Technical news update 22/10/2019

Taxation and trusts 

• The latest statistics show that corporation tax receipts and liabilities continue to rise
• No-deal Brexit - DWP guidance updated
• HMRC victory in IR35 case
• The IFS Green Budget
• Stamp Duty Land Tax statistics
• Probate fee increases abandoned
• A Budget date at last?
• The estimated cost of tax reliefs
• The Digital Services Tax – latest international progress
• OTS review of taxation and life events: simplifying tax for individuals 

Pensions 

• Defeat for women in state pension age challenge
• GMP Equalisation Guidance Notes issued
• Workplace pension scheme: Shareholder Rights Directive II fact sheet
• PPF publishes updated PPF 7800 index - October 2019
• TPR publishes automatic enrolment declaration of compliance report
• FCA action now that Berkeley Burke will not appeal its unregulated investments charge
• Pensions minister requests copies of ESG statements

TAXATION AND TRUSTS 

The latest statistics show that corporation tax receipts and liabilities continue to rise

(AF2, JO3) 

Recent corporation tax statistics published by HMRC show the increase in liabilities is mainly driven by the largest companies paying more. There is also an increase in the number of companies liable for corporation tax. 

These latest statistics show that corporation tax receipts have hit their highest ever level, at £55.1 billion for 2018/19. This is up 2% on 2017/18.

 

Interestingly, corporation tax receipts continue to grow despite decreases in the rate of corporation tax over the last decade, with the most recent change that affects this publication being from 20% to 19% on 1 April 2017. However, this latest increase has slowed from last year, when corporation tax receipts were up 10%.

Part of the reason for this year’s increase is that more companies are liable for corporation tax. According to Companies House statistics, there were 4,202,044 companies registered at the end of March 2019, an increase of 4.2% when compared with the end of March 2018 figures. 

The number of companies with trading profits in accounting periods ending in 2017/18 increased slightly on the previous year to 1.6 million. The number of companies with a tax liability was up 4% to 1.5 million. The proportion of companies with gross taxable trading profits with a tax liability has increased from 90% in 2016/17 to 93% in 2017/18, in part due to restrictions on bringing losses forward. 

HMRC says that two other recent changes in corporation tax policy will also be increasing liabilities: 

• New interest restriction rules, which limit the amount of tax relief for deducting net interest and other financing costs, affecting companies or company groups that will deduct over £2 million in a 12-month period. 

• The removal of the capital gains indexation allowance. 

The increase in corporation tax receipts provides advisers with an opportunity to engage with corporate clients to consider their tax-planning options.

Source: HMRC Guidance: National Statistics - Corporation Tax Statistics 2019 – dated 24 September 2019.

No-deal Brexit - DWP guidance updated

(AF3, FA2, JO5, RO4, RO8) 

The Department for Work and Pensions (DWP) has updated its guidance, on pensions and benefits in the event of a no-deal Brexit, in relation to the rights of EU citizens to claim UK benefits if they arrive in the UK after Brexit. The DWP’s guidance is based on the UK leaving the EU on 31 October 2019. It will be updated if anything changes, including if a deal is agreed.

EU, EEA and Swiss citizens and their family members can apply to the EU Settlement Scheme to continue living in the UK after Brexit. 

Irish citizens and members of their family living in the UK will be able to claim or continue to receive the UK State Pension and benefits they are entitled to after Brexit. They will also continue to receive any Irish benefits they remain entitled to while living in the UK. 

Other EU, EEA and Swiss citizens:

• Individuals and their family members living in the UK by 31 October 2019 will be able to continue receiving UK benefits on the same terms as now.
  
• Individuals moving to the UK after Brexit will be eligible to claim benefits until 31 December 2020 on the same basis as EU citizens who arrived in the UK before Brexit.
  
  They will need to apply for European temporary leave to remain to stay after 31 December 2020. If their application is successful, they will receive a temporary immigration status that will allow them to stay in the UK for 36 months from the date it is granted. They will be eligible to claim benefits during these 36 months, on the same basis as EU citizens who arrived in the UK before Brexit.
  
  From January 2021 they will be able to apply under the future immigration system.
  
• Individuals who live in the EU, EEA or Switzerland and receive the UK State Pension or a benefit will continue to receive it as long as they meet the eligibility conditions.

UK workplace penisons

UK law allows for workplace pensions to be paid overseas. The Government does not expect this to change after Brexit

The DWP suggests that anyone with any questions should contact their pension provider, and adds that if their workplace pension is paid into a UK bank account, their bank should contact them if they need to change the way they receive their pension after Brexit.

Source: DWP Guidance: Benefits and pensions for EU, EEA and Swiss citizens in the UK if there's a no-deal Brexit – dated 27 September 2019.

HMRC victory in IR35 case

(AF2, JO3) 

HMRC has won an important IR35 case against three BBC presenters at the First-tier Tribunal (FTT). 

In the case of Paya Limited, Tim Willcox Limited, Allday Media Limited v The Commissioners for Her Majesty’s Revenue & Customs the judges concluded that IR35 applied to all of the arrangements under consideration, except for a few of the contracts between the BBC and Tim Willcox Limited. 

HMRC was however out of time to issue the determinations in respect of some of the disputed years, so it won’t be able to collect tax from all of the years that were under scrutiny. This is because the FTT rejected HMRC’s case of trying to prove ‘carelessness’ on the part of the presenters and their accountants. 

However, it was not a straightforward win for HMRC, as the cases had to be decided by a casting vote, after two Tribunal judges disagreed over the presenters’ status under IR35. The third, Judge Harriet Morgan, concluded that there was “sufficient mutuality and at least a sufficient framework of control to place the assumed relationships between the BBC and the presenters in the employment field”. 

“Mutuality of obligation” and “control” are the two key employment status tests – see below. 

Tim Willcox was, however, found to have “much more control” in a few of his contracts, as he would “write headlines” and do “my own interviews.” Also, he tended not to discuss questions or areas of the segment with BBC employees beforehand because, as he submitted, he had “total editorial freedom about what I ask”. 

The judges found that an “imbalance of bargaining power” meant that the BBC forced the three presenters into contracting through personal service companies so as to reduce their pay. 

Despite this, the presenters were deemed to be employees in all but name, which made them liable to be taxed under IR35. 

It’s extremely rare for Tax Tribunal judges to be split on a decision in this way – one of the few previous cases also being in relation to IR35. This not only highlights the difficulty that judges are having with this issue, but also how difficult it is likely to be for affected private sector businesses to make these decisions from April 2020. 

As we have said previously, a number of organisations representing and supporting freelancers and contractors are requesting a halt to the roll out of the IR35 reforms. And, the Association of Taxation Technicians has recently called for greater clarity about next April’s changes. 

Sources: FTT: IR35 case won by HMRC - Paya Limited, Allday Media Limited & Tim Willcox Limited v HMRC – dated 17 September 2019; Contractor UK: HMRC scrapes IR35 win against BBC presenter trio who owe £920,000 – dated 20 September 2019.

The IFS Green Budget

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

The Institute for Fiscal Studies (IFS) has published its Green Budget report, looking ahead to a Budget surrounded by multiple uncertainties. 

Traditionally, the IFS publishes a Green Budget shortly before the real thing. The Green Budget examines the economic and fiscal background and weighs up the Chancellor’s options ahead of the big day. 

In 2019, the IFS has had some problems in producing its Green Budget: 

• It has no Budget date to work from; 

• It does not know who the Budget-presenting Chancellor will be; and 

• The economic outlook is heavily contingent on two imminent events that have near binary outcomes: 

1. The UK’s departure (or possibly otherwise) from the EU, which in turn is largely driven by; 

2. The outcome of the next General Election, the timing of which is also unknown…beyond being imminent. 

These vagaries made for a curious set of presentations on Tuesday 8 October. For example, Citi, which provided the economic overview, put forward four possible Brexit scenarios: 

1. Base scenario which assumed that there would be a further deferral beyond 31 October, resulting in 1% GDP growth in 2020 and under 1.5% in the following two years; 

2. Brexit deal which see growth of around 1.5% over the next three years; 

3. No-deal Brexit which results in GDP shrinking by 0.4% next year before increasing by just 0.3% in 2021 and then 1.1% in 2022; and 

4. Never Brexit, which for Citi implies a Labour-led coalition, higher Government spending and GDP growth of 1.1% in 2020, rising to 2.2% in 2021 and back down to 1.9% in 2022. 

On the taxes front, the IFS repeated what it has said since the last Spending Round: there is no headroom left for giveaways under the current fiscal framework. Indeed, there were two presentations on tax; one dealing with options for decreases and the other looking at the scope for increases. 

The tax increase section was a late addition. It is a nod to the fact that the pre-Election spending pledges being thrown around will require extra revenue as well as additional borrowing. The message here was a familiar one: taxing the top 5% (the Labour party solution) just does not yield enough cash. The lesson from elsewhere (notably Europe) is that middle-income groups could be taxed more to generate more meaningful sums. HMRC’s ready reckoner shows that 1% on all income tax rates produces around £7bn a year, whereas 1% on higher and additional rates raises about £1.5bn. 

The IFS report does not make happy reading for any Budget-time resident of 11 Downing Street. Even after the adjustment to fiscal targets that looks inevitable, manifesto pledges will be difficult to turn into reality. Unless, that is, the next Government is a coalition, in which case individual Party pledges can be expediently dropped/forgotten… 

Source: IFS Green Budget 2019 – dated 8 October 2019.

Stamp Duty Land Tax statistics

(AF1, RO3) 

HMRC has recently published the annual totals and breakdowns of stamp taxes, including 'Land and property' Stamp Duty Land Tax (SDLT). 

The SDLT data is split by transaction type, property type, region, price band and buyer type, including transactions paying the higher rates on additional dwellings (HRAD), and those claiming the first-time buyers’ relief (FTBR). 

SDLT decreased by 7% to £11,940 million. However, after discounting the effect of FTBR and devolution to Wales, the fall would be around 3%.

 

Properties valued at £250,000 or less accounted for 59% of all transactions, and 11% of the total SDLT receipts, whilst properties over £1 million accounted for nearly 3% of transactions and over 45% of total SDLT receipts. 

Residential properties, where the value is less than £250,000, accounted for 9% of residential property receipts and 58% of residential transactions. 

Non-residential properties, where the value is above £1 million, accounted for 77% of non-residential property receipts but just 11% of non-residential transactions. 

There were 230,600 HRAD transactions in 2018/19, a decrease of 9% (21,900) from 2017/18, whilst HRAD receipts were £3,810 million in 2018/19, a decrease of 6% (£250 million) from 2017/18. Of this total, £1,675 million came from the additional 3% element (12% decrease from 2017/18). Additional dwellings transactions accounted for 22% of residential transactions and 46% of residential receipts (an increase of 2% from last year) in 2018/19. FTBR is thought to have influenced this change. 

218,900 transactions benefited from FTBR in 2018/19, with an estimated £521 million relieved in total. 2018/19 was the first full tax year of FTBR claims. 

Despite still having the largest value for SDLT receipts. London has also seen the steepest dip in the absolute value of SDLT receipts over the last year (£315 million). Most of the other regions (excluding Yorkshire & Humber and the East Midlands) have also shown a decline in SDLT receipts although this decline has been much smaller. London was, however, the region with the highest proportion of transactions which were additional dwellings, with 28%. 

Transactions by property type 

Residential SDLT receipts decreased by 10% (£905 million) to £8,370 million between 2017/18 and 2018/19. The decrease in receipts is partly due to FTBR, devolution of SDLT to Wales, as well as the fall in transactions over £1 million, dropping by 8% since last year. 

Residential transactions decreased by 6% (70,000) to 1.036 million between 2017/18 and 2018/19. 

Non-residential receipts decreased by 2% (£60 million) to £3,570 million between 2017/18 and 2018/19. Again, this will be affected by the devolution of SDLT to Wales. 

Non-residential transactions decreased by 5% (6,000) to 115,000 between 2017/18 and 2018/19. 

SDLT transactions and receipts by buyer type 

The majority of residential properties are bought by individuals, and their share has stayed the same since last year (90%). 

The propensity for non-individuals (e.g. public sector bodies, charities etc.) to purchase residential properties increases with price, so much so that almost 23% of residential properties over £2 million were purchased by this type of buyer. 

The amount of SDLT from non-natural persons (companies, partnerships and collective investment schemes) paying the 15% rate of SDLT on residential transactions has decreased by 33% in the past year to £70m, from £105 million in 2017/18. 

The majority (73%) of non-residential transactions were made by non-individuals in 2018/19. 

Non-individuals continued to account for almost 95% of non-residential transactions over £2 million in 2018/19. 

Source: HMRC National Statistics: UK Stamp Tax statistics – dated 1 October 2019.

Probate fee increases abandoned

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

It emerged at the weekend of 12/13 October that the Government had abandoned its controversial plans to replace flat fees of £155 or £215 for probate applications in England and Wales with a sliding scale running up to £6,000. The news first appeared on Saturday morning on the Daily Mail website, which seems to have been given a briefing by Robert Buckland, the current Justice Secretary. At the time of writing, no announcement had appeared on the Ministry of Justice (MoJ) website, although the story in the Mail and later on BBC radio news was that there would now be minor adjustments as part of an annual review of all Court fees. 

If you have an overwhelming feeling of dejà vu, you are not alone. The whole sorry saga is very similar to what happened in 2016/17 when the MoJ last proposed a substantial increase in probate fees. In that instance the first announcement was made in February 2016 and the climb down arrived 14 months later, as an Election loomed into view. 

On this occasion the timescale has been shorter, but more frustrating. The revised proposals came out in November and by early February had reached the point of a Statutory instrument that gained a 9-8 approval by the House of Commons Fourteenth Delegated Legislation Committee. From that stage everything went quiet, other than at probate offices which were swamped with applications leading to long delays. This weekend’s announcement may, like the 2017 abandonment, have more than a passing connection with an impending General Election. 

Last November’s explanatory memorandum suggested that the fee increases would yield £145m of additional income in 2019/20. Given the amount of increased spending the Government has promised in recent weeks, the Chancellor will hardly notice the loss.

Source: Daily Mail Online: Death tax hike is axed: Victory for the Mail as minister lifts threat of £6,000 probate fees from grieving families – dated 12 October 2019.

A Budget date at last?

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

The Government has announced a Budget date of Wednesday 6 November. The Treasury’s press release quotes the Chancellor as saying, 

“This will be the first Budget after leaving the EU. I will be setting out our plan to shape the economy for the future and triggering the start of our infrastructure revolution”. 

The announcement raises a variety of issues: 

• The timing assumes that the Government will survive until 6 November, which is by no means certain. It looks a given that the Queen’s Speech will not gain a majority in parliament, which could trigger a no confidence vote. 

• It is not yet clear whether there will be a deal on Brexit. The chairman of the Office for Budget responsibility (OBR) has already explained in a letter to the Treasury Select Committee that the OBR does not have the resources to produce two versions of the Economic and Financial Outlook, one based on a deal and the other on no deal. As Robert Chote (Chair of the OBR) said, “We would need to know at the beginning of the process [our italics] whether [the Government] intended to design the policy package for a ‘deal’ or ‘no deal’ Brexit to help us decide on what basis we should produce the underlying pre-measures forecast”. 

• The Treasury’s press release states, ‘The Government is committed to securing a deal and leaving on 31 October. In the event of no deal, the Government would act quickly to outline our approach and take early action to support the economy, businesses and households. This would be followed by a Budget in the weeks thereafter.’ That wording hints at a Budget later than 6 November if: (i) Halloween arrives without a deal; and (ii) The Government circumvents the Benn Act (“Surrender Act” in BoJospeak) which mandates the Prime Minister to request another Article 50 extension. 

• Just as the Government lacks a majority to pass a Queen’s Speech, so it also looks extremely unlikely it could pass any Budget Resolutions, let alone a Finance Bill, which must receive a second reading within 30 days of the Budget Resolutions being passed. 

As with this Queen’s Speech, the Budget – if it happens – will be more an exercise in manifesto publication than parliamentary process. 

The estimated cost of tax reliefs

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

Each year, around this time, HMRC issues its estimates for the costs of various tax reliefs. This year’s publication has had a substantial revamp, with coverage expanded “to include reliefs which HMRC classes as non-structural tax reliefs”. 

The notion of a ‘non-structural relief’ may furrow a few brows, so it is worth borrowing HMRC’s explanation of the difference between a structural relief (eg personal allowance) and a non-structural relief (eg ISAs): 

“Many tax reliefs are a largely integral parts (sic) of the tax structure. We have classified these as ‘structural reliefs’. These reliefs have various purposes including: to define the scope of the tax, calculate income or profits correctly, and make the tax progressive or to simplify. For example, a number of the larger allowances operate as thresholds to make the tax system progressive, while others exist to avoid disproportionate compliance burdens, or define the tax base by recognising the expense incurred in obtaining profits. 

In contrast, the effect of other reliefs is to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives. In this publication we refer to these as ‘non-structural’ tax reliefs. 

The split between ‘structural tax reliefs’ and ‘non-structural tax reliefs’ is not always straightforward and these categorisations remain under continuous review…” 

That last comment is exemplified by the fact that the personal savings allowance is classed as non-structural but the dividend allowance counts as structural. 

In best Alan Freeman style, the list below shows the top 20 most costly reliefs with the structural variants shaded in grey. Perhaps the most interesting number is one that has not emerged before – what we have described as the National Insurance contributions (NICs) effective discount for the self-employed. With more space, HMRC defines this £5.6bn relief as: 

“Represents the difference between Class 2 and 4 NICs paid by the self-employed on their profits and an estimate of the Class 1 NICs that would be paid at contracted out rates on an equivalent amount of employee earnings. The Class 1 estimate includes employer contributions due but assumes a corresponding reduction in earnings to hold staff costs broadly constant, and also takes account of the resulting reduction in income tax”. 

That £5bn+ may look a low-hanging fruit but, as you may recall, it proved toxic to touch when the former Chancellor tried to increase Class 4 contributions by 1% a year over two years in his 2017 Budget. 

 

Relief	2019/20 Cost £bn
Personal allowance	113.00
NICs - secondary threshold	31.50
NICs - primary threshold	27.40
Main residence CGT exemption	26.50
Pensions income tax reliefs	21.20
NICs - Employer pension contributions	18.70
Capital Allowances - Income and corporation tax	17.12
Inheritance tax - nil rate band	13.00
NICs - effective discount for self-employed	5.60
Corporation tax - double taxation relief	4.54
Annual Investment Allowance	4.00
Income/corporation tax exemption for non-resident gilt owners	3.80
ISAs	3.30
R&D relief small companies	2.46
NICs - lower profit threshold	2.44
R&D relief: large cos and RDEC	2.33
Income tax and CGT - double taxation relief	2.20
NICs - Employment Allowance	2.20
Entrepreneurs' relief	2.10

The cost of the personal allowance is by far the greatest outlay, a fact that has prompted at least one think tank to suggest it should be scrapped and replaced with a flat payment. 

Source: HMRC: Estimated cost of tax reliefs – dated 10 October 2019.

 

The Digital Services Tax – latest international progress
(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8)

The UK Government is introducing the Digital Services Tax (DST) from April 2020, to ensure certain digital businesses pay tax reflecting the value they derive from UK users. However, a recent OECD proposal indicates progress is being made at an international level. The Chartered Institute of Taxation has therefore called for the UK’s DST to be delayed.

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

On 9 October the OECD Secretariat published a proposal to advance international negotiations to ensure large and highly profitable Multinational Enterprises (MNEs), including digital companies, pay tax wherever they have significant consumer-facing activities and generate their profits. 

The new OECD proposal brings together common elements of three competing proposals from member countries, and is based on the work of the OECD/G20 Inclusive Framework on BEPS, which groups 134 countries and jurisdictions on an equal footing, for multilateral negotiation of international tax rules.

The proposal, which is now open to a public consultation process, would re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets. It is intended to ensure that MNEs conducting significant business in places where they do not have a physical presence, be taxed in such jurisdictions, through the creation of new rules stating: 

1. where tax should be paid (“nexus” rules); and
2. on what portion of profits they should be taxed (“profit allocation” rules). 

The OECD Secretariat said: “Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”

Beyond the specific elements on reallocating taxing rights, a second pillar of the work aims to resolve remaining issues in relation to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), to ensure a minimum corporate income tax on MNE profits. This will be discussed in a public consultation, expected to take place in December 2019.

The ongoing work will be presented in a new OECD Secretary-General Tax Report during the next meeting of G20 Finance Ministers and Central Bank Governors in Washington DC, on 17-18 October.

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

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

The DST 

The DST will be a 2% tax on the revenues derived from providing a social media platform, search engine or online marketplace to UK users and will only apply to businesses whose global revenues from these in-scope business activities are greater than £500 million and where more than £25 million of these revenues are derived from UK users. 

In addition, in-scope businesses will not need to pay DST on their first £25 million of UK revenues, and will also have the option of using an elective ‘safe harbour’ provision. 

The safe harbour will allow businesses with very low profit margins, or those making losses, to elect to make an alternative calculation of their tax liability under the DST. The DST has the primary character of a tax on gross revenues. This means the safe harbour cannot become the default way for most taxpayers to meet their DST liability, but rather should be a limited feature of the tax to ensure it does not place disproportionate burdens on those with low margins.   

The Government will review the thresholds in 2025 to determine that they are still set at the appropriate level. 

Following the OECD’s 9 October announcement, the Chartered Institute of Taxation (CIOT) has called on the Government to put its planned introduction of the DST on hold for at least a year. 

A French digital tax came into effect earlier this year, backdated to the start of 2019. However, following talks with the US Government, France has pledged to reimburse affected companies any excess taxes once an international deal is in place. That is, any amount of tax paid under the French digital tax which would not have been paid under whatever international framework is agreed through the OECD would be refunded to the company in question. The CIOT suggests that a delay might help the UK Government to avoid having to propose similar reimbursement measures. 

As the CIOT points out, although these Secretariat proposals are not yet a consensus view of OECD members, they do indicate progress is being made at an international level. 

Sources:

• CIOT Press release: OECD progress makes case for keeping UK Digital Services Tax on ice – dated 10 October 2019;
• OECD: OECD leading multilateral efforts to address tax challenges from digitalisation of the economy – dated 9 October 2019.

 

OTS review of taxation and life events: simplifying tax for individuals

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

The Office of Tax Simplification (OTS) has published a report making recommendations about a number of key areas in which individuals’ experience of engaging with the tax system could be simplified and improved.

The report is 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 looks 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 relates 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 (covered in a separate article); 

• the ability for people to assist others who may have lesser capacity; 

• the potential for better information and education about tax. 

Child benefit and the HICBC 

In 2017/18 there were about 7.3 million recipients of Child Benefit, of whom 809,000 (around 11% of total claimants) had either opted out or who were paying the HICBC. This tax charge applies where an individual or their partner receives Child Benefit, and either of them has income of more than £50,000. The charge claws back a sum equivalent to all the Child Benefit paid if that person’s income is above £60,000 and a tapered proportion of it if the person’s income is between £50,000 and £60,000. 

The difficulty, the OTS points out, is that those affected have various options about what to do, and the consequences of these options are not obvious. The options are to: 

• not claim the benefit at all; 

• claim the benefit, but not to receive payment of it; 

• receive the benefit but, in effect, pay some or all of it back through the HICBC tax charge. 

Registering a claim for Child Benefit but then opting not to receive it is the only way to avoid paying the HICBC charge and its associated administration, while preserving National Insurance entitlements. It is not always appreciated that, as well as providing financial support to families with children, Child Benefit has important links with the wider National Insurance system by: 

• being the main way children are issued a National Insurance number as they turn 16; and 

• providing the Child Benefit claimant with National Insurance credits until the child is 12, which can help fill gaps in their National Insurance record for State Pension if they are not working. 

OTS recommendations on the HICBC 

1. The Government should review the administrative arrangements linked to the operation of Child Benefit, making clear the consequences of not claiming the benefit, with a view to ensuring that people cannot lose out on National Insurance entitlements. 

2. The Government should consider the potential for enabling National Insurance credits to be restored to those people who have lost out through not claiming Child Benefit. 

3. The Government should consider how to ease the process of enabling children of those who have not claimed Child Benefit to receive their National Insurance number. 

The operation of PAYE 

The PAYE system collected £162 billion of tax in the year 2018/19, which, together with self-assessment income tax and employees’ and self-employed National Insurance contributions (NICs) of £94 billion, makes up 41.3% of all tax collected by HMRC. 

However, according to the OTS, there were just over 6 million PAYE overpayments, and just under 2.9 million underpayments, in 2017/18. 

The OTS highlights a number of issues it has heard about with the current system: 

• It does not handle situations very well where individuals hold multiple jobs, or have concurrent employment and self-employment; 

• Tax codes and the workings of the system are not always clearly explained to taxpayers; 

• Issues arise when someone first starts work, or takes on a second job and, in particular (in terms of the number of people affected), when the state pension is first received. Previous OTS work found people were confused about how their personal allowance had been allocated between multiple pension sources. 

• Interactions between the tax and benefits systems cause administrative difficulties, particularly around the quality and accuracy of information provided to the Department of Work and Pensions (DWP), on which the calculation of Universal Credit depends.

OTS recommendations on PAYE 

1. HMRC should work with the Government Digital Service to improve the visibility of guidance for non-commercial employers and maintain the Basic PAYE Tools to meet their needs. 

2. HMRC should incorporate consideration of practical issues arising in connection with starting work, changing jobs, taking on additional jobs and claiming expenses into its ongoing work to improve the operation of the PAYE system. 

3. HMRC should improve the explanatory notes provided with tax coding notices issued when people first receive the state pension, or another pension. 

4. HMRC should explore the potential for developing automated checks or other tools for ‘designing out’ errors such as the allocation of ‘K-codes’ to smaller PAYE sources. 

Here, the OTS appears to have focused largely on issues around people receiving the state pension, and less so on the difficulties with the current PAYE system in dealing effectively with the taxation of withdrawals from private pension pots, and on the lack of understanding of taxpayers about the taxation impact of making a withdrawal from their pension. 

Helping others - OTS recommendations 

1. HMRC should review the current series of forms issued once a death has been notified through ‘Tell Us Once’ and consider how they could work more effectively with personal representatives to gain a complete view of the tax affairs of the deceased person, and the survivor, rapidly and sensitively. 

2. HMRC should integrate and improve its various sources of guidance for those helping others, including agents and those with powers of attorney, to help make it easier for suitable people (whether paid or not) to take on such roles. 

Improving tax education and awareness – OTS recommendations 

1. HMRC should collaborate more with relevant external bodies, including schools and in further and higher education, seeking to improve the public’s understanding of tax and finance, when seeking to extend the reach of its own tax education materials.
   
2. HMRC should extend its collaboration with academic researchers to quantify the effect of HMRC’s tax education programme and explore the potential for a cost/benefit measure to allow HMRC to prioritise and target its tax education resources. 

Source: OTS Policy paper: OTS Life Events review - Simplifying tax for individuals – dated 10 October 2019.

 

PENSIONS

Defeat for women in state pension age challenge

(AF3, FA2, JO5, RO4, RO8) 

Julie Delve and Karen Glynn have lost their discrimination case against the Government’s increase of the state pension age. 

The claimants argued there had been discrimination because the changes intended to equalise the position for men and women, i.e. the increase in the state pension age for woman, had in fact led to increased inequalities suffered by women. In addition, they argued that there had been insufficient notice of the changes. 

The High Court ruled that there was no direct discrimination on grounds of sex because the legislation does not treat women less favourably than men. Instead, it equalises the different treatment of men and woman and thereby corrects the direct discrimination against men. 

The Court also rejected the claimants’ argument that the policy was discriminatory based on age (on the basis of case law which establishes that a State can introduce a new legislative scheme which effects changes from a given date based on age) and stated that, even if it was, this could have been justified on the facts (applying the relevant test, which is that the measure is not “manifestly without reasonable foundation”). 

The Court also rejected the arguments that there had not been sufficient notice of the changes and that this was contrary to the requirements of public law. 

The Court concluded that, whilst it was saddened by the stories contained in the Claimants’ evidence, the Court’s role was limited and the wider issued raised about whether the choices were right or wrong or good or bad were not for the Court. 

A summary of the judgement is available here.

 

GMP Equalisation Guidance Notes issued

(AF3, FA2, JO5, RO4, RO8) 

The Guidance Note issued by the GMP working group, under the supervision of PASA, sets out suggested approaches schemes may wish to adopt to address common unanswered issues. 

It forms part of a series of notes offering guidance to UK pension schemes on principles for adjusting benefits correct for the inequalities of GMPs. The High Court's decision in the Lloyds Bank case requires schemes to equalise benefits and approved a range of methods that could be adopted. The note suggests ‘good practice’ approaches to deal with a number of common issues not addressed by the High Court. It is not a definitive guide to the issues nor is it a substitute for professional advice. It also gives worked examples in the appendices of the note. 

The note only considers the methods proposed and approved by the Court. These are by: 

• Adopting a year by year method; or
• Converting the GMP and equalising benefits on an actuarial value basis. 

These are only viable for current or deferred members and we still await clarification about those that previously transferred out of the scheme. 

Comment 

The guidance in this note will hopefully mean that those who have been waiting to start this contentious project will be able to at least consider the best options for each segment of their membership. 

We await confirmation from the Court regarding what should be done about those who have transferred out and may have been discriminated against.

 

Workplace pension scheme: Shareholder Rights Directive II fact sheet

(AF3, FA2, JO5, RO4, RO8) 

The Department of Work and Pensions have issued an explanation of the requirements established by Shareholder Rights Directive II (SRD II) relating to workplace pension scheme stewardship and governance. 

The Factsheet was originally issued in September but has recently been updated with further clarity.

 

PPF publishes updated PPF 7800 index - October 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.  

October 2019 Update Highlights 

• The aggregate deficit of the 5,450 schemes in the PPF 7800 Index is estimated to have decreased over the month to £149.0 billion at the end of September 2019, from a deficit of £162.9 billion at the end of August 2019.
• The funding ratio increased from 91.5 per cent at the end of August 2019 to 92.2 per cent.
• Total assets were £1,769.3 billion and total liabilities were £1,918.2 billion.
• There were 3,584 schemes in deficit and 1,866 schemes in surplus.
• The deficit of the schemes in deficit at the end of September 2019 was £265.3 billion, down from £273.5 billion at the end of August 2019.

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

TPR publishes automatic enrolment declaration of compliance report

(AF3, FA2, JO5, RO4, RO8)

The Pensions Regulator (TPR) has published its monthly report on automatic enrolment, which sets out information based on data submitted by employers. According to the report, between July 2012 and the end of September 2019, 1,568,122 employers confirmed that they had met their automatic enrolment duties. The report also states that 10,165,000 eligible jobholders were automatically enrolled into an automatic enrolment pension scheme during the same period. This page sets out a summary of the reports figures through 2019.

 

FCA action now that Berkeley Burke will not appeal its unregulated investments charge

(AF3, FA2, JO5, RO4, RO8) 

Berkeley Burke Sipp Administration Limited has decided not to appeal the court ruling which ordered the provider to pay almost £1m to people affected by unregulated investments. The appeal was scheduled for 15 and 16 October and although Berkeley Burke had raised enough funding for the two-day hearing, the £100,000 funds it had secured from across the financial services industry would not have covered costs if the Sipp provider had lost the appeal. The Berkeley Burke Group has now distanced itself from the defunct Sipp business, which entered into administration last month. However, a spokesperson for the Group said: “Berkeley Burke Group decided to try and raise legal funds to allow for the administrators to continue with the appeal to the Court of Appeal, after unprecedented support from independent FCA regulated firms unconnected with the litigation who wanted to see the appeal go ahead. It is thought that a successful appeal at the Court of Appeal may have mitigated the need for the FSCS to make pay-outs in relation to the company in administration.” 

Following the Berkeley Burke decision not to appeal, the Financial Conduct Authority (FCA) has put out a statement to Sipp operators to contact the FCA if they feel unable to meet their financial commitments. In the statement, the FCA said: “We reiterate that if the outcome of this case calls into question a Sipp operator’s ability to meet financial commitments as they fall due, they should contact the FCA immediately. We also remind firms of their obligations to treat complainants fairly and handle complaints according to the rules set out in the Dispute Resolution Handbook.”

 

Pensions minister requests copies of ESG statements

(AF3, FA2, JO5, RO4, RO8) 

Guy Opperman has written to 50 of the largest pension funds to remind them on their new duties. Since the 1 October 2019, pension schemes with more than 100 members have had to disclose how they consider risks from environmental, social and corporate governance (ESG) factors, including climate change. 

The pension minister has requested copies of their statements of investment principles which set out how they meet their ESG requirements. The Department of Work and Pensions (DWP) aim to compile a record so the minister can monitor compliance with the new regulations that aim to make funds pay greater attention to environment issues. 

In the DWP press release Mr Opperman is quoted as saying that pension schemes “must meet their responsibilities to savers now and in the future, and to protect the future of the planet.”