TAXATION AND TRUSTS

 

National Audit Office criticises HMRC

(AF1, RO3)

 

The National Audit Office says that taxpayers are being 'let down by poor HMRC customer service'

 

Source: HMRC, OBR estimates   

 

As the graph above demonstrates, the freeze on the personal allowance has been dragging up the number of UK income taxpayers in recent years. On the Office for Budget Responsibility (OBR)’s latest projections (from the March 2024 EFO), by 2028/29 the taxpayer population will be almost a quarter larger in 2028/29 than it was in 2018/19. In 2024/25 it is estimated to have already grown by 18%.

 

That rapid expansion is causing problems for HMRC, as has been underlined by a new report from the National Audit Office (NAO) looking at HMRC customer service. Its conclusions include:

 

• The Government has loaded more tax collection work onto HMRC and has done little to reduce it beyond raising the automatic threshold for self-assessment from £100,000 to £150,000 for 2023/24 onwards. As, the NAO observes, that move has been criticised because of the importance of the £100,000 threshold in terms of the personal allowance and tax-free childcare.

 

• HMRC’s telephone and correspondence services have been falling below the expected service levels for too long, and HMRC has not achieved planned efficiencies. The average telephone wait time was nearly 23 minutes in the first 11 months of 2023/24 (up from five minutes in 2018/19). The NAO view is that, to achieve value for money, HMRC must provide a timely and effective service for taxpayers needing help with their tax or benefits, even as it attempts to reduce costs.

 

• HMRC’s strategy is to encourage taxpayers to turn to its digital services first so that queries can be resolved online. This aims to cut costs servicing telephone calls and correspondence, as well as freeing up staff to serve people who need extra support. In the NAO’s view, while digital transactions can be easier and faster for many taxpayers to access and submit information, they do not currently allow taxpayers to resolve more complex queries.

 

• Forecasting how far and fast digital services will reduce demand for telephone and correspondence is highly uncertain and, to date, digital services have not had the hoped for effect. The total number of telephone calls has reduced, but the total amount of time advisers are spending on each call has increased, meaning HMRC’s workload has reduced more slowly than reductions in call volumes.

 

• While many of HMRC’s digital services work well, they have not made enough of a difference to taxpayer contact levels. In the face of funding pressures, HMRC has pressed on with attempts to reduce costs despite its poor performance. HMRC and its growing band of ‘customers’ have been ‘caught in a declining spiral of service pressures and cuts’.

 

• HMRC has been unable to cope with telephone demand and consequently fallen short in processing correspondence and dealing with telephone calls according to procedures, creating further service pressures. HMRC felt it had no choice but to close phone lines to catch up and compel people to use digital services. It has had to reverse this approach in the face of stakeholder opposition (aka Jeremy Hunt).

 

• HMRC now faces a significant challenge without increasing its capacity. The NAO believes HMRC’s approach to cutting services as it introduces new digital solutions has been too aggressive. More time is required for new services to bed in and to understand the difference they make before undertaking any staff reductions. The NAO says that, without a more measured approach, services will continue to suffer, and unnecessary service pressures and contact issues will remain.

 

• HMRC cannot be certain that tax revenue is not suffering as a result. There are opportunities to reduce unnecessary levels of contact and improve efficiency. HMRC must demonstrate it understands how to make these gains, and form more realistic plans for how to deliver these, while ensuring it maintains service levels.

 

 

 

EWHC interpret will leaving residual estate to fifteen charities

(AF1, JO2, RO3)

 

The England and Wales High Court (EWHC) have interpreted the will of Marjorie Thompson (the deceased), (Dryden v Young, 2024 EWHC 1095 Ch). The will leaves the residue of her estate in equal segments to fifteen charities, some of which were named incorrectly or ambiguously.

 

In 2016, Marjorie Thompson had her will drafted by a solicitor no longer practicing who then passed the relevant files onto another firm. When Marjorie died, on 9 April 2020, the firm confirmed that they did not hold will files, only a limited number of deeds and documents including a will made in 2011 containing a list of charities. There was therefore little information available on why the residuary gifts were drafted as they were or who the beneficiaries were intended to be.

 

The Identities of seven of the named charities were unclear, so Marjorie’s bank accounts were checked in a bid to identify the beneficiaries of the gifts. Unfortunately, this did not give any answers as to who the intended beneficiaries were. It was therefore up to the EWHC to determine the validity of the gifts, whether any gift lapsed, passed on intestacy or was to be applied cy-près.

 

Marjorie’s estate was valued at £1.48 million and the latest accessible estate accounts indicated that a one-fifteenth share of the residual estate would be worth approximately £105,000, subject to the costs of the proceedings. If any of the charity gifts failed, that gift could fall into the residual estate and increase the bequests received by the remaining charities. However, clause 13 of the will added a complication by barring any charity from benefiting if it had changed its name or merged with another before the estate was distributed.

 

Among the principles obtained by the court for the available authorities, the first was:

 

'It is first necessary to construe the words of the gift to identify the donee. In the case of gifts to apparent charities it is necessary to identify if the gift is conferred upon an entity which existed at the date of the will and what that entity is. If there is no such entity or it is unclear which entity is meant then the question will be whether the gift evinces a gift to charity which will be applied cy-près by way of scheme.'

 

Other principles made reference to the purposes of the charitable gifts, what happens if the named charity no longer exists, never existed, or ceased to exist with no clear successor. There were also distinctions to be drawn on whether or not the charity is incorporated.

 

The EWHC proceeded to deal with each of the ambiguous charities on the facts. These were:

 

• The Animal Defence Society – which ceased to exist in 1971 and was succeeded by the Animal Defence Trust.
• The Animal Health Trust – which was in liquidation and so the bequest could be paid to its creditors.
• The Society for Promotion of Nature Reserves – which has been renamed several times since 1976 and is now The Royal Society for Wildlife Trusts.
• The Donkey Sanctuary – with an address in Berkshire, but which has since been taken over by a Devon-based charity.
• The Home Rest for Horses – the name of which doesn’t exist but is used by a private charity called Horseworld Trust.
• The Heavy Horses Preservation Society – which does not exist but may be referring to the Shire Horse Society.
• The Society for the Preservation of English Countryside – which the EWHC interpreted as meaning the Campaign to Protect Rural England.

 

In all of the cases, the court identified a suitable body to receive the gift left in Marjorie’s will so none of the gifts eventually failed, regardless of the unusually worded clause 13 in the will. The EWHC interpreted the clause as biting only ‘on relevant identified changes that occur after the date of the execution of the Will’ and concluded that all such changes took place before the date of the execution of the will.

 

Comment

 

This case is a useful reminder of the need to review wills on a regular basis. This is even more important now that charitable reliefs are restricted to UK charities. Care should be taken where individuals have wills in place that leave a donation to a charity to determine whether it qualifies for inheritance tax relief under the new definition. In most cases, a legacy to an EU or EEA charity will now no longer be free of inheritance tax (and will no longer reduce the overall inheritance tax bill by 10% (to 36%)).

 

 

Consumer Duty extends its reach

(AF1, AF2, JO3, RO3)

Firm's closed products and services will need to be compliant with the FCA's expectations under the Consumer Duty from 31 July 2024.

 

The Consumer Duty was not applied to closed products at 31 July 2023 when it came into force for open products and services. This extension was designed to help firms with large numbers of closed products to manage the additional implementation challenges. However, that will change from 31 July 2024.

 

For the purposes of the Duty, a closed product or service must meet both of the following criteria:

 

• there are existing customers who took out a contract before 31 July 2023, and
• the product or service hasn’t been marketed or distributed (including by renewal) on or after 31 July 2023.

 

An example of a closed product would be a pension product that is no longer sold to new customers, but where existing policyholders can continue to pay in contributions. Another example is a Venture Capital Trust share class which is no longer open to investment, but in which the existing shareholders are still entitled to dividends.

 

On 16 May, the FCA sent a ‘Dear CEO/Director’ letter entitled ‘Implementing the Consumer Duty for closed products and services by 31 July 2024.’ The letter was intended to support them in their final preparations for this deadline and in it, the FCA reminds relevant CEOs and directors that:

 

“The Duty applies in full to closed products and services from the deadline. It does not apply to the past actions of firms. Instead, it applies to the ongoing actions of firms from 31 July 2024. For example, communications issued by the firm from 31 July 2024 for a closed product or service will need to comply with the Duty’s higher standards.”

 

However, firms do not need to have a target market or distribution strategy for closed products or services. They do, though, need to monitor and evidence that those products or services are delivering good outcomes for customers who hold them.

 

The FCA realises that, where the Consumer Duty is concerned, older products or services or those that have been closed might present issues that are not necessarily evident with those currently available to consumers. In light of this, it highlights five key themes for impacted firms to consider and address:

 

1. Gaps in firms’ customer data

Closed products and services may by nature be older, and the data firms hold about their customers may be incomplete, for example, due to challenges with complex legacy systems, back book purchases, and inadequate record-keeping practices at the time of sale.

 

2. Fair value

Firms’ actions from before the Duty came into force will be judged against the rules that applied at the time. From 31 July 2024, the Consumer Duty price and value outcome applies, including that there is and remains a reasonable relationship between the price customers pay and the benefits of the product or service.

 

3. Treatment of consumers with characteristics of vulnerability

Challenges such as gaps in data, the age and complexity of many of these products, inflexible legacy systems, and the fact that consumers’ circumstances and needs change over time can all drive risks. of harm, particularly if firms are not acting with appropriate levels of care.

 

4. Gone-away or disengaged customers

This issue may be more acute in closed products and services due to their age profile. This poses challenges for firms, and also potential harm for their customers (including customers paying for products they no longer need, want or are eligible for, and customers failing to take advantage of product features).

 

5. Vested contractual rights

Vested rights include pre-existing contractual rights to which a firm already has legal entitlement (e.g. annual fees that are due) and rights to payments falling due in the case of a contractually-specified event such as exit charges.

 

Comment

 

It is unclear how many closed products or services will be materially ready for the Consumer Duty implementation. However, the raised expectations in terms of client outcomes will no doubt be welcomed by some customers who feel they have little recourse since the full attention of providers switched from the active sale of the product to which they are subscribed.

 

INVESTMENT PLANNING

 

The psychology of inflation

(AF4, FA7, LP2, RO2)

 

CPI inflation. In April 2024 it was 2.3%, so why doesn’t it feel like it?

 

Inflation is now as close to the Bank of England’s 2% target as it has been since July 2021. However, there are a variety of explanations why a 2.3% inflation reading may not feel as good as the number would suggest:

 

• The yardstick for inflation is an annual change, but that is not the way most of us think about rising prices. You will not remember the price of an item exactly a year ago, but you may well recall ‘that only used to cost X’. The implicit timescale in such lookbacks is typically two to three years ago. The public sense of inflation is thus cumulative rather than annual. As the graph above shows, that makes a big difference now: three-year cumulative inflation is 20.9%, a long way from 2.3%. Perhaps more telling, 20.9% inflation is also just one percentage point below what a decade of 2% inflation would deliver.

 

• The basket of goods measured by the CPI is based on average spending which inevitably rarely matches individual experience. For example, if you do not eat out, then the 11.2% weighting in the CPI for restaurants and cafes (current annual inflation 6.2%) is irrelevant. The Office for National Statistics (ONS) has responded to this by providing a personal inflation rate tool available here.

• There is a tendency to focus on regular purchases as a personal guide to inflation. In the USA and, to a lesser extent the UK, the classic example is the widely advertised price of petrol. Until recently in the UK food prices were a very visible aspect of inflation. Food inflation is now down to an annual rate of 2.8%, but six months ago it was 10.1% and a year ago 19.3%. Over the last three years food prices have risen by 27.3%.

 

• The CPI does not incorporate any direct allowance for mortgage costs. The nearest it comes is a 7.8% weighting for housing rentals. The ONS’s favoured inflation yardstick, CPIH, includes a 16.5% weighting for owner occupiers’ housing costs (OOH). Even this does not incorporate mortgage costs, instead using a rental equivalent measure. The April reading of CPIH was 3.0%, with the OOH component running at 6.6%, its highest since July 1992. CPIH had been below CPI between August 2021and October 2023.

 

• The flip side of price inflation is earnings inflation. The former does not feel as bad if the latter is at least keeping pace with it. That has not happened in recent times, with the highest earners suffering the biggest gap between the two. The lowest earners have been protected by the sharp rises in the National Living Wage. Over the last three years to March 2024, inflation-adjusted average weekly earnings fell by 2.3%. Frozen tax bands and allowances then add to the net income pain.

 

• Annual inflation measures consider only two points in time which creates the statistical quirk of base effects. These showed up in April’s inflation figures, through the April Ofgem price cap, meaning utility prices fell by 12.3% between March 2024 and April 2024, but were flat for the same period in 2023. There was a smaller but similar effect for tobacco, as this April did not see a duty increase whereas last April did.  

 

Comment 

Inflation is expected to trickle upwards for the remainder of the year as some of the base effects drop out. That, and the reduced prospects for interest rate cuts from the 2.3% reading, have possibly helped in cementing Wednesday’s decision to announce a summer election.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dow Jones Index reaches an all-time high

(AF4, FA7, LP2, RO2)

The Dow Jones Index, which closed above 40,000 for the first time on Friday. So what?

 

 

On Friday, the Dow Jones Industrial Index (DJI) closed above 40,000 for the first time, having flirted with the threshold intraday during the week. Hitting a new big round number did not merit as many headlines as you might have expected for one good reason: the DJI is a not an index any professional investor pays attention to. The Dow, as it is commonly known, falls firmly into the if-it-didn’t-exist-we-wouldn’t-invent-it-now category:

 

• It has just 30 constituents, a hangover from its original creation in 1896, when sophisticated calculation meant using a slide rule. The 30-share coverage makes it difficult for the Dow to be fully representative of the USA equity market.

 

• Nearly all modern indices have an objective mathematical basis for determining their constituents – hence the front-running that occurs ahead of review dates. The Dow´s constituents are chosen by The Wall Street Journal´s editorial board. Their discretionary changes are few and far between – there have fewer than 60 since the index’s birth. The latest, which took effect on 26 February 2024, was the first since August 2020 and saw Amazon (!) enter the index and Walgreens Boots Alliance leave. The main reason for the change seemed to be Walgreen’s lowly share price, which meant it had an index weighting of about 0.4%.

 

• The Dow is a price-weighted index whereas modern indices are nearly always weighted by market-capitalisation. The mathematics of price-weighting mean that higher priced shares have more influence on the index number than lower priced shares. For example, a $1 change in Walt Disney (share price $103.25) has the same effect as a $1 change in the largest constituent, UnitedHealth Group, (share price $524.63), even though proportionately the Walt Disney change is five times as great.

• Despite the name, the constituents are no longer purely industrials. As the list of the Dow’s member companies shows, the index has a heavy weighting to financial services (its top sector at 23.16%) and a more modest weighting to technology (18.63% - and no Nvidia). The corresponding figures for the capitalisation-weighted S&P 500 are 12.67% and 30.16% (of which 5.05% is Nvidia...)

 

Comment

 

The Dow’s only real virtue is its age. As the graph shows, it has understated the US stock market’s performance significantly in recent years.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC Pension Scheme Newsletter 160 – May 2024

(AF8, FA2, JO5, RO4)

 

As Pension scheme newsletter 160 covers the following:

 

• lifetime allowance abolition
• relief at source
• Managing pension schemes service
• contacting HMRC Pension Scheme Services

 

Areas of particular interest

 

Lifetime allowance abolition

 

Transitional tax-free amount certificates

 

HMRC have produces a tool that allows members to check if they can apply for a transitional tax-free amount certificate. 

 

HMRC want to remind providers that a transitional tax-tree amount certificate must contain the following:

 

• individual’s name, address and National Insurance number 
• individual’s lifetime allowance previously used amount expressed as a percentage of the standard lifetime allowance 
• amount that the scheme administrator is satisfied is the individual’s lump sum transitional tax-free amount 
• amount that the scheme administrator is satisfied is the individual’s lump sum and death benefit transitional tax-free amount.

 

Without this the certificate will not be valid.

 

Certificates should not have been issued or dated before 6 April 2024.

 

Contacting HMRC Pension Schemes Services

 

HMRC want to remind scheme administrators and practitioners that for any queries relating to the pension tax rules they should first consult the relevant tax manual.

 

Pension scheme administration pages provides guidance for pension scheme administrators, pension scheme practitioners, trustees and members.

 

The Pensions Tax Manual provides in-depth guidance on the pension tax rules. It helps you to deal with the most common questions about the rules and legislation.

 

If they still have queries following that,  below are use contact details for different types of queries

If the question relates to:

 

• migration of pension schemes to the Managing pension schemes service — you should email migration.mps@hmrc.gov.uk
• feedback on the Pensions Tax Manual — you should email  ptm.consultation@hmrc.gov.uk
• the Public Service Pensions Remedy — you should email  publicservicepensionsremedy@hmrc.go.uk
• relief at source annual return of information — you should email  reliefatsource.administration@hmrc.gov.uk

 

There is also the general contact details for any queries not covered in the above

 

Pension schemes - GOV.UK (www.gov.uk).

 

 

TPR: April 2025 and Furnished Holiday Lets

(AF8, FA2, JO5, RO4)

 

Looking back at the Budget a couple of months ago, it will be remembered that it was announced that from 6 April 2025, the special tax-treatment for Furnished Holiday Lets (FHLs) would be abolished. There have been many articles aimed at tax-firms explaining the implications for accountants and tax-advisers. The current tax treatment delivers a number of advantages, including:

 

• business asset disposal relief (BADR) can apply on a disposal of the business;
• holdover and rollover relief can be claimed;
• finance costs can be deducted in full;
• plant and machinery capital allowances can be claimed;
• profits can be strategically allocated to co-owners easily;
• profits count as relevant earnings for the purpose of working out the pension annual allowance.

 

However, very little has been commented on the fact that the profits will no longer be within the definition of Relevant UK Earnings (RUKEs) for the purposes of justifying tax-relievable pension contributions. Advisers should check their clients who are currently making pension contributions that are justified by FHL profits and use forthcoming annual review meeting to inform clients that, unless they have another source of RUKEs to justify their pension contributions these will either need to be stopped or reduced to the “basic amount” of £3,600 p.a., after 5 April 2025.

 

 

 

 

 

 

 

 

 

NAO: Investigation into the Pensions Dashboards Programme

(AF8, FA2, JO5, RO4)

 

The National Audit Office (NAO) has issued a report following on from an investigation it has undertaken into the Pensions Dashboard Programme (PDP). Following a letter from Labour MP Nick Smith in the summer of 2023, requesting that it considers investigating the delays in the delivery of the PDP.

 

The report found that the estimated overall cost of the project rose by 23% between 2020 and 2023, an increase from £235m to £289m, driven by a range of factors, including a rise in supplier costs and the delivery timetable being extended by two years. The investigation also revealed that the estimated gross benefits have reduced by 5%, based on an assessment of how much people would be willing to pay for a dashboard and the value of lost pension pots recovered, falling from £437m in 2022 to £413m in 2023. Delays to the project have been attributed by the investigation to capacity and capability issues, including a lack of digital skills and ineffective governance.

 

The DWP is set to bolster oversight of arm’s-length bodies and provide increased support. The DWP has also uncovered a failure by the PDP to meet Government data protection and security standards.

 

 

TPR: "Pensions schemes must get the basics right — the stakes have never been higher"

(AF8, FA2, JO5, RO4)

 

The Pensions Regulator (TPR) has issued a Press Release setting out the main points of the keynote speech given by their Chief Executive Nausicaa Delfas at Professional Pensions Live. In the speech, she has told the industry that schemes must get the basics right on data quality to deliver on key areas such as pensions dashboards and Value for Money (VfM). She sent on to set out TPR’s regulatory roadmap for pensions, which she said: “drives value for DC savers, security for DB members and higher standards of trusteeship for all.” TPR has also published the full text of the speech.

 

Ms Delfas said: “Regulatory compliance is not optional. You will see a step-change in our enforcement approach — going out into the market, at scale, to ensure schemes have high quality data and deliver value for members. The stakes have never been higher. Savers will soon be interacting with their personal data as never before through pensions dashboards and the [VfM] framework. Failure to meet the deadlines is not an option. That is why we will be engaging hundreds of schemes asking them to account for how they are measuring and improving their data and will be taking action where trustees are failing to meet our expectations.”