TAXATION AND TRUSTS

 

The cash basis of accounting - a reminder

(AF1, AF2, JO3, RO3)

HMRC’s latest update for Tax Agents, includes the following reminder regarding the expansion of the cash basis of accounting.

 

From the 2024/25 tax year (i.e. the current tax year), the cash basis will become the standard way to calculate income and expenses for self-employed people and partnerships who are completing and submitting their income tax self-assessment return. If businesses wish to use traditional accruals accounting, or they are excluded from using the cash basis, from 2024/25 they will need to opt out of the cash basis when submitting their self-assessment return. The first return for which this will be required is the 2024/25 return, due (normally) by 31 January 2026.

 

What is the cash basis?

 

The cash basis is a method of accounting that self-employed people and partnerships can use to calculate trading profits for income tax purposes, as an alternative to traditional accruals accounting.

 

It is a simplified regime that reduces the complexity of keeping records, calculating profits, and reporting income to HMRC while still providing an appropriate measure of profits for many businesses.

 

Cash basis changes from the 2024/25 tax year

 

1. The cash basis will be the default way of calculating taxable profit, with an opt-out available to use traditional accruals accounting.
2. The turnover limits of £150,000 and £300,000 will be removed, allowing eligible self-employed people and partnerships of any size to use the cash basis.
3. Loss restrictions have been removed so both the cash basis and accruals accounting businesses will be subject to the same tax rules. This will allow cash basis users to set their losses off against other income.
4. Interest restrictions have been removed so both cash basis and accruals accounting will be subject to the same tax rules, allowing cash basis businesses to deduct all of their business interest.
5. People with more than one business will be able to choose whether they use the cash basis or accruals accounting for each business they have, rather than having to pick one method for all their businesses.

 

More information on the changes to cash basis is available on GOV.UK.

These changes only apply to the cash basis for trading income; no changes are being made to the cash basis for property businesses.

 

Another High Income Child Benefit Charge case lost by HMRC (AF1, RO3)

The case of Sarah Manzi, in which she successfully appealed against four tax assessments and a penalty in respect of the High Income Child Benefit Charge (HICBC).

 

Child Benefit is paid, upon a claim, to the parent or carer of a child up to the age of 16, or 20 if in approved education or training.

 

The aim of the HICBC is to make any Child Benefit recipient repay some or all of their Child Benefit back (as tax) if they or their partner has an individual adjusted net income exceeding £60,000 per year. The repayment is at the rate of 1% of total benefit paid for each £200 of income above the threshold, up to £80,000, at which point the tax charge matches the total benefit.

 

In the recent case of Sarah Manzi (TC09219), the taxpayer started claiming Child Benefit in 2005 (well before the introduction of the HICBC in 2013). Throughout the 2014/15 to 2019/20 tax years, she paid income tax through PAYE with her income during that time exceeding the then HICBC threshold of £50,000. However, she did not notify her liability to the HICBC or file a self-assessment tax return.

 

On 3 December 2019, HMRC sent Ms Manzi a letter advising her to check her liability for the HICBC in earlier tax years. On 9 December 2019, she called HMRC and spoke to an HMRC officer, who advised her that the letter may have been sent in error but that she should deregister for Child Benefit (which she did) and that, otherwise, she did not need to take any further action.

 

However, on 1 June 2021, Ms Manzi received a letter from HMRC informing her that she owed HICBC totalling £10,480 covering the 2014/2015 to 2019/20 tax years. She called HMRC on 10 June 2021 and explained that she had stopped claiming Child Benefit on 9 December 2019, and she then heard nothing further from HMRC until 10 October 2022, (HMRC had paused all work on the HICBC on 16 June 2021, pending the decision of the Upper Tribunal in the case of HMRC v Jason Wilkes) when HMRC wrote to her confirming that the total tax charges had been reduced to £9,930 to reflect her claiming Child Benefit for only part of the 2019/20 tax year.

 

It wasn’t until 1 November 2022 that HMRC formally issued notices of assessment, a self-assessment statement and a notice of penalty assessment. In addition to the £9,930 HICBC figure, Ms Manzi was charged penalties of £1,862.20 and she was also liable for late payment interest.

 

Due to HMRC’s delay in issuing the tax assessments, only the assessments for the 2018/19 and 2019/20 tax years fell within the usual four-year time limit. So, HMRC argued that the assessments for the earlier tax years were valid because the taxpayer had failed to take reasonable care or, alternatively, had no reasonable excuse for failing to notify her liability to the HICBC (in which case HMRC would benefit from a longer time period).

The taxpayer appealed to the First-tier Tribunal (FTT). The Tribunal judge considered that ‘reasonable excuse’ and ‘reasonable care’ meant the same thing and that the taxpayer’s ignorance of the HICBC prior to December 2019 amounted to a reasonable excuse. She was an employee who had always been within the PAYE system. The HICBC had not existed at the time she started to claim Child Benefit. She had never had any other source of income requiring her to file a self-assessment tax return and, despite HMRC’s various media campaigns, she had not been made aware of the requirement to notify her chargeability to the HICBC when her income increased over the then £50,000 threshold.

 

That excuse ended when she received HMRC’s letter in December 2019. However, the FTT found that she had a further reasonable excuse based on the HMRC officer’s advice during the phone call on 9 December 2019 that the letter may have been an error and that she did not need to take any further action. In the FTT’s view, that advice excused the taxpayer’s failure to notify her chargeability to the HICBC until HMRC wrote to her on 1 June 2021 (by which time it was too late for her to notify by filing a self-assessment tax return).

 

HMRC disputed that the 9 December 2019 phone call ever took place but did not include its telephone logs in evidence (an omission which the FTT called ‘stark’ and which HMRC could not explain in the hearing). HMRC also argued that none of its officers would have given the advice which the taxpayer claimed to have received over the phone.

 

However, in the absence of any evidence to support HMRC’s assertions, the FTT found that the taxpayer’s account supported the conclusion that the phone call had indeed taken place and that she had been advised that she did not need to take any further action.

 

As the FTT decided that the taxpayer had a reasonable excuse, HMRC’s tax assessments for the tax years 2014/15 to 2017/18 were out of time, and so no HICBC was payable for those tax years. In addition, HMRC’s penalty assessment had to be cancelled. The tax assessments for the 2018/19 and 2019/20 tax years, in the amounts of £1,788 and £1,238 respectively, were issued within the four-year time limit, so remained payable. However, the total interest would be reduced, as four of the tax assessments were out of time.

 

Comment

This case is another example of a taxpayer having to go to Tribunal because they were unaware of the requirement to file a self-assessment return to notify a liability to the HICBC. It will reaffirm the assertion for many that the collection of the HICBC should be simplified.

 

In addition, the HICBC has been heavily criticised for the way two-income families, where both earn less than £60,000, are treated compared to a single parent earning more than £60,000.

Two earners on £60,000 a year, so a combined income of £120,000, lose no Child Benefit.

 

The Spring Budget announcement of a plan to administer the HICBC on a household income-based system rather than on an individual basis, by April 2026, didn’t make any progress before Parliament was prorogued ahead of the election, so it is unclear if this change will go ahead under the new Labour Government. (Prorogation brings to an end nearly all Parliamentary business.)

 

A successful claim for the non-residential rate of stamp duty land tax to apply

(AF1, RO3)

A case where HMRC tried and failed to persuade the First-tier Tribunal (FTT) that a substantial area of woodland attached to a dwelling was residential for stamp duty purposes, without having visited the property.

 

The case was TC09203, in which the taxpayer, Marie Guerlain-Desai, purchased, in 2021, for £3.16m, a property comprising a six-bedroom house set in 16.6 acres of land, including a triple garage, outbuildings, four acres of private formal gardens and 12 acres of mature woodlands at the rear of the property.

 

The taxpayer filed a stamp duty land tax (SDLT) return describing the property as entirely residential and paid the £372,750 tax due on that basis. However, a few weeks later, her agent sent an amended SDLT return to HMRC claiming that the woods were non-residential. This claim was that the purchase was mixed-use and subject to the lower SDLT rates applicable to non-residential property. The rate of SDLT on mixed-use transactions, so those which are partly residential and partly non-residential, is only 5% compared with rates of up to 17% for purchases of wholly residential property. The agent requested a refund of £225,250 plus interest.

 

HMRC rejected this claim and the taxpayer appealed to the FTT.

 

HMRC argued that the woods formed an “intrinsic and integral part of the garden or grounds” making the property entirely residential within the meaning of section 116 of Finance Act 2003 and subject to the full SDLT rate. Applying what it referred to as “a balancing exercise”, HMRC weighed up various relevant factors from its SDLT guidance (SDLTM00440 to SDLTM00480) including the historical and present use; layout; proximity to the dwelling; and legal factors.

 

HMRC argued that: 

 

• the purchase of the dwelling house and the woods as a single parcel of land demonstrated that there was a relationship between them;
• historically, the woods had been a key selling point for the property and essential to its rural character as well as providing privacy and security;
• the woods and the dwelling house were contained in the same HM Land Registry title;
• the woods were not used or occupied for a purpose separate from or unconnected to the rest of the grounds, or exploited or used by a third party; and
• the woods surrounded, and were physically adjoined to, the dwelling house.

 

The taxpayer agreed that a multifactorial assessment based on the same factors should be applied. However, the evidence she put forward tipped the scales towards the woods being non-residential. She argued that the woods did not perform any function in relation to the dwelling and the size and extent of them, at 12 acres was “much more extensive than is appropriate to a dwelling house of this size”. She said that the woods were “more in the nature of a public space enjoyed by local residents”. Although there was some signage stating that the woods were private, Ms Guerlain-Desai explained that, in reality, they were not. As well as neighbours using each other’s woodland areas for daily walks, the woodlands had become a favoured spot for the local community. Photographic evidence was provided that showed that the woods were connected to other woodland areas, including woodland open to the public owned by the National Trust. Further, it was managed by a third-party land company as part of a much larger woodland covering 30 acres and 35 different properties. There was no fencing restricting or deterring the general public from accessing the woods. In contrast, the private garden of the dwelling was fenced off from the woods and a privacy screen of mature bushes and trees had been established to separate the two.

 

There was no formal use or occupation of the woods separate from and unconnected with the dwelling house other than the fact it had become a wooded area with public access. However, the FTT found that, despite the legal position, in reality, the woods had evolved into common land with unrestricted access given to the public, including dog walkers and cyclists. As a consequence of the public access, other people had rights over the land and the taxpayer had obligations of maintenance on the property.

 

The Tribunal judge was not persuaded that the woods were a key selling point, nor essential to the character or function of the dwelling and the private garden. The woods had become similar to a common and had little connection to the dwelling. In addition, the woods did not have a functional purpose or use that supported the dwelling. On balance, the FTT found that the woods did not comprise the gardens and grounds of the dwelling in terms of the SDLT legislation and the taxpayer’s appeal was allowed.  

 

In this case, the taxpayer provided a witness statement, extensive evidence including several photographs and was examined and cross-examined, leading the FTT to consider her a credible witness. HMRC, on the other hand, admitted that the decision had been made to reject the SDLT amendment without anyone from HMRC having visited the property.

 

Despite this, HMRC’s counsel made statements such as that: the woods could be “viewed from the dwelling house”; “provide a treasured view to the dwelling”; and “provided a degree of privacy and security from users of nearby public footpaths”. The judge noted that these statements were “in complete contradiction to the evidence of [the taxpayer] who lived at the property and who referred to photographs”. Ms Guerlain-Desai’s evidence showed that there was no view of the woods from the dwelling house and vice-versa. 

 

Unsurprisingly, given the relative perspectives, the FTT was inclined to put more weight on the taxpayer’s submissions.

 

Perhaps if an HMRC officer had visited the property in the first place, HMRC might have accepted the taxpayer’s amended SDLT return, and the case need never have gone to the FTT.

 

Comment

 

Changes were expected to be announced to the mixed-use rules in the March 2024 Budget. However, whilst the scrapping of multiple dwellings relief (MDR) was announced, it was confirmed that the mixed-use rules would remain unchanged. It will be interesting to see if the new Labour Government takes a different view of the mixed-use rules.

 

The absence of any anticipated anti-avoidance legislation on mixed-use purchases has been cited as the cause of a number of failed claims being submitted that had very little hope of success, often instigated by repayment agents. Perhaps HMRC officers fell into the trap of assuming this would be another easy win when deciding it would not be necessary to actually view the property themselves in this case.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

June inflation numbers

(AF4, FA7, LP2, RO2)

The UK CPI inflation rate for June 2024, which was 2.0%, unchanged from May.

 

The CPI annual rate for June was 2.0%, unchanged from May, but 0.1% above the Reuters consensus forecast and expectations of a small drop from the Bank of England. After beating the USA and Eurozone on the way up, UK annual inflation is now usefully below that of the Eurozone (2.5% for June) and USA (3.3% in June).

 

The monthly UK CPI reading was up 0.1% from May. The CPI/RPI gap narrowed 0.1% to 0.9% with the RPI annual rate falling by 0.1% to 2.9%. Over the month, the RPI index rose by 0.2%.

 

The Office for National Statistics (ONS)’s favoured CPIH index was unchanged to an annual 2.8%, maintaining its unusually high 0.8% above the CPI. As we said last month, a large part of that excess is due to the owner occupiers’ housing (OOH) category, which has a 16.5% weighting in the CPIH but is absent from the CPI. The OOH is up 6.8% over the past year.

The ONS attributed the flat CPIH inflation to a pair each of main upward and downward drivers:

Main upward drivers 

 

Restaurants and hotels. Prices in this division rose by 0.9% between May and June this year, compared with a lower monthly rise of 0.5% a year ago. The annual rate rose to 6.3% in the year to June 2024, up from 5.8% in the year to May.

The rise in the annual rate was almost entirely because of the price of hotels, which saw a monthly rise of 8.8%, a higher rate than the 1.7% a year earlier. This rise – which may have been linked to the Taylor Swift tour – was partially offset by the price of restaurants and cafes which saw a monthly rise of 0.3%, lower than the 0.5% rise a year earlier.

 

Transport. Prices in the transport division rose by 0.7% in the year to June 2024, compared with a rise of 0.3% in the year to May. This is the largest annual price rise since September 2023, where it was also 0.7%. On a monthly basis, prices fell by 0.2% this year, compared with a fall of 0.7% a year ago.

 

The increase in the annual rate was mainly because of second hand cars, where prices decreased by 0.3% on the month compared with a decrease of 1.9% a year ago. Second hand car prices decreased by 9.8% in the year to June 2024, the 11th consecutive month of annual decrease.

 

Maintenance and repairs of personal transport equipment and air fares also provided upward effects, although these were smaller in magnitude. Railway fares were one of the few categories to provide a counteracting negative effect.

 

Overall motor fuel prices rose by 2.6% in the year to June 2024, compared with a rise of 2.3% in the year to May.

 

Main downward drivers 

 

Clothing and footwear. Prices in this division rose by 1.6% in the year to June 2024, compared with a rise of 3.0% in the year to May. On a monthly basis, prices fell by 1.2% this year, compared with a 0.2% rise a year ago. The fall in the annual rate was the result of downward effects from garments for women, garments for children, footwear for women, and garments for men. Prices in all these categories apart from garments for children saw price falls in June 2024 coupled with a rise in the monthly price in June 2023. Monthly prices for garments for children fell in June 2024 at a greater rate than the fall in June 2023.

 

These price falls in the latest month may reflect a larger proportion of sales markers (indicating a temporary reduction in prices) in this division than occurred in June 2023.

 

Food and non-alcoholic beverages. Prices of food and non-alcoholic beverages rose by 1.5% in the year to June 2024, down from 1.7% in the year to May. The June figure is the lowest annual rate since October 2021, when it was 1.3%, and compares with 17.4% a year ago. The annual rate has eased for the 15th consecutive month from a recent high of 19.2% in March 2023, the highest annual rate seen for over 45 years.

 

Prices rose by 0.2% in June 2024, compared with a monthly rise of 0.4% a year ago. Prices have been relatively high but stable since early summer 2023, compared with sharp rises over the previous 12 months.

 

Five of the twelve broad CPI divisions saw annual inflation decrease, while five rose and two were unchanged. The category with highest annual inflation rate remains alcoholic beverages and tobacco (3.9% of the Index) which recorded an 7.3% annual increase. Five divisions (Food and non-alcoholic beverages Clothing and Footwear; Housing, Water, Electricity, Gas and Other Fuel; Furniture; Household Equipment and Maintenance; and Transport), accounting in total for 50% of the Index, posted an annual inflation rate below 2.0%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was flat at 3.5%, in line with consensus expectations. Goods inflation in the UK fell 0.1% to -1.4%, while services inflation continued to be sticky, staying unchanged at 5.7%, 0.1% above the Reuters consensus.

Producer Price Inflation input prices fell by 0.4% in the 12 months to June 2024, against a revised fall of 0.7% in the year to May 2024. The corresponding output (factory gate) figures saw a 1.4% annual rise against a previous 1.7% increase. 

 

Comment

 

In launching its latest World Economic Outlook yesterday, the International Monetary Fund (IMF) said, ‘Services inflation is holding up progress on disinflation, which is complicating monetary policy normalization. Upside risks to inflation have thus increased, raising the prospect of higher for even longer interest rates…’

 

The Bank of England will be attuned to that warning, given that, while the CPI has dropped from 7.9% in June 2023 to 2.0% in June 2024, the services component has only fallen from 7.2% to 5.7%. Tomorrow will see the latest earnings data published and if that confirms continued strong pay growth (6.0% without bonuses was the last print), there is unlikely to be an announcement of a base rate cut on 1 August, after the Bank’s next meeting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC Public Service Pensions Remedy Newsletter – July 2024

(AF8, FA2, JO5, RO4)

 

HMRC have issued the latest Public Service Pensions Remedy (McCloud) newsletter

This focuses on the calculation and submission service HMRC plan to make available to help members and their advisers calculate any tax charges and rebates as a result of the remedy. 

The calculation service was initially launched at the end of last year but was removed earlier this year to correct errors and improve the functionality.

 

As a reminder, the remedy will involve the benefits of many members of public sector schemes being moved back from the career average scheme to the final salary scheme for the remedy period.  The remedy period covers the seven years between 6 April 2015 and 5 April 2022.  For this period, members will be provided with revised pension inputs for the relevant years.  For some, mainly higher earners, this may create tax rebates or tax charges.  Rebates will only apply to those who have previously paid annual allowance charges either directly or using scheme pays. 

 

The updated calculation service is expected to be issued in September 2024.  This is just in time for when many members will receive their revised pensions saving statements which are due by the end of October 2024.

 

As part of the improvements, members will no longer be required to input their original pension input amounts.  They will just need the revised ones provided by the scheme.

 

New functionality will also aim to help members identify whether they are subject to tapering in each of the tax years and use the adjusted income to calculate the correct tapered annual allowance where relevant.

 

The service will automatically notify schemes of some scheme pays credits and also allow members to make scheme pays elections directly through HMRC rather following the usual process where the member notifies the scheme.

 

Triage

 

Whilst the number of members impacted by the remedy will be enormous, only a small percentage of these will have a change in tax position.   Therefore, HMRC will introduce a triage process to help members decide whether they need to use the full calculator and submission service or not. 

 

Interim process for members

 

Whilst the service is unavailable, members who need to make a submission to HMRC can email publicservicepensionsremedy@hmrc.gov.uk with ‘PSPR submission request’ in the subject line.

 

They can also contact HMRC by telephone and select option 1.

TPR: Master trust supervision evolves to focus on investments, data and innovation

(AF8, FA2, JO5, RO4)

 

The Pensions Regulator (TPR) has issued a Press Release setting out details of an event it hosted in London for an audience of master trust chairs of trustees, trustees, scheme strategists and scheme funders.

 

Speaking at the Neil Bull, TPR’s Executive Director of Market Oversight, has announced that TPR is changing its supervision of master trusts. He said: “Value has to be the guiding light for all that we do. For our engagement with master trusts that means: A focus on investments. A focus on data quality and standards. And a focus on innovation at retirement.”  Mr Bull went on to say that TPR would:

 

• probe and challenge more on how a master trust’s approach to investments delivers for savers.
• investigate how a master trust is seeking the best possible long-term risk-adjusted returns.
• look more broadly at master trust investment governance practice and investment decision making.
• request deep dives into the systems and processes of master trusts.

 

He added that the changes would see master trusts become the “gold standard for pension provision”

 

 

Boost for new National Wealth Fund to unlock private investment

(AF8, FA2, JO5, RO4)

 

A Press Release from HM Treasury, Department for Energy Security and Net Zero, Department for Business and Trade Chancellor has confirmed that Rachel Reeves and Business Secretary Jonathan Reynolds have directed officials to start the process of establishing the new National Wealth Fund. This initiative will integrate the efforts of the UK Infrastructure Bank and the British Business Bank to stimulate private sector investment and drive economic growth.

 

A taskforce, led by Dr. Rhian-Mari Thomas, the head of the Green Finance Institute, was set up when the Labour Party was in opposition and has now delivered an interim report setting out design principles for the NWF along with five “key foundational recommendations”. Other notable members include former Bank of England governor Mark Carney, Barclays CEO CS Venkatakrishnan, Aviva CEO Dame Amanda Blanc, and major institutional investors.

 

HM Treasury is to engage with industry, government departments and the UK’s public finance institutions to set into motion detailed plans for the creation of the NWF. As part of this the case for bringing together bodies from across the UK’s public finance institutions will be examined. Further detail will be set out ahead of the Government’s international investment summit later in 2024. New legislation will be brought forward when parliamentary time allows, as the NWF will be a statutory body.

 

The National Wealth Fund aims to consolidate key institutions and attract investors to 'mobilize billions more in private investment and generate returns for taxpayers'. An additional £7.3 billion has been allocated through the UK Infrastructure Bank to initiate investments immediately, according to the Treasury. This funding, which focuses on sectors such as green technologies and growth industries, aims to catalyse further private investment and is supplementary to the existing UKIB funding.

 

As part of the establishment of the National Wealth Fund, reforms will be implemented in the British Business Bank, which falls under the Department for Business and Trade. These reforms will enhance the bank's ability to mobilize institutional capital by leveraging its investment portfolio and proven track record as the UK's largest venture capital investor.

Chancellor Reeves and Ed Miliband, the Secretary of State for Energy Security and Net Zero, have convened the inaugural meeting of the National Wealth Fund taskforce at No. 11 Downing Street to commence this initiative.

 

The Pensions and Lifetime Savings Association (PLSA) has commented in a Press Release, on the Government's plan. Nigel Peaple, Director of Policy and Advocacy at the PLSA said: “In examining the role pensions might play in providing additional investment in UK growth assets, the PLSA recommended last year that the Government take steps, alongside the British Business Bank, to improve the pipeline of investible assets available to pension funds. We welcome the Government acting decisively to set out plans for a National Wealth Fund for this purpose and look forward to working in partnership to help develop solutions that work for savers, pension funds and the economy.”

 

 

FOS: Annual complaints data and insight 2023/24

(AF8, FA2, JO5, RO4)

 

The Financial Ombudsman Service (FOS) has published its Annual Complaints Data and Insights for the year to 31 March 2024. Overall, it received 198,798 new complaints in 2023/24 compared with 165,149 the previous year.  FOS highlights that banking and payments complaints have reached the highest-level in at least a decade. Looking more closely at pension complaints:

 

• Personal Pensions (All Categories), 4,377 complaints were received with a complaint uphold rate of 41%.
• Personal Pensions (DB Transfers), 766 complaints were received with a complaint uphold rate of 67%.
• QROPS, 28 complaints were received with a complaint uphold rate of 35%.

 

• SIPPs (all categories), 1,652 complaints were received with a complaint uphold rate of 62%.
• SIPPs (DB Transfers), 425 complaints were received with a complaint uphold rate of 71%.
• SIPPs (on Platform), 122 complaints were received with a complaint uphold rate of 37%.