CANADA LIFE LIMITED – TEXT FOR NEWSLETTER FOR ACCOUNTANTS
SUMMER 2016
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Summer 2016
Professional Adviser Briefing
For professional connections only
Issued by name, role, IFA
I have pleasure in sending you the latest edition of our regular newsletter.
Since the last edition, we have seen the Brexit vote and whole change of personnel at the head of the Conservative party.
It will be interesting to see if the new Chancellor, Philip Hammond, makes any major changes to the plans of his predecessor, George Osborne.
Given that they are in the same party with the same political philosophy, you wouldn’t expect it to be so; but sometimes a ‘new broom’ does abandon some plans or introduce new ideas.
We will find out if that is so when Philip Hammond delivers his Autumn Statement. We do not know the date of this yet but, as an indication, last year it was on 25 November.
I trust that you will find the newsletter interesting and if you know of anyone who might appreciate a copy, let me know and I will send them one.
In this edition:
1. Accountants aim to extend regulated services
2. Finance Bill amendment corrects tax pool problem
3. Higher rate taxpayers hit record levels
4. The cost of tax reliefs is put under scrutiny
5. Draft disguised remuneration legislation published for consultation
6. Workplace pensions and the risks of inadvertently giving regulated advice
Accountants aim to extend regulated services
The Institute of Chartered Accountants in England and Wales has applied to extend the range of legal services it can regulate.
It is now almost two years since the Institute of Chartered Accountants in England and Wales (ICAEW) became an approved regulator and licensing authority for probate services.
This was after the Legal Services Act 2007 extended the provision of 'reserved' or regulated legal services to appropriately qualified individuals who are not solicitors.
The ICAEW is now applying to the Legal Services Board to become a regulator of the following remaining reserved legal activities:
· Conduct of litigation*
· Rights of audience*
· Reserved instrument activities*
· Notarial services
· Administration of oaths
* Restricted to taxation services only.
The ICAEW has already licensed 200 firms to provide probate services - double its initial estimate and believes that with this application, it be in a position to help member firms broaden the range of legal services which can be offered to its clients, services that in many cases are more natural for a chartered accountant to provide.
Finance Bill amendment corrects tax pool problem
Amendments made to Finance (No 2) Bill 2016 have rectified trustee tax pool problem.
The Finance (No. 2) Bill 2016, as drafted, created an increased tax liability for trustees and beneficiaries of discretionary trusts due to the fact that only the difference between the dividend trust rate and the dividend ordinary rate would enter the trustees' tax pool.
Following representations, technical amendments have now been made to the Bill which ensure that all tax paid by the trustees – including tax paid on dividend income within the first £1,000 of a trust's income – will go into the tax pool.
These amendments ensure that beneficiaries receiving distributions from discretionary trusts get a credit for all of the tax paid by the trustees so that the income is not taxed any more harshly than it would have been had an additional rate taxpaying individual received the dividend directly.
Higher rate taxpayers hit record levels
According to HMRC and the Institute of Fiscal Studies (IFS), the number of Britons paying income tax at the higher or additional rate is estimated to have reached a record 5 million people last year.
The HMRC data shows that increasing numbers of people are being swept into higher and additional rate tax bands, where they pay income tax of 40 per cent and 45 per cent respectively.
However, the statistics also show that more than a million fewer people will pay income tax this year than they did when the coalition government came to power – although low-paid workers are still caught in the net of national insurance (NI) contributions.
It was a Liberal Democrat party pledge in 2010 – that proved so popular the Conservatives adopted it as their own – to raise the personal allowance and take millions out of tax altogether.
And it had the desired effect: 31.3 million people paid income tax in 2010-11, but this year, it will be just 30.1 million. Without the discretionary increases in the personal allowance introduced by the coalition and Conservative governments, the figure would instead have risen significantly.
This means that there are now 23 million adults in the UK whose income is sufficiently low that they do not pay income tax. A third of men and half of women will pay no income tax at all this year.
Income tax revenues of £182 billion are expected to be collected in 2016-17, according to forecasts from the Office for Budget Responsibility, meaning that each income taxpayer will pay an average of just over £6,000.
But in reality, the payments are far from evenly distributed. Revenues are very reliant on the behaviour of a relatively small number of high income individuals.
The top 10 per cent of income taxpayers – people with annual income in excess of £54,300 – receive a third of total income, but pay almost three-fifths of the tax. This is part of a wider trend towards greater reliance for tax revenues on a small group of wealthy, high income individuals.
While the total number of people paying income tax has fallen over recent years, there has been growth in the number of people aged 65 and over who pay income tax – rising to 5.9 million this year.
The referred to 'top 10% of taxpayers' are more likely to need and want financial advice – and, importantly, have the means to pay for it.
It's an undeniable fact that the more intense and meaningful a problem (like tax) becomes, the more interested an individual will be in avoiding it.
The cost of tax reliefs is put under scrutiny
The National Audit Office (NAO) has called for more scrutiny of tax reliefs and, specifically, the capital gains tax exemption. This is used by people selling their main home and apparently costs the exchequer £18 billion a year.
Altogether, tax reliefs cost more than the budget of any government department and MPs, lawyers and think-tanks have questioned their effectiveness and value for money.
The cost of exempting main residences from capital gains tax rose to £18 billion as house prices went up. It was the biggest factor in a 13 per cent rise in the cost of reliefs – to £117 billion – during the past four years.
The NAO said there was scope for the misuse of the relief, given its scale, the complexity of the rules and the lack of reporting requirements.
It noted that the number of buy-to-let landlords had risen significantly in recent years and said the eligibility rules for the relief were not always straightforward.
'There are several restrictions and related reliefs which allow individuals to claim relief for two homes concurrently. This means more scrutiny may be needed to ensure people are following the rules correctly,' the NAO said.
HMRC said the rise in the cost of the relief was because house prices had gone up and there have been more sales. It said: 'We ensure the right capital gains tax is paid through reviewing the data we hold and cross-checking it against third-party information’.
The NAO said it had found examples of good practice in the way HMRC monitored the cost of reliefs though. It said specialist units checked all claims concerning the 'patent box' – a tax relief on profits from intellectual property – creative industry reliefs, including breaks for makers of high-end television shows and venture capital schemes.
The NAO said the sheer number of tax reliefs meant it would be impractical for HMRC to administer each one individually, adding that in many cases the costs of doing so could outweigh the benefits.
The NAO warned that older tax reliefs could present risks too. It said that 'changing trends can lead to increased take-up or they can become the focus of tax avoidance schemes'.
Worryingly for business owners, the NAO said HMRC was planning an extensive review of entrepreneurs' relief. They had previously raised concerns that entrepreneurs' relief was costing three times more than expected, although the government has since introduced changes to reduce its cost and it is understood that there is no general HMRC concern about the fundamental principle of the relief.
The fundamental point underlying the NAO concern is that there should be a very regular 'cost/benefit' analysis applied to tax reliefs.
Draft disguised remuneration legislation published for consultation
The government has published draft legislation for consultation, which is designed to block disguised remuneration schemes that attempt to circumvent the targeted anti-avoidance legislation introduced in 2011.
The measures, which are due to take effect from 6 April 2017, also include a retrospective tax charge on historic loans.
HMRC has long since held the view that disguised remuneration schemes – such as those employed in the long-running Rangers employee benefit trust case – do not work. At Budget 2016, the government announced a further package of changes to tackle the continued use of disguised remuneration schemes which exploit perceived weaknesses in the disguised remuneration legislation introduced by Finance Act 2011.
A technical consultation has now been launched, alongside draft legislation for inclusion in Finance Bill 2017, which includes more detail on the proposals. It also includes retrospective tax charge on loans that remain outstanding at 5 April 2019, where the loan has not been taxed and no settlement has been agreed with HMRC.
The schemes that are being targeted by the new measures typically involve loan transfers, where employees become indebted to a third party instead of their employer who made the loan.
The new rules put beyond any doubt that all such schemes, which result in a loan or other debt being owed by an employee to the third party, are within the scope of the disguised remuneration legislation at Part 7A ITEPA 2003 whatever the intervening steps.
This consultation – which runs to 5 October 2016 – also includes details of proposals to tackle similar schemes used by the self-employed and proposals to restrict the tax relief available to employers in connection with the use of these schemes.
Disguised remuneration was one of the first areas of tax avoidance tackled by the then coalition government. These schemes usually involve an individual's income being funnelled through a third party, with the money often then being paid to the individual as a 'loan' that is never repaid.
While the disguised remuneration legislation, introduced in 2011, was successful in stopping the promotion of schemes that existed at that time, since then a number of new schemes have evolved. Furthermore, the 2011 legislation did not have retrospective effect as only loans made after 9 December 2010 were in scope.
The new measures make it clear that all arrangements which result in the employee being indebted to a third party are 'treated in the same way as if the third party made the loan directly' and provide that, as at 5 April 2019, any outstanding loan or similar payment from an EBT will be treated as if it were a taxable bonus subject to PAYE and NIC as at that date.
Workplace pensions and the risks of inadvertently giving regulated advice
There is a fine line, for both employers and their professional advisers, between supporting auto enrolment of their workforce and a “financial promotion”.
Currently, a key issue with the pensions auto enrolment programme is communication and employee engagement in driving good outcomes.
The logic is that better engagement by workers with their retirement saving arrangements will require more support from employers and trustees. However, is there a risk that the greater the role the employer has (and any non-FCA regulated business advisers), the more carefully they will need to tread to ensure that they do not stray into regulatory difficulties with the Financial Conduct Authority (FCA).
There are many examples of employers and trustees trying very hard to do the right thing in relation to pensions and workplace benefits. However, regulatory rules control what can be said and guidance from the FCA has not always been clear on the boundaries between which activities should and should not be regulated.
Employers and trustees and the third parties that act for them, need to ensure that they are not straying into providing regulated financial advice to workers/members, or potentially carrying out other regulated activities.