What's new bulletin - January 2022

TAXATION AND TRUSTS

Simplifying tax for smaller businesses and on life events - OTS reviews

(AF2, JO3)

The Office of Tax Simplification (OTS) has published an evaluation update paper following its earlier reviews about simplifying everyday tax for smaller businesses and taxation and life events, each published in 2019.

The OTS is the independent adviser to Government on tax simplification, challenging tax complexity to help all users of the tax system; it does not implement changes - these are a matter for Government and for Parliament

The  OTS  review about simplifying everyday tax for smaller businesses focussed on ways to simplify the everyday experience of businesses dealing with tax, particularly for smaller businesses – which, for the purposes of this review, the OTS described as being businesses with fewer than ten employees and an annual turnover of less than £2 million.

The review covered events such as:

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

Its review about taxation and life events was based on a number of ‘life events’, such as having children, entering work, changing jobs, saving for or drawing a pension, and supporting others who are less able to take care of their own affairs. It looked at issues that, the OTS believes, are likely to cause the most error or inadvertent non-compliance, resulting in additional costs for all concerned. And it related mainly to income tax, in particular:

• the High Income Child Benefit Charge (HICBC);
• the operation of PAYE, as people start work or first receive a pension;
• the workings of pension reliefs and charges;
• the ability for people to assist others who may have lesser capacity;
• the potential for better information and education about tax.

The OTS says it has carried out its work in the light of the changes in the wider context since the two reports were conducted, in particular recognising the significance of the Government’s Tax Administration Strategy, HMRC’s Tax Administration Framework Review and the Single Customer Account.

And it considers that in future all new tax policies must take account of digital requirements, both in the public and private sector – as a fundamental part of the policy-making process.

This paper focuses on raising awareness and education about tax, helping those starting out in business and issues affecting small companies. Other areas of interest explored in the two reports will be covered in separate notes to be published early in 2022.

Separately, the OTS welcomes the October 2021 Budget announcement that top-up payments will be introduced to address the difference in outcomes between those using net pay and relief at source pension schemes, which was highlighted in the review of taxation and life events.

Tax awareness and education

The OTS considers that, alongside the HMRC information on GOV.UK, more should be done to actively present tax information to those who need it, for example through third party ‘engagers’ or intermediaries such as conveyancers.

Many of those forming new businesses would also benefit from basic business tax training being provided in the context of relevant vocational courses in universities and further education colleges.

Expanding on their ‘Tax Facts’ programme for schools, HMRC could also look at other ways to engage young people. For example, the communication that 16-year-olds currently receive to give them their National Insurance number could also contain an invitation to log on and set up a Single Customer Account.

Help for those starting out in business

The OTS remains concerned that not enough is being done to help those looking to start up in business, and that, in particular, people need basic tax information before registering for tax.

However, the OTS welcomes the announcement by HMRC that it intends to use the Tax Administration Framework Review as an opportunity to explore much needed reform to various administration processes, including tax registration.

The OTS also welcomes HMRC’s work to improve the ‘Budget Payment Plan’ and the supporting funding announced in the Autumn 2021 Spending Review.

Issues affecting small companies

The OTS welcomes long-term work between Companies House and HMRC to look at progressing the ambition of companies only needing to file one set of accounts annually with Government.

More estates now free from form filling

(AF1, JO2, RO3)

As of 1 January 2022, the rules for inheritance tax changed to make the procedures easier and to reduce administrative burdens.

In March 2021, the Government announced that they would be reducing inheritance tax reporting requirements for 90% of non-taxpaying estates requiring probate or confirmation, following suggestions made by the Office of Tax Simplification.

For deaths up to and including 31 December 2021 it is still necessary to send full details of the estate’s value even if no tax is due, if amongst other things, the person who died:

• gave away over £150,000 in the seven years before they died;
• left an estate worth more than £1 million; and
• had inherited part of the inheritance tax threshold from a previous spouse or civil partner.

However, in addition to various other simplifications and clarifications of the rules, if the person died on or after 1 January 2022, the £150,000 and £1 million limits are increased to £250,000 and £3 million respectively. The definition of inheritance tax threshold is also amended to include cases where some of the available threshold was used when the first of a married couple or civil partnership died and a claim is made for the unused percentage to be made available against the current estate. These changes only apply in England, Wales and Northern Ireland.

For more information about the new rules and to use HMRC’s inheritance tax checker tool, please see here.

Minimum 15 percent rate of corporation tax - new consultation

(AF2, JO3)

The Government has published a consultation seeking views for how a worldwide 15% minimum corporation tax should be domestically implemented.

The reforms, agreed in principle by the G7 in June 2021 and confirmed on 8 October 2021, are intended to mean multinationals pay their fair share of tax in the countries they do business (Pillar One), along with a minimum 15% corporation tax rate in each country they operate in (Pillar Two).

With changes aimed to come into effect from 2023, this latest consultation, which will run for 12 weeks, seeks views on the application of the global minimum corporation tax in the UK, as well as a series of wider implementation matters, including who the rules apply to, transition rules and how firms within scope should report and pay.

The OECD published detailed guidance on the Pillar 2 framework in December last year which countries will use to implement the rules in domestic law. This includes guidance on how to calculate the effective tax rate (ETR) of a group in a jurisdiction and the steps that should be taken to collect additional tax where the ETR falls below 15%.

Pillar 2 is designed to apply to large multinational enterprises (MNEs). This recognises these businesses have greater international scale and are therefore likely to derive greater benefits from the low-tax outcomes that Pillar 2 is intended to limit. The rules achieve this through the consolidated revenue threshold, which ensures businesses are only within scope of the ‘Globe rules’ when they operate in more than one jurisdiction, and when the revenue in their consolidated financial statements is greater than €750m in at least two of the previous four Fiscal Years. The Globe rules are designed to ensure that MNEs pay a minimum ETR of 15% on their profits in each jurisdiction. This means high taxed profits in one jurisdiction cannot be used to offset low-taxed profits in another jurisdiction. Allocating profits appropriately between jurisdictions is consequently integral to the Globe.

The basic steps involved in calculating the ETR and top up tax payable for an in-scope multinational group, and then determining how that top up will be charged, include:

• Step 1: Determine the entities that a group has in a particular jurisdiction.
• Step 2: Determine the profits of those entities.
• Step 3: Determine the taxes that relate to those profits (including those which relate to timing differences).
• Step 4: Aggregate the profits and taxes found in Steps 2 and 3.
• Step 5: Calculate the group’s ETR in that jurisdiction by dividing the aggregate taxes by the aggregate profits.
• Step 6: If the ETR in Step 5 is less than 15%, calculate the group’s ‘top-up percentage’ for the jurisdiction which is 15% less the jurisdictional ETR.
• Step 7: Calculate the jurisdictional top up tax by taking the profit calculated in Step 2, deducting a 5% return on the tangible assets and payroll expenses in that jurisdiction, and then multiplying that amount by the ‘top-up percentage’ in Step 6.
• Step 8: Attribute that jurisdictional top up tax to the group’s individual entities in that jurisdiction based on their relative contribution to total profit.
• Step 9: The top up tax attributed to an entity is first charged under the Income Inclusion Rule (IIR) which charges this tax on the entity’s parent entity.
• The IIR is charged on a top-down basis which means the ultimate parent will generally be charged the top up when it is located in a jurisdiction that has introduced Pillar 2.
• This means the IIR will only be charged at an intermediate parent level if the ultimate parent entity is not subject to Pillar 2 (or if the low-taxed entity is more than 20% owned by minority investors). These parents will be charged a top up based on their ownership share in the low-taxed entity.
• Step 10: Any remaining top up not collected under the IIR will be charged upon other group entities under the Undertaxed Profits Rule (UTPR). The total amount to be collected from group entities in a jurisdiction under the UTPR will be based on the tangible assets and employees of those entities as a proportion of tangible assets and employees in all jurisdictions that have implemented the UTPR.

As part of the Pillar 2 implementation process, the UK is exploring the idea of introducing a domestic minimum top up tax (DMT) in the UK. This would be closely based on the Globe rules, but rather than allowing a foreign jurisdiction to charge top up taxes in relation to any low-taxed profits of a group’s entities in the UK, the UK would instead impose that top-up tax. While this goes beyond the requirements in the Globe rules, those rules contemplate countries introducing domestic minimum taxes alongside Pillar 2 and the Government believes there is a strong case for doing so in the UK. This is because a DMT would only ensure that any additional tax on UK economic activities and profits that results from the Pillar 2 minimum tax framework is to the benefit of the UK Exchequer. In other words, businesses would in most cases pay the same level of tax on their UK profits whether there was a DMT or not, but rather than allow another country to collect that tax, a DMT would ensure the tax is paid to the UK Government. The Government also believes a DMT could significantly reduce compliance burdens on UK headquartered groups by preventing them from being subject to the UTPR in multiple countries in respect of their UK domestic operations.

The Government anticipates that the parts of this legislation relating to the IIR would be included in Finance Bill 2022- 23 and would have effect from 1 April 2023. The Government anticipates that both the UTPR and the domestic minimum tax would be introduced from 1 April 2024 at the earliest.

This consultation closes at 11:45pm on 4 April 2022. The Government expects to publish draft legislation in Summer 2022.

Work also continues to progress within the OECD implementation of Pillar 1 of the October 2021 agreement, which reforms taxation rules to ensure a greater share of multinational profit is taxed in the countries in which their customers are located.

 

INVESTMENT PLANNING

Gilts - just a few words from the Fed...

(AF4, FA7, LP2, RO2)

The first week of 2022 produced a sharp jump in bond yields, courtesy of a warning shot from the Federal Reserve.

In the graph above, the solid lines (black for gilts, orange for US Treasuries) show where yields ended at the end of the first week into the new year. The change from the last day of 2021 (the dotted lines) is marked. In just five days the yield on 10-year bonds rose by 0.21% in the case of gilts and 0.25% for Treasuries.

What happened? The answer is that on 5 January, the Federal Reserve published the minutes of its December meeting. After that meeting a statement revealed the Fed had agreed a quickening of the pace of tapering quantitative easing (QE). A faster taper has been expected because of accelerating US inflation, so December’s announcement was not a surprise. It was only in the formal minutes of the meeting that it emerged the Fed had been thinking beyond a speedier taper:

‘…it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.’

The key words are ‘reduce the size of the Federal Reserve’s balance sheet’, which translated from Fedspeak means reversing QE. In other words, whereas the Federal Reserve spent much of second half of last year buying $80bn of Treasuries and $40bn of mortgage-backed securities each month, at some point in 2022 it could begin selling some of its huge bond portfolio back to the market or at least not reinvesting maturity proceeds. The minutes offered no commitment to act, yet alone precise timing. However, the combination of accelerated QE taper and earlier Fed messaging that interest rates could increase once taper ended pointed to the possibility of the change starting as early as March.

The bond markets were not the only ones to be moved by the Fed minutes. The US stock market also took a dip: after rising by 0.6% on the first trading day of 2022, by the end of the week the S&P 500 was down 1.9%. The Nasdaq, which is more interest-rate sensitive because of its tech bias, turned a first day gain of 1.2% into a week’s decline of 4.5%.

The UK equity market fell on Thursday in response to the Fed minutes and Wall Street’s drop, but over the week managed a gain of 1.4% on the FTSE 100. This could be because the Bank of England is ahead of the Fed. The Old Lady has already ended QE and posted its first rate rise last month. It has also indicated it could end reinvestment of maturing QE bond holdings once base rate reaches 0.5%, which may happen in February.

Bond markets on both sides of the Atlantic have effectively been insulated from the Covid-induced flood of Government debt sales by QE. The future scenario could see continued Government issuance, albeit at lower levels, as the central banks withdraw, neither buying fresh stock nor replacing existing holdings as they mature. That may prove a recipe for rising long term rates.

Child Trust Funds - where capacity is an issue

(FA5)

Numerous Child Trust Funds have matured. However, what is the position where the child lacks capacity?

Under the current rules in England and Wales, a parent/guardian has to make an application to the Court of Protection to be able to manage finances of someone who lacks mental capacity. This would also be the case for a CTF in cases where the child cannot manage their own account. Given the process, timescales and the cost involved to access what is often a small amount of money many families in this position have complained.

In light of this, the Ministry of Justice has launched a consultation on a new system to ease the administrative burden.

The new streamlined process would allow withdrawals and payments of up to £2,500 from cash-based accounts, such as a CTF or a Junior ISA, without requiring permission from the Court of Protection.

The consultation is open until 12 January 2022, and, as ever, we will keep you informed of any developments.

Latest property statistics

(AF4, FA7, LP2, RO2)

HMRC has recently published the latest property statistics, which shows an increase in the provisional property figures for November.

Interestingly, after a significant decrease was observed for UK residential transactions completed in October 2021, as a result of the temporarily increased nil rate band for SDLT ending on 30 September 2021, the provisional estimate of transactions completed in November 2021 has increased by 22.7%.

The figures also show that:

• following year on year decreases in April and May 2020 of around 50% caused by the coronavirus pandemic, non-seasonally adjusted UK residential transactions gradually increased, before peaking in March, June and September 2021;
• the provisional seasonally and non-seasonally adjusted estimate of UK residential transactions in November 2021 is 16.4% and 13.4% lower than November 2020 and 24.3% and 22.7% higher than October 2021;
• the provisional seasonally and non-seasonally adjusted estimate of UK non-residential transactions in November 2021 is 15.9% and 21.3% higher than November 2020 and 9.0% and 10.9% higher than October 2021.

Review of the UK funds regime: a further update

(AF4, FA4, FA7, LP2, RO2)

HMRC has published a technical consultation around derivatives used to hedge foreign exchange risks in share transactions. It is seeking views on new legislation (in the form of a draft statutory instrument), which will extend the scope of existing regulations designed to align the tax treatment of hedging instruments and hedged items, ahead of its proposed introduction in 2022.

Under current rules such derivatives are taken into account as income items during the lifetime of the contract. This gives rise to a mismatch with the tax treatment of the shares, which will not be taxed or relieved until the shares are ultimately disposed of or may alternatively be covered by the substantial shareholding exemption.

As part of the work on asset holding companies, the Government announced that it was examining the possibility of legislating to address this issue and continued to take account of stakeholders’ views on this matter.

This instrument seeks to remove the current tax mismatch on such derivatives, covering different commercial hedging and share transaction structures. This will create a fairer and more complete tax regime for hedging, which will also support the new asset holding company regime.

This technical consultation seeks feedback from stakeholders on the draft regulations to make sure they deliver the policy correctly and effectively.

You can read the full statutory instrument, The Disregard and Bringing into Account of Profit and Losses on Derivative Contracts Hedging Acquisitions and Disposals of Shares Regulations 2022, and explanatory notes here.

This consultation closes at 11:45 pm on 24 January 2022.

 

PENSIONS

DWP launches State Pension age review

(AF3, FA2, JO5, RO4, RO8)

The DWP has launched a review to consider whether the State Pension age remains appropriate. The review is a requirement under the Pension Act 2014 and must be published by 7 May 2023.

State Pension age is currently 66, with two further planned increases to 67 and then 68 over the next 25 years. However, the first review of State Pension age in 2017 concluded that the next review (i.e. this one) should consider bringing forward the increase to age 68 to 2037-39.

The DWP states the review will:

• examine the implications of the latest life expectancy data;
• provide a balanced assessment of the costs of an ageing population and future State Pensions;
• consider the changes in the labour market and people’s ability and opportunities to work over State Pension age;
• develop options for setting the legislative timetable for State Pension that are fair and transparent.

The Government states that as the number of people over State Pension age increases, it needs to ensure that decisions on managing costs are fair and transparent for taxpayers both now and in the future.

Increase in NMPA to age 57 – further HMRC guidance

(AF3, FA2, JO5, RO4, RO8)

The latest HMRC pension schemes newsletter provides further information on the increase to the Normal Minimum Pension Age (NMPA) from 6 April 2028 and the new protections being introduced in the Finance Bill (No 2) 2021 – 2022. 

The new protection framework will provide a right to take the benefits before age 57 if, on or before 4 November 2021, they either had an unqualified right to take benefits before age 57 or were in the process of a substantiative transfer to a scheme that provided that right.

Unqualified right

An unqualified right is where the member had the right to take benefits without the scheme or their employer’s consent. Where trustees or employers may have previously always used their discretion to provide consent this will not provide an unqualified right.

Where the scheme rules refer to benefits being able to be taken at the NMPA, or its underlying legislation, it would not provide an unqualified right to a protected pension age.

Based on this guidance, we expect that very few schemes will have an unqualified right.

The unqualified right had to be within the rules as at 11 February 2021, so there is no scope for schemes to update their rules to provide the right.

Joining a protected scheme

To benefit from the 2028 protection, an individual would have to have been a member of the scheme, or made a substantiative request to join a scheme offering an unqualified right, on or before 4 November 2021.

A substantiative request is where the member has made an instruction to transfer £X or x% of their pension funds to a named pension fund.

Block transfers

A member will retain their protected pension age if they transfer to a new scheme as part of a block transfer, i.e. they transfer all of their pension rights under the scheme in a single transaction with at least one other member.

Unlike the block transfer rules in place to protect other benefits, under the 2028 protection framework, there is no requirement that the member must not have been a member of the receiving scheme for more than 12 months and no need for all the member’s benefits to be taken at the same time.

The protection will apply to all the member’s benefits held in the scheme.

The protection can be maintained on subsequent block transfers.

Individual transfers

A member with a protected pension age can retain the protection on an individual transfer. However, the protection will not apply to other sums already in the receiving scheme or any new funds added to the scheme, i.e. only the benefits built up in the pension scheme with the unqualified right are protected.

Subsequent transfers will allow the protection to be maintained, but only in relation to the protected benefits from the initial scheme.

Transitional issues

HMRC point out that there may be transitional issues for some members. One area is where a member has reached age 55 but not age 57 by 6 April 2028. HMRC are working on this and will provide further updates and guidance when available.

Note the existing rules for other earlier pension age protection are unchanged by these new rules.

Think tank and MP call for auto-enrolment reforms

(AF3, FA2, JO5, RO4, RO8)

A report entitled: “Levelling up pensions to boost savings by £2.8 trillion” by think tank Onward has called on the Government to:

• Abolish the £10,000 earnings trigger for auto-enrolment,
• Abolish the £6,240 lower earnings limit for pension contributions, and
• Reduce the age at which people benefit from auto-enrolment from 22 to 18 years old.

The previous Government committed to lowering the minimum auto-enrolment age to 18 and scrapping earnings bands by the ‘mid-2020s’; although this was before COVID struck. Onward argues that over the whole working lifetime of the current workforce, these reforms would result in a full-time worker on the national living wage gaining an extra £93,989, which amounts to a 60% increase in their workplace pension savings. According to the report, the changes would mean that over the whole working lifetime of the current workforce, the total additional savings could be as high as £2.77trn.

The proposals are included in a Private Member’s Bill put forward by Richard Holden, MP for Durham North West, on 5 January. Mr Holden said: “Auto-enrolment has been one of the massive hidden triumphs of the last decade in the UK, but sadly millions of hard-working British people aren’t benefiting because they’re under 22 or simply not working enough hours. I want to change that.”

Nigel Peaple, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association (PLSA), said in their Press Release that: “The PLSA has long supported maintaining the momentum in auto-enrolment by extending it to workers under 22 and removing the lower earnings limit so that people save from the first pound of earnings. We have also maintained that in order for savers to reach an adequate income in retirement, the current 8% minimum contribution level should be increased to 12% by 2030 — split 50/50 between employers and employees. The PLSA also commends the intent of the proposal to remove the £10,000 earnings threshold to support workers on very low earnings or with multiple jobs; however, additional analysis may be necessary to ensure it will benefit households at all income levels.”

Comment

One of the main problems with the £10,000 “Earnings Trigger” is the fact that it means many part-time employees in low-paid jobs have earnings below £10,000 and are therefore not auto-enrolled even when, by having more than one part-time job, their total earnings exceed £10,000. As many of these individuals are female, there is always the possibility the Government might be taken to task as the legislation not meeting equality standards.

TPR: Trustees must ensure climate advisers have the right skills

(AF3, FA2, JO5, RO4, RO8)

In new Guidance, The Pensions Regulator (TPR) has warned that trustees must ensure they get the advice they need from appropriately skilled and competent advisers. The new guidance is designed to help trustees of certain schemes meet tougher standards of governance and reporting in relation to climate-related risks and opportunities. As this is a new and developing area, not all advisers will have the right capabilities to support trustees implementing these requirements for the first time.

TPR has also published it consultation response to their earlier Climate-related governance and reporting which resulted in the new guidance.

David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said: “Trustees make use of external expertise in a variety of areas. However, we recognise that the governance and reporting of climate-related risk is relatively new, so trustees may be more reliant on external experts while they build their scheme’s capability in this area. Trustees must take responsibility for ensuring their advisers have the appropriate skills and expertise and the advice they offer is relevant, helpful and represents value for money.” He added: “While this guidance is aimed at trustees in the initial group of schemes within scope of the rules, it offers an opportunity for all trustees to improve their scheme’s structures and governance in relation to climate-related risk and opportunities in preparation for any expansion.”

The Pensions and Lifetime Savings Association (PLSA) has issued a Press Release commenting on TPR’s new guidance. Nigel Peaple, Director of Policy and Advocacy at the PLSA, said: “The PLSA is pleased to see TPR's new guidance on climate-related governance and reporting and we welcome the additional case studies, and step-by-step guide that is due in 2022. We also are pleased that our request to see new additions on qualitative scenario analysis has been heard and that this is being taken forward.” However, he added that the PLSA “would welcome more guidance to be made available to trustees in both the toolkit and on the issue of covenant guidance”.

FCA: British Steel Pension Scheme Redress Scheme

(AF3, FA2, JO5, RO4, RO8)

The FCA’s Board has asked for a consultation to be prepared on a redress scheme, under s404 of the Financial Services and Markets Act, for former members of the British Steel Pension Scheme (BSPS) who transferred their pension.

Subject to final approval of the consultation documents by its Board, the FCA expects to consult by the end of March 2022 having gathered further evidence and following engagement with stakeholders.

A redress scheme would be limited to BSPS transfer advice. BSPS is a highly exceptional case with the FCA’s analysis indicating significantly more unsuitable advice (47%) than observed in reviews of higher-risk firms in non-BSPS cases (17%).

The FCA has issued a “Dear CEO letter” setting out its expectation that firms in the scope of a potential redress scheme should retain assets and should not try to avoid their responsibilities. The letter states the FCA has the following expectations that firms:

• Must have adequate financial resources.
• Should retain assets for a potential redress exercise.
• Should not try to avoid their responsibilities.
• Ongoing responsibilities.

The FCA has warned it will take such action as it deems necessary if a firm attempts to avoid redress liabilities.

Former BSPS members should continue to check whether they received unsuitable advice and find out how to complain.

Firms should continue to progress any existing FCA required Past Business Reviews and engage in any ongoing enforcement investigations or supervisory work connected to the British Steel Pension Scheme.

WPC launches final part of inquiry into impact of pension freedoms

(AF3, FA2, JO5, RO4, RO8)

The Work and Pensions Committee (WPC) has launched the third and final part of its inquiry into the impact of the pension freedoms and protection of savers. The inquiry will now focus on:

• whether households have enough pension savings for retirement;
• what advice and guidance people need when saving for retirement; and
• what the Government should be doing to support self-employed people to save for retirement.

Stephen Timms MP, Chair of the WPC, said: “Making sure the right support and encouragement to save is in place from the very start of people’s working lives should be a key part of pensions policy if everyone is to benefit from a secure and comfortable retirement. Our inquiry will examine the impact on saving rates of both auto-enrolment and advice to savers and whether there are changes that could be made to boost the incomes of pensioners. With a rising number of people in precarious forms of work, the inquiry will also look at how self-employed people and those in the gig economy can be helped to save for their pensions to ensure they do not miss out later on in life.”