiciled status and continuing to pay tax in the UK. 

2. Those individuals leaving the UK tax system.

Source: HMRC Statistical commentary on non-domiciled taxpayers - 8 August 2019.

In 2016/17, 53,300 non-domiciled taxpayers paid £7,713m in income tax, capital gains tax and National Insurance contributions on the remittance basis. This is the highest amount paid by this group since the series began in 2008/09. Of this group, 4,700 paid remittance basis charges in 2016/17, with payments totalling £315m.

Overall, whilst there has been a drop in the number of non-domiciled taxpayers and the amount of tax and National Insurance contributions in these statistics, this has not resulted in a fall in revenue to the Exchequer.

You will see from the figures that there was also a large drop in those claiming non-domiciled status between 2015/16 and 2016/17 – yet the amount of income tax, capital gains tax and National Insurance contributions paid by this group increased between these two tax years.

The statistics also show that the number of taxpayers who paid remittance basis charges increased from 4,300 in 2015/16 to 4,700 in 2016/17. Aside from this, the number of non-domiciled taxpayers liable to pay the remittance basis charge has been fairly stable over time. However, non-domiciled UK resident taxpayers claiming the remittance basis of taxation on their SA tax return have paid more in every tax year than those claiming the arising basis of taxation on their self assessment tax return.

Within the release, the reasons given for the decrease in the number of non-domiciliaries includes:

• Individuals switching to domiciled status – of course, for some, this would happen automatically if they become deemed domicile in the UK by having been here for 15 out of the previous 20 tax years, and for others this could be down to the costs and complex rules associated with being non-domiciled – not only the remittance basis charge itself but also the special rules that apply in terms of how income and/or gains are matched to what the individual remits to the UK; 

and

• Individuals leaving the UK tax system – which could be down to Brexit!

Source: HMRC Official Statistics: Non-domiciled taxpayers in the UK – dated 8 August 2019

Banking, insurance and other financial services in the event of a no-deal Brexit – updated guidance

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

Financial services institutions

The updated guidance in relation to financial services institutions reiterates that in the event that the UK leaves the EU without a deal, the UK will no longer be part of the EU’s single market for financial services or the EU’s joint supervisory framework for financial services firms and markets.

Firms based in the UK will lose access to the EU ‘Passport’. The EU ‘Passport’ gives firms authorised in their home state the right to conduct business in the EEA based on their home state authorisations. The ability for firms to trade cross-border may therefore change as a result and the UK authorities on their own will be unable to address all the consequences of the loss of the EU ‘Passport’. 

The updated guidance urges firms to check if they are using the ‘Passport’ by checking the Financial Conduct Authority’s financial services register.

The Government and the financial services regulators have put in place legislation, via the EU (Withdrawal) Act, to ensure that, in the event that the UK leaves the EU without a deal, there is a functioning legal and regulatory regime for financial services. As far as possible, the same rules that apply pre Exit will apply immediately post Exit.

However, it has been necessary to make some changes to reflect the UK’s new status as a non-EU country, for example by transferring functions currently carried out by EU bodies to the appropriate UK body, or amending otherwise deficient reference to EU institutions in UK legislation.

As part of this work, the Government has legislated to create a range of temporary permissions and transitional arrangements for European firms and funds. One such arrangement is the Temporary Permissions Regime, which will allow EEA firms operating in the UK via a passport to continue to conduct business in the UK for a limited period after Brexit while they go through the process to obtain full authorisation. 

A Financial Services Contracts Regime has also been put in place to allow EEA firms that do not join the Temporary Permissions Regime in the UK, or are unsuccessful in applying for UK authorisation, to provide a mechanism by which existing contractual obligations can be wound down in an orderly manner.

The Government has also delegated a general temporary transitional power to the UK regulators which will enable them to phase in changed regulatory requirements for firms post Exit, where requirements are changing as a result of the UK leaving the EU. The Bank of England, Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have already committed to broad use of this power. Firms and regulated entities will be made aware of the areas in which they will have to comply with changed obligations in time for Exit day in a no-deal scenario, and where use of the transitional power will allow firms more time to reach compliance. Further information is available on the regulators’ websites.

Further information about HM Treasury’s legislative approach to preparing for a no-deal exit is available here. 

The updated guidance also covers: 

• Preparing a firm for Brexit - including implementing alternative transfer mechanisms to send personal data from the EU to the UK. More information for financial services firms preparing for Brexit can be found on the FCA website.

• Assessing the impact on a firm - the FCA have put together a list of questions that may help firms in considering the areas in which they could be affected.

• Continuing to provide services to customers in the EEA - where the guidance states that the UK authorities are not able to address risks to customers based in the EEA of UK firms currently providing services into these countries using the EU ‘Passport’. Financial services institutions based in the UK that want to continue to provide services to customers in the EEA should, if they haven’t done so already, take legal advice and discuss their position with the regulator in the country in which they wish to continue operating. Some EU countries have also announced that they are also taking steps to ensure that UK financial services firms will be able to serve their existing customers after the UK leaves the EU.

• Continuing to provide services to UK customers - financial services firms based in the EEA, who want to continue to provide services to customers in the UK, will also need to take action in order to continue to provide services to consumers and should take legal advice and discuss their position with the UK regulators.

Financial services products

The Treasury has also updated its guidance for people, businesses or other organisations in the UK that have a financial services product, for example: 

• a bank account, debit or credit card; 

• insurance; or 

• a product that provides an income in retirement, such as a personal pension or annuity.

This guidance states that the Government and the regulators have taken steps to ensure that wherever feasible the same rules will apply to financial services in the UK after the UK has left the EU, with some small changes to reflect the UK’s new position outside the EU. The Government and regulators have also taken steps to enable financial services providers based in the EU, Norway, Liechtenstein and Iceland to continue providing services in the UK for a minimum of three years after Brexit, with some small changes to reflect the UK’s new position outside the EU.

Similarly, the Treasury has also updated its guidance for people or businesses in the EEA that have a financial services product, for example: 

• a bank account, debit or credit card or loan, such as a mortgage; 

• insurance; or 

• a product that provides an income in retirement, such as a personal pension or annuity.

Both sets of guidance in relation to financial services products state that it is expected that the majority of people will see limited, or no, difference after the UK leaves the EU, and will be able to use and rely on their bank accounts, insurance, personal pensions or annuities, and other services whether they are provided by a firm based in the UK, Europe or elsewhere in the world.

For UK citizens living in the EU, Norway, Liechtenstein or Iceland, many UK financial services firms are taking steps to ensure they will continue to be able to serve their customers after the UK leaves the EU. Some EU countries have also announced that they are taking steps to ensure that UK financial services firms will be able to serve their existing customers after the UK leaves the EU.

However, both sets of guidance also set out the categories under which some people, businesses or organisations may be affected by the UK leaving the EU without a deal on 31 October 2019.

Source: HM Treasury Guidance: Banking, insurance and other financial services if there’s no Brexit deal – dated 14 August 2019. 

The 2% allowance for non-residential structures and buildings – new guidance

(AF2, JO3) 

A new capital allowance for new non-residential structures and buildings (SBA) has been available on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2%, on a straight-line basis (ie. over a 50-year period.) 

The legislation for this new capital allowance was laid before Parliament and came into force on 5 July (ie. more than eight months after the start date for the new relief.)  

The Government reasoning behind this was to accommodate stakeholder views as far as possible before finalising the legislation, but without delaying the effective start date. 

HMRC has now published its promised guidance on this new relief. 

In brief, it states that all construction contracts must have been signed on or after 29 October 2018 and the structure must: 

• have not been used as a residence the first time it was used or during the period being claimed for; 

• be used for a qualifying activity which is taxable in the UK (see below); and 

• have an allowance statement (see below). 

Qualifying activities: 

• any trades, professions and vocations; 

• a UK or overseas property business (except for residential and furnished holiday lettings); 

• managing the investments of a company; and 

• mining, quarrying, fishing and other land-based trades such as running railways and toll roads. 

Allowance statement 

The first person to use the structure must create a written allowance statement before they can make a claim. The allowance statement must include: 

• information to identify the structure, such as address and description; 

• the date of the earliest written contract for construction; 

• the total qualifying costs; and 

• the date that they started using the structure for a non-residential activity. 

If a person buys a used structure, they can only claim the allowance if they obtain a copy of the allowance statement from a previous owner. 

For any extensions or renovations that were completed after they started using the structure, they can record separate construction costs on the allowance statement or create a new allowance statement. 

Information must be kept about the earliest construction contracts in records, such as formal contracts, emails or board meeting notes. 

Sources:

• HMRC Consultation outcome: Capital allowance regulations for new non-residential structures and buildings comes into force – dated 16 July 2019; 

• HMRC Guidance: Claiming capital allowances for structures and buildings – dated 15 August 2019.

The Investing in Women Code – new treasury policy paper

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

The Investing in Women Code is intended to be a commitment by financial services firms to improving female entrepreneurs’ access to tools, resources and finance.

The Investing in Women Code is intended to commit organisations (of any type and size) to promote female entrepreneurship by:

• having a nominated member of the senior leadership team who will be responsible for supporting equality in access to finance;
• increasing the transparency of financial services firms’ data concerning support for female entrepreneurs; and
• adopting internal practices to improve the outlook for female entrepreneurs.

Trade bodies will be working closely with their members in the coming weeks and months to establish a collectively agreed set of metrics that are comparable across organisations and useful for understanding the landscape of female entrepreneurship financing, and bringing together their members to establish and promote good practices to enable female entrepreneurs to successfully access the tools, resources, investment and finance they need to build and grow their businesses.

For more information, please see here.

HM Treasury will publish the first annual report in Autumn 2020.

The Investing in Women Code is intended to be complementary to the Women in Finance Charter, which promotes gender equality for employees within firms in the financial services sector.

Source: HM Treasury Policy paper update: Investing in Women Code – dated 12 August 2019.

IR35 for private sector workers – a reminder of the forthcoming new legislation

(AF1, AF2, JO3, RO3) 

The Government will be reforming the operation of the off-payroll working (IR35) for private sector rules from April 2020. This reform could have a wide-reaching effect for clients, whether they are working as a self-employed contractor, or running a business and using self-employed contractors. The changes, which were introduced into the public sector in 2017, will be extended to all sectors, making medium and large organisations responsible for deciding if workers are caught by IR35 or not. 

The consultation on this reform ran from 5 March to 28 May 2019. Draft legislation, an explanatory note and a summary consultation response document were published on 11 July 2019 and HMRC would like any comments on the draft legislation by 5 September 2019. 

HMRC’s latest Employer Bulletin states that businesses can prepare for the reform by: 

• Identifying and reviewing their current engagements with intermediaries, including personal service companies and agencies that supply labour to them;
• Reviewing their current arrangements for using contingent labour, particularly within the organisation’s functions that are more likely to engage off-payroll workers;
• Putting in place comprehensive, joined-up processes, for example assessing roles from a procurement, human resources (HR), tax and line management perspective, to ensure consistent decisions about the employment status of the people they engage; and
• Reviewing internal systems, such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes. 

HMRC has committed to providing organisations with education, guidance and support to make sure they have the tools to make the right determination. Online guidance will be available from late Summer 2019. A series of education events is also planned, including webinars, workshops and one-to-one engagement with the largest employers. 

HMRC adds that it is currently working with stakeholders to enhance the Check Employment Status for Tax (CEST) tool, including improvements to clarity and accessibility and additional guidance to make it easier for customers to use. There will also be more questions to cover a wider range of working practices. And HMRC says that it will continue to stand by the results of the existing service where it has been used in accordance with its guidance. 

Interestingly, back in 2009, the current Chancellor, Sajid Javid stated in an article published on the Conservative Home website “We should … repeal the silly IR35 tax on providers of personal services.” And ContractorUK (plus a number of organisations representing/supporting freelancers and contractors) have reminded Mr Javid of this comment in a recent letter sent to both Boris Johnson and Sajid Javid, requesting a halt to the roll out of the IR35 reforms.

Sources:

• HMRC Guidance: Employer Bulletin - August 2019 – dated 14 August 2019;
• Conservative Home article: Sajid Javid: We must slash corporate tax rates and burn regulations to improve conditions for small and medium sized businesses – dated 17 October 2009.

INVESTMENT PLANNING

July inflation numbers

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

The CPI for July showed an annual rate of 2.1%, up 0.1% from June, whereas the market consensus had been for a 0.1% fall, according to Reuters. Across June to July prices were flat, the same as happened a year ago – rounding accounts for the 0.1% increase. 

The CPI/RPI gap narrowed by 0.2% to 0.7%, with the RPI annual rate dropping (but see below) 0.1% to 2.8%. Over the month, the RPI was down by 0.03%. Commuters may be grateful for that small drop, as the July RPI sets the basis for rail fare increases in January 2020. 

Alongside the July data, the Office for National Statistics (ONS) also reported an earlier error in the calculation of the RPI which meant the March 2019 figure was understated by 0.1% and the June 2019 figure overstated by the same amount. As is standard practice, the old figures will not be revised, meaning the reality (as opposed to what the tables show) is that the annual RPI rate was unchanged between June and July. 

The ONS’s favoured CPIH index was up 0.1% for the month at 2.0%. The ONS notes the following significant factors across the month: 

Upward 

Recreation and culture This group alone produced a 0.08% CPIH increase. The largest effect came from games, toys and hobbies (in particular from the old chestnut of consoles and volatile computer games) where prices overall rose by 8.4% between June and July 2019 compared with a rise of 4.1% between the same two months a year ago. 

Clothing and footwear This category produced a large upward contribution with prices falling by 2.9% between June and July 2019 compared with a 3.7% fall between the same two months in 2018. The main upward effects came from footwear including repairs and garments. 

Restaurants and hotels Within this group, prices for overnight hotel accommodation rose by 3.1% between June and July 2019 compared with 0.5% 12 months ago. The move counterbalances a relatively large decrease between May and June this year. 

Miscellaneous goods and services The main upward effects came from banking services, where prices rose by 0.6% between June and July 2019 but fell by 4.2% between the same two months a year ago, following the removal of initial charges for investment in some unit trusts. 

Downward 

Transport Prices rose by 2.6% between June and July this year compared with a 6.1% rise between the same two months a year ago. The main downward effect came from air, international rail and sea fares. 

Housing and household services Prices in this category for electricity, gas and other fuels were little changed between June and July this year but rose by 1.3% between the same two months a year ago. 

In six of the twelve broad CPI groups, annual inflation increased, while four categories posted a decrease. Communication was again the category with the highest annual inflation rate, although this month it was joined by alcoholic beverages and tobacco, both showing 3.8% annual increases. 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was up 0.1% at 1.9%. Goods inflation rose 0.2% at 1.7%, while services inflation was flat at 2.5%. 

Producer Price Inflation was 1.8% on an annual basis, up 0.2% on the output (factory gate) measure. Input price inflation rose to 1.3% year-on-year, up from 0.3% in June. The main driver here – as ever - was oil prices. 

These inflation figures are higher than expected, even though they do not reflect the latest fall in the pound (2.4% in July alone). With earnings growth reported on 13 August at 3.7% (3.9% excluding bonuses), the Bank of England has yet another reason to stay its hand when it meets in mid-September.

Source: ONS 14/08/19

The yield curve

(AF4, FA7, LP2, RO2) 

The inversion of the US yield curve has reached a new stage, with the UK following in its wake.

 

Attention recently has focused on the increased inversion of the US yield curve and the potential risks which precedent suggested accompanied such a move in interest rates. 

On 14 August, just as the S&P 500 index was falling by almost 3% (and the more widely quoted Dow Jones Index by 800 points), the yield curve came back to the front of investors’ attention. During the day, the yield on 2-year US Treasury Bonds rose above that of their 10-year counterparts. As the orange and blue lines on the graph show, the crossover has been threatened for the last 12 months. Its final occurrence is seen by some experts as a further reinforcement of the recession warning coming from the US bond market. 

Not quite by coincidence, on this side of the Atlantic the 2-year and 10-year UK gilt yield also briefly crossed. As the yellow line shows, the convergence has been driven by the recent sharp drop in the 10-year yield, which has almost halved in the space of one month (from 0.82% to 0.444%). The fact that UK CPI inflation came in 0.2% above market expectations seems to have had no impact. 

The yield inversion was not helped by news on the same day that the German economy had shrunk by 0.1% in the second quarter and publication of a raft of disappointing data from China (higher unemployment numbers and lower than expected production and consumption data). Recession is becoming a global concern. 

Source: Investing.Com

PENSIONS 

FCA issue consultation on contingent charging for defined benefit transfers

(AF3, FA2, JO5, RO4, RO8) 

The FCA have issued a package of proposed changes with regards to the high number of those with defined benefit (DB) pensions that have been transferred out to more flexible pension schemes. The FCA feel that the proportion of consumers advised to transfer is too high and so have made proposals in three areas to address this:

• Initial conflicts of interest - contingent charging.
• Ongoing conflicts of interest.
• Other proposed remedies.

Initial conflicts of interest - contingent charging

The FCA propose to ban contingent charging, except for groups of consumers with certain identifiable circumstances that mean a transfer is likely to be in their best interests. These include, those who have a specific illness or condition resulting in a materially shortened life expectancy and those who may be facing serious financial hardship such as losing their home, for instance due to not being able to make mortgage payments. Where contingent charging is permitted, advisers will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.

The FCA have concerns that charging structures may be designed to try and get around the ban on contingent charging so they are proposing to introduce rules on the way advisers set their charges for transfers. They propose that firms should:

• Not offset charges for advice on pension transfers and conversions against any other work they undertake for the client.

• Not charge less in total for advice on pension transfers and conversions than if they provided and transacted investment advice for the same size of (non pension transfer or conversion) investment. This is to prevent firms from ‘gaming’ the ban by charging a token fee for initial advice. The FCA consider that advice on pension transfers and conversions is generally more complex than other investment advice, and so should typically cost the same or more than other investment advice.

• Limit any subsequent ongoing adviser charges on funds that are transferred. They should do this so that the ongoing advice charges are no greater than if the funds had not been the subject of a DB pension transfer. This, together with the floor on initial advice charges above, is to limit the opportunity for cross-subsidies between initial and ongoing advice on transfers.
• Charge for advice where any services related to full advice have been undertaken such as the appropriate pension transfer analysis and transfer value comparator

There are no proposed changes to the triage service, which doesn’t give any advice to the client if the idea of a transfer is viable for them. The FCA also propose to introduce a short form of ’abridged’ advice. Abridged advice will act as a new mechanism to filter out those consumers for whom a pension transfer or conversion is unlikely to be suitable, before they pay for full advice. Abridged advice includes the initial stages of the usual advice process. The FCA comment that they would expect the adviser to conduct a full fact-find and risk assessment, including an assessment of the client’s attitude to transfer risk in line with their guidance on assessing suitability. Based on this analysis, the adviser may provide the consumer with a personal recommendation not to transfer or convert their pension if they can demonstrate that a pension transfer or conversion is unlikely to be suitable. It cannot result in advice to transfer.

Ongoing conflicts of interest

The FCA are also strengthening their existing requirements that firms should consider an available workplace pension as a receiving scheme for a transfer.

They go as far as to set out proposed circumstances where they consider a workplace pension scheme need not be considered as the recipient of a transfer. These are:

• the client does not have access to a default fund with capped charges within a defined contribution workplace pension scheme either as an active or deferred member;
• the scheme does not accept transfers in;
• the advice sets out why and how the member will access the funds within 12 months of decumulating, and the workplace pension scheme is incompatible with the way the pot will be accessed;
• the member can demonstrate prior evidence of investment activity through an adviser or active investment choices as a self-investor (excluding investment in a mortgage endowment policy or a default fund of a workplace pension scheme).

Other proposed remedies

The FCA state that they have concerns about advisers’ overall competence and their ability or willingness to give consumers information to understand the implications of a transfer. They plan to address this with various proposals.

They want the Pension Transfer Specialist to send a letter of engagement that sets out, in monetary terms, the amounts that would be paid under various conditions:

For abridged advice:

• The firm offers abridged advice and a transfer or conversion is not recommended following abridged advice;
• The firm offers abridged advice but is unable to take a view on whether it is in the client’s best interests to transfer or convert without undertaking full advice;
• The firm gives abridged advice followed by full advice.

For full advice:

• The firm is giving full advice, making it clear that the amount is generally payable irrespective of whether the advice is to transfer or convert and transacted;
• The amount of ongoing adviser charges that would be paid each month in the year following a transfer or conversion if funds remained invested, making no assumptions about growth but allowing for the cost of initial advice;
• If the first-year charges would be significantly lower than subsequent years’ charges, the letter should indicate the charges in subsequent years until normal charging levels are reached.

If an adviser operates the carve-out and knows that a potential client would be eligible for the non-contingent charging, the letter must explain:

• the reasons for this;
• that no charge would be payable in the event of a recommendation not to transfer or convert.

The FCA propose that a new one-page summary is included in the suitability letter detailing key information. The consultation gives examples of these. They want the summary to be limited to one side of A4 if printed and to include:

• Charges disclosure.
• The adviser’s recommendation.
• A statement of the risks associated with the transfer of a pension or pension conversion.
• Information about any ongoing advice service provided if the adviser proceeds with the pension transfer or pension conversion.

The FCA want to be sure that the client understands the advice being given to them, so are proposing new guidance where a firm intends to make a positive recommendation to transfer or convert where a pension transfer specialist is required. The firm must gather evidence that the client can demonstrate that they understand the risks to them of proceeding with a pension transfer before finalising the recommendation and keep a record of this evidence. They are not mandating how this is done but refer to current practices of getting the client to play back to them their own understanding of what advice has been given, and why, or asking the client questions about the advice given to them.

The proposals include a requirement that pension transfer specialists complete 15 hours of continuing professional development (CPD) each year, on top of any other CPD they undertake. At least five hours of this should be from an external source.

In addition to all of the above the FCA are:

• extending the range of data that is currently collected from financial advisers to improve their ability to regulate the sector;
• making technical amendments to their rules, which include changes to the definition of a pension transfer.

Issues that these changes may cause

The FCA recognise that these changes are likely to restrict the market because some consumers will be unwilling to pay upfront for advice. However, they believe that the exemptions they are proposing will limit this to those that probably shouldn’t be considering a transfer because it is likely to be in their best interest to remain in the scheme.

Next steps

The consultation closes on 30 October with the final rules planned to be published in the 1st quarter of 2020.

The timetable for implementing these rules will be very swift once these rules have been set in place, with only one week for the ban on contingent charging to take effect.

FCA and TPR warn again about pension scams

(AF3, FA2, JO5, RO4, RO8) 

HMRC, The FCA and TPR are again warning investors to be careful of pension scams and are joining forces to highlight some of the most common scams and the likelihood of people falling for them. According to the report the likelihood of being drawn into one or more scams increased to 60% among those who said they were actively looking for ways to boost their retirement income.

Censuswide conducted research with 2012 adults about the six most common pension scams, the results are below:

1. Offering exotic investment opportunities- 23% of 45-65-year-old pension savers would pursue an offer of high returns in either overseas properties, renewable energy bonds, forestry, storage units or biofuels, even though these are high-risk investments and unlikely to be suitable for pension savings.
2. Calls out of the blue– 23% of 45-65-year-old pension savers would engage with a cold call from a company asking to discuss their pension plans.
3. Offering early access to your pension pot– 17% of 45-54-year-old pension savers would be interested in a company that offered to get them early access to their pension pot.
4. Guaranteed high returns on your pension savings– 13% of 45-65-year-old pension savers would pursue an offer guaranteeing returns of 11% on their pension savings.
5. Offering to review your pension for free – 10% of 45-65-year-old pension savers would say yes to a free pension review from a company they’d never dealt with before.
6. Time-limited offers– 7% of 45-65-year-old pension savers would say yes to a company who offered a special deal that won't be around for long and offered to send a courier to sign the paperwork immediately.

The joint initiative was launched again this summer on 1 July and includes adverts on TV, radio and online to try and highlight the issue. More information can be found at www.fca.org.uk/scamsmart

No Deal Brexit - DWP Guidance updated

(AF3, FA2, JO5, RO4, RO8) 

The DWP have updated two pages about pensions and benefits in the event of a no deal Brexit.

The first is aimed at UK nationals living in the EU, EEA or in Switzerland and reassures them that benefits should generally still be payable.

The second is aimed at EU, EEA and Swiss citizens living in the UK and accessing pensions and benefits in the UK, again the page is generally reassuring

The pages also give links to sign up to Brexit updates which could be very useful for those concerned.   

The Pensions Regulator news: Recruitment agency to be prosecuted for trying to avoid giving its staff workplace pensions – 6 August

(AF3, FA2, JO5, RO4, RO8) 

A recruitment firm and its managing director are being prosecuted on suspicion of trying to avoid their automatic enrolment duties. 

They are accused of failing to automatically enrol employees, falsely claiming they had enrolled them and providing false information to the TPR.

SKL Professional Recruitment Agency a specialist agency working in the care sector and its managing director Linus (Lee) Kadezere have been summoned to appear at Brighton Magistrates’ Court on 4 September 2019.

Read more on the TPR website

PPF publishes updated PPF 7800 index - August 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. 

August 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 £90.7 billion at the end of July 2019, from a deficit of £51.7 billion at the end of June 2019.
• The funding level decreased from 97.0 per cent at the end of June 2019 to 95.0 per cent.
• Total assets were £1,729.8 billion and total liabilities were £1,820.5 billion.
• There were 3,396 schemes in deficit and 2,054 schemes in surplus.
• The deficit of the schemes in deficit at the end of July 2019 was £218.8 billion, up from £189.3 billion at the end of June 2019.

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