Technical news update 02/04/2020

Taxation and trusts

• Corporation Tax changes - Rates and allowances for Corporation Tax from 1 April 2020
• Coronavirus - funding the cost of Government support
• Borrowing for the Coronavirus
• Business Interruption Loan Enhancements
• COVID-19 – impact on house moves
• Owner managed businesses and the Job Retention Scheme
• Owner managed businesses and the Job Retention Scheme – HMRC confirms the Government’s Coronavirus Job Retention Scheme will not cover dividends
• Coronavirus Job Retention Scheme
• Dormant Assets Scheme: Consultation deadline extended
• Job Retention Scheme and Furlough payment
• Temporary changes to the Statutory Residence Test – COVID-19
• Reclaiming IHT on reduced value shares and collectives
• Fact sheet on CGT 30 days reporting and payment obligations
• Child Trust Funds – a reminder

Investment planning 

• UK dividend payments are set to fall sharply

Pensions 

• FCA produces COVID-19 guidance for pensions and retirement income firms
• PPF publishes updated PPF 7800 index - April 2020
• FOS publishes its Plan and Budget for 2020/21
• HMRC Annual Allowance
• PPF publishes Business Plan 2020/21
• MaPS reports on progress of pensions dashboards
• PPI: How could changes to price indices affect Defined Benefit schemes?

Taxation and trusts

Corporation Tax changes - Rates and allowances for Corporation Tax from 1 April 2020
(AF2, JO3)

HMRC has published updated information about the rates payable for corporation tax:

Rate for the year starting 1 April	2020	2019	2018	2017	2016	2015	2014
Small profits rate (companies with profits under £300,000)	-	-	-	-	-	-	20%
Main rate (companies with profits over £300,000)	-	-	-	-	-	-	21%
Main rate	19%	19%	19%	19%	20%	20%	-
Marginal relief lower limit	-	-	-	-	-	-	£300,000
Marginal relief upper limit	-	-	-	-	-	-	£1,500,000
Standard fraction	-	-	-	-	-	-	1/400
Special rate for unit trusts and open-ended investment companies (OEICs)	20%	20%	20%	20%	20%	20%	20%

Corporation tax on chargeable gains

If a company sells or disposes of certain chargeable assets, such as shares, a business premises, or buy-to-let properties, it will need to pay corporation tax at the above rates on any chargeable gains, i.e. on gains after available reliefs and allowances.

When working out the chargeable gain, the company can use Indexation Allowance Rates to reflect the increase in value of the asset between the time it was acquired and 31 December 2017. From 1 January 2018 Indexation Allowance is frozen. Where assets acquired before 1 January 2018 are disposed of on or after that date, the Indexation Allowance will be calculated using the Retail Prices Index (RPI), or factor, for December 2017, irrespective of the date of disposal of the asset.

Additional points to note

• Up to 5 April 2019, company gains on properties within the annual tax on enveloped dwellings (ATED) - regime – i.e. property let to a person connected with the company, not on market terms – were charged to capital gains tax (CGT) at 28%. Non ATED-related gains and losses were subject to the usual capital gains rules. If a non ATED-related gain accrued to a company within the scope of corporation tax on chargeable gains it was subject to corporation tax in the same way as other chargeable gains.
  However, the ATED-related CGT provisions were abolished on the introduction of extended rules for taxing gains on ‘immovable property’, on 1 April 2019. As a result, for disposals made from 6 April 2019, ATED-related CGT no longer applies, and any gain made by a company from this date will be liable to corporation tax.

• Gains on a company’s interest-based investments are generally chargeable to corporation tax under the loan relationships regime, as the profits arise, and are not deferred until a disposal.

Source: HMRC Guidance: Rates and allowances - Corporation Tax – dated 1 April 2020.

 

Coronavirus - funding the cost of Government support

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

Writing about the specifics of the economic and fiscal measures put in place to help individuals, the self-employed and businesses through COVID-19 is a dangerous thing - unless publication is instant. Why? Well, because so many changes are being made on an almost daily basis. And then, for those changes that are made, there are many questions raised that require clarification and more detail. This is hardly surprising.  Aside from the self-evident medical, clinical and logistical challenges that the virus brings there are the (just as self-evident) financial challenges to address pretty much “on the hoof”. Detail and anticipation of all consequences is often (inevitably) missing. Please don’t take this as criticism of what is being done by the Government! It’s a tough and demanding challenge with so many “moving parts” and many unknowns.

We have effectively had three Budgets in pretty rapid succession over the past few weeks. We started with the scheduled one on 11 March. In the financial planning sector the focus at Budget time is usually on proposals made in relation to taxation and especially proposals that are likely to have a direct or indirect impact on financial planning strategy. This year’s Budget was almost entirely focused on economic, financial and fiscal measures related to combating the severely economically debilitating impact of the coronavirus. So, the emphasis was almost (but not quite) entirely on financial support for individuals, the self-employed and businesses.

Further, pretty much unprecedented (in recent times at least) measures were announced on 17 and 20 March, with another (long awaited) announcement on measures to protect the self-employed on 26 March. Let’s just remind ourselves (in brief) of what those announcements were. (Note that the implementation dates of these announcements vary.)

On 11 March

For individuals:

• The relaxation to the Statutory Sick Pay (SSP) rules for employees – applying it from Day one rather than Day four. (This measure was originally announced on 4 March.)

• The accompanying relaxations to the Contributory Employment and Support Allowance and Universal Credit – especially for those unable to claim SSP, most obviously the self-employed.

• A £500m hardship fund for local authorities.

For business:

• SSP costs refunded to employers with fewer than 250 employees (SMEs) in full for up to 14 days.

• A scaling up of the helpful “time to pay” arrangements.

• The Coronavirus Business Interruption Loan Scheme where banks offer loans to SMEs and the Government guarantees up to 80% of losses.

• Business Rates Retail discount (100%) for qualifying businesses (including in the hospitality and leisure sectors) with premises occupied with a rateable value of less than £51,000. (On 25 March, some of the exclusions were removed, so that for example estate agents, lettings agencies and bingo halls can qualify.)

• A cash grant for businesses eligible for small business rates relief.

17 March measures

For business:

• A further £330bn of loan guarantees. For SMEs the limit went up to £5m.

• Insurance cover for those with “pandemic” cover within their policy would be available.

• The grants for businesses were increased further - from £3,000 to £10,000 for businesses qualifying for the small business rates relief. Plus a £25,000 grant for retail, hospitality and leisure businesses with property with a rateable value of between £15,000 and £51,000.

• New IR35 implementation pushed back to 2021/22.

For individuals:

• Mortgage holidays of up to three months

• An indication that there would be more employment support.

And then on 20 March

• The Coronavirus Job Retention Scheme. Basically, HMRC refunding 80% of a furloughed worker’s salary to the employer. This has catapulted a new word (“furlough”) into common conversation in the UK. It has also resulted in many questions about the detail of this scheme – especially in relation to shareholding directors.

• Deferral of VAT to 31 March 2021 and deferral of income tax and Class 4 National Insurance (NIC) payments (self-assessment 31/07 instalments) until 31 January 2021. Note though, deferment not cancellation.

• Coronavirus loan interruption schemes – first six months borrowing to be interest free. (This has subsequently been increased to 12 months.)

• Universal Credit and Working Tax Credit to be increased by £20 per week.

At this point the combination of the COVID-19 support measures were estimated to be running at £50bn. It started at £7bn with the initial 11 March measures.

And then on 26 March we had the announcement of the self-employed income support scheme (SEISS) providing up to 80% of proven self-employed profit for three months for qualifying self-employed (including partners) with profits of no more than £50,000 in 2018/19 or on average over the two or three years (as appropriate) up to the end of 2018/19.

As referenced above, more detail on the scope and operation of all of these initiatives (especially the job retention scheme and the self-employed income support scheme) was immediately required, but the principles were clear and, well, bold.

All of this is about Government expenditure (with some predicting up to £190bn for a three-month lockdown – around 9% of GDP) and everyone recognises the long-term cost. It’s immense. In a world that will take some time to “get back to full capacity” future tax rises look inevitable.

At this point, understandably, the Government is focusing on meeting the challenge that the virus represents. But by way of an indication of what the future might hold, there has already been a reference by the Chancellor to the big differences in the NIC paid by the self-employed and employees. This in the context of the self-employed support package announced. The Chancellor said “…in devising this scheme … it is now much harder to justify the inconsistent contributions between people of different employment statuses”. The implication is that NICs will have to rise for the self-employed, an idea Mr Sunak did not deny in press questioning after his statement.

The importance of discovering and delivering permissible tax alpha seems unlikely to diminish any time soon.

Borrowing for the Coronavirus

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

Although the Budget on 11 March had an Office for Budget Responsibility (OBR) (pre-COVID-19 calculated) forecast of Government borrowing of £54.8bn for 2020/21, that was no real indication of how large gilt sales would have to be in the year. The Debt Management Office (DMO), which manages gilt issuance for the Treasury, had set its ‘financing remit’ at £156.1bn, nearly three times as much. The difference is down to the fact that 2020/21 sees close to £100bn of stock maturing over the year, all of which has to be refinanced. That level of maturities is about £1.5bn less than in 2019/20.  

The measures announced to counter the impact of COVID-19 have rendered last month’s DMO numbers for 2020/21 meaningless. Estimates for borrowing in the new financial year are heading towards the £200bn territory, implying that the DMO’s financing remit could reach £300bn. To get an idea of the scale of that, the latest figures from the DMO put the total nominal amount of gilts outstanding at £1,619.8bn. It will help that the Bank of England has restarted quantitative easing (QE) with a spend of £200bn, the bulk of which is likely to be used to purchase gilts.

The DMO has recently started on the task of raising the money the Government is going to need in the coming months. It announced that in April it would raise £45bn from Government bond sales, about three times its previously scheduled amount. Fortunately, so far, there seems plenty of appetite for UK Government debt. On the day following its £45bn announcement, the DMO revealed that it had sold £3bn of 1⁵/₈ % Treasury 2028 at an average yield of 0.204%, having received bids for 3.45 times the amount on offer. At present the highest yields to be found on Government bonds are little more than 0.8%, in the 25-30 year maturity area – half the level of 12 months ago.

The DMO’s announcement is a reminder that the Chancellor’s largesse over the last few weeks is not courtesy of a magic money tree – at least not yet. While interest rates are scraping the floor, the immediate financing cost of his actions in terms of debt interest will be low, but the debt will still be there to be repaid (or refinanced) at some point. The ‘bond vigilantes’ are nowhere to be seen at present, despite, the UK’s credit rating being lowered to AA- on Friday by Fitch.

Source: DMO 31/3/20

Business Interruption Loan Enhancements

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

The Chancellor announced on 3^rd April further action to support firms affected by the Coronavirus crisis. It is aimed at making it easier for small businesses to access necessary finance through the Coronavirus Business Interruption Scheme (CBILS) and for larger businesses to have more available access to the finance they need through a new Coronavirus Large Business Interruption Scheme (CLBILS).

Driving these changes is the Chancellor’s desire that banks provide all important finance more quickly to support the economy, jobs and businesses. This is no doubt a reaction to a growing number of reports of the difficulty that businesses were experiencing in trying to access finance in extremely challenging circumstances. For some businesses, cash flow may have dried up entirely.

As indicated above there are now two Loan Schemes to consider:

• The Coronavirus Business Interruption Loan Scheme (CBILS); and
• The Coronavirus large Business Interruption Loan Scheme (CLBILS).

Under the CBILS (for SMEs) administered by the British Business Bank the main changes announced are that:

• No personal guarantees (PG) will be required for any loans under £250,000.

            By way of reminder, where PGs are required for loans above £250,000 recoveries will be capped at 20% of the outstanding balance and the principal private residence cannot be taken as security.

• The CBILS is now to be available to businesses who would previously have met the (less attractive and non-Government guaranteed) eligibility criteria for an ordinary commercial facility and so would not have been eligible for a CBILS. This means that having insufficient security (a key criteria for a commercial facility) is no longer a condition of applying for a CBILS.

As a reminder of the main provisions of the CBILS:

• Loans will be offered by accredited lenders (there are over 40 of these including the main banks).

• The business applying needs to have a turnover of £45 million or less.

• A loan of up to £5 million can be granted under the scheme.

• Loans can be term loans, overdrafts, invoice finance, or asset finance.

• The borrower remains fully liable for the debt.

• The lender is not compelled to offer a facility.

• Normal information will be required, e.g. the amount to be borrowed, the purpose, the repayment period.

• The application will need to be supported by such evidence as management accounts, cash flow forecast, Business Plan, historic accounts and details of assets.

The new CLBILS (for larger businesses) will ensure that more firms are able to benefit from Government-backed support during this difficult time. It will provide a Government guarantee of 80% to enable banks to make loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million. This will give banks the confidence to lend to more businesses which are impacted by coronavirus but which they would not lend to without CLBILS. Loans backed by a guarantee under CLBILS will be offered at commercial rates of interest and further details of the scheme will be announced later this month.

If the schemes are to achieve their purpose it is essential that what happens in reality is aligned to the objectives.

So far (at the time of writing – these numbers will be changing rapidly it is hoped!) it is understood that there have now been over 130,000 enquiries from businesses across the country for business interruption loans, according to latest figures from UK Finance. Some 983 businesses have had finance approved, while banks are processing thousands of loan applications. As indicated above the official hope is that the scheme changes announced will help lenders approve loans for the smallest businesses as quickly as possible. Time really is of the essence.

Business Secretary Alok Sharma MP said:

“The coronavirus pandemic represents a challenge to businesses unlike any other they have faced before and we are determined to support them through this difficult time.

The changes we are making to the Coronavirus Business Interruption Loan Scheme will make it easier for business to access the lending we have put in place, helping them to continue trading and protect the livelihoods of their staff.”

Importantly, the Chancellor and the Governor of the Bank of England, Andrew Bailey, wrote to banks asking them to support small and medium-sized enterprises in any way they can. This included ensuring interest rates offered to struggling businesses are reasonable and to pass on the benefit of the Government guarantee to those borrowing under the Coronavirus Business Interruption Loan Scheme. Of course, those businesses qualifying for the CBILS will have no liability for interest or other related bank fees for 12 months as the Government will effectively meet these through a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied charges.

It’s worth remembering though that, despite the loosening of conditions, it is however essential that the borrowing business needs to be able to show that it is viable into the future and that with the support of the loan it has a credible “fighting chance” to remain viable once the pandemic is over and things return to normal. In other words, the scheme is not designed to just elongate the time to what seems likely to be an inevitable end, i.e. that aside from the impact of COVID-19 the business was likely to cease anyway.

Subject to all of that, it has to be said that the level of Government support for small, medium and large businesses through loan guarantees and, for SMEs, 12 months of freedom from interest, are genuine and hopefully powerful attempts to keep business working. These combined with the much discussed Job Retention Scheme (and the associated hot topic of furloughing), the Self Employment Income Support Scheme, deferment of VAT (without application), deferment of self-assessment payments, the scaling up of the Time to Pay Scheme for all taxes not otherwise specially deferred, the various business grants available for businesses who are eligible for small business rates relief or are in the leisure hospitality and retail business (subject to the satisfaction of the necessary conditions) and Business Rates Relief add up to an unprecedented array of very real support for business.

In relation to the taxation aspects of these measures, it was reassuring to learn that the deferment of the July self-assessment payment to January 2021 applies to all affected taxpayers and not just the self-employed, and applies to all tax.

It’s also worth remembering that payments made to furloughed employees are made by the employer and are subject to tax and national insurance (NIC) and deductible for the employer as any other salary payment would be. These payments would also be pensionable. The government “80%” payment is made to the employer and would also be a taxable receipt for the employer.

Payments made under the Self Employment Income Support Scheme (SEISS), in this case made directly to the individual claiming, would also be fully taxable and subject to NIC.

It should be remembered that the Government payments to employers will not be claimable until later in April (though employees can of course be and are being furloughed before that) when the claims portal is completed. SEISS payments will not be available until June, when a cumulative single payment will be made. Claims will only be possible online and only if invited to claim by HMRC. In other words “don’t call us, we’ll call you”.

Source: HM Treasury News Story.  Chancellor strengthens support on offer for businesses as first Government- backed loans reach firms in need. 3 April 2020.

COVID-19 – impact on house moves

(ER1, LP2, RO7)

HMRC recently published its latest property statistics which show an increase in the number of transactions completed in the UK since last year. However, given the current state of affairs, property transactions this month (and possibly for the next two) will be on the decline following the Government’s announcement last week that people should not move house, to try to limit the spread of coronavirus across the UK.
The Government said that buyers and renters should delay moving given that emergency measures are in place and everyone should be staying at home where possible.
According to the press it would appear that lenders are concerned about the effect of the pandemic on valuations and banks are also worried about granting mortgages during this period of extreme economic uncertainty.
Some mortgage lenders are delaying issuing mortgage offers and are reducing the number of mortgages available as a result of their concerns about a potential recession. In addition, people are experiencing problems arranging mortgage valuations as a result of the current lockdown.

An article published by Edwin Coe, provides details of the current position.

To summarise, broadly in cases where contracts have been exchanged it is possible to continue with the move provided the property is “vacant”. It is assumed that this means a property whereby the seller has already vacated the property.

For any move that has not yet started – so where contracts may be exchanged but removals haven’t been booked, or where removals have been booked but there are logistical difficulties because the removers may not have started packing etc., it is advisable to cancel or postpone the move. In cases where contracts have been exchanged, the parties should try to “amicably” agree an alternative completion date, but, if they can’t for contractual reasons, they can continue with the move but must follow the Government guidance on staying away from one another.

A full copy of the Government’s guidance, including the related advice to the public and removal companies, can be found here.

For many, the uncertainty with the lockdown situation, will mean they face practical difficulties if they try moving at the current time as some removal companies are no longer accepting bookings and others are going so far as to cancel bookings they have already taken.
Given the difficulties individuals face, banks are enabling individuals to defer mortgage payments and tenants should also get rent-breaks. In addition, mortgage providers have said that they would extend mortgage offers by up to three months to enable people to move later. However, note that this does not extend to those purchasers who have not yet exchanged contracts.

Sources:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/874151/MPT

https://www.edwincoe.com/blogs/main/covid-19-can-you-still-move-house/

https://www.edwincoe.com/blogs/main/covid-19-can-you-still-move-house-part-ii

Owner managed businesses and the Job Retention Scheme

(AF2, JO3)

Since the Job Retention Scheme (JRS) was announced there have been a growing number of questions about whether and, if so, how shareholding directors of SMEs (owner /managers) could access the scheme in respect of themselves. In other words, could they furlough themselves?

It is clear that such owner/managers can’t qualify for the Self Employment Income Support Scheme. They aren’t self-employed in relation to their status with their company. And the terms of the JRS refers to the Government grant being paid to the employer in relation to the salary (within the stated rules and conditions) of the furloughed employees who, while on furlough, should do no productive work for their employer.

It was recently reported in the Financial Times that the Treasury had stated that owner-directors could apply to furlough 80 per cent of the PAYE element of their income via the JRS for salaried staff and continue with their statutory obligations as company directors, so long as that was all they were doing.

The Treasury’s guidance says “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”

So, two questions arise from this. What are the said statutory duties and why not the dividend element of drawings.

First the statutory duties.

Here they are:

1. To act within powers (i.e. to act in accordance with the company's constitution, and only exercise powers for the purposes for which they are conferred.)

2. To promote the success of the company for the benefit of its members (shareholders) as a whole. 

3. To exercise independent judgment.

4. To exercise reasonable care, skill and diligence.

5. To avoid conflicts of interest.

6. Not to accept benefits from third parties.

7. To declare interests in transactions or arrangements with the company.

Nothing outrageous here, but the one that is most relevant to the current challenge under the JRS and furloughing is number 2, “To promote the success of the company for the benefit of its members (shareholders) as a whole”. Could this be interpreted to impose a positive duty on the director to continue to do all they could to keep the business afloat ( as a director) despite being furloughed as an employee, and would that extend to actually doing work for a client or which in any way results in the production of revenue for the business?

The Company’s Act states as follows:

‘172 Duty to promote the success of the company

1. A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a)       the likely consequences of any decision in the long term,

(b)       the interests of the company's employees,

(c)       the need to foster the company's business relationships with suppliers, customers and others,

(d)       the impact of the company's operations on the community and the environment,

(e)       the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)        the need to act fairly as between members of the company.

2. Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

3. The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.’

So, it would seem that the duty states a director must act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. When making decisions, directors must also consider the likely consequences for various stakeholders, including employees, suppliers, customers and communities. They should also consider the impact on the environment, the reputation of the company, company success in the longer term and all of the shareholders (including minority shareholders).

A duty to promote the success of the company may seem like an obvious task for a director. However, it brings with it a number of implications.

Board decisions can only be justified by the best interests of the company, not on the basis of what works best for anyone else, such as particular executives, shareholders or other business entities. But directors should be broad minded in the way that they evaluate those interests – paying regard to other stakeholders rather than adopting a narrow financial perspective.

And aside from these statutory duties, how about what you might be able to do as a shareholder?

There is also the question of how what is actually being done is monitored?

And there’s the question of what an employer could claim for- on the face of it, only salary within the stated constraints. But, so many director shareholders take all or most of their drawing from the company by way of dividend. If its only salary that’s covered, even if the “statutory duties” or continued activity as a shareholder is permitted, it won’t yield much of a grant if it is anchored to a low or zero salary. Remember, it’s the salary as at 28 February that is counted, so it’s too late to change a drawing pattern now. There is increasing press around this issue, pointing out that a significant segment of the owner-manager community (one-person companies and multi-owner) may well be denied access to the support that is available to employees and the self-employed. 

At the moment then it is not possible to give reliable and certain guidance on these really important questions. It is understood that the Treasury/HMRC is listening to questions and requests from interested parties and we can expect some (eagerly anticipated) further guidance on these important issues in the (hopefully) near future.

Sources:

https://companieshouse.blog.gov.uk/2019/02/21/7-duties-of-a-company-director/

https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

https://www.ft.com/content/8481b0d7-4176-473f-9216-429906c4a8ee

 

Owner managed businesses and the Job Retention Scheme – HMRC confirms the Government’s Coronavirus Job Retention Scheme will not cover dividends
(AF2, JO3)

According to New Model Adviser, Jim Harra, chief executive at HMRC, has confirmed, speaking via video conference to the Treasury Committee on 8 April, that dividends will not qualify in the Job Retention Scheme (JRS) and company directors will only be able to claim 80% of their salaried wage.

“I am aware that some owner-managers of companies pay themselves a relatively small wage and top that up with dividends.”

“However, those dividends would not qualify in the furlough scheme.”

“It is only 80% of their wage that will qualify for the grant. They will also not qualify for the self-employed scheme.”

“From our perspective, we have no way of identifying which dividends people receive are dividends in lieu of wages and which are simply a return on capital in their own company or an investment. We have not been able to come up with a design to be able to top this up for those people in the timeframe given.”

“Of course, the Government continues to listen and knows what the issue here is, but there are no plans to do anything further on it.”

Despite the scheme not being able to cover dividends, the Treasury recently confirmed that owner-directors could apply to furlough 80% of the PAYE element of their income via the JRS for salaried staff and continue with their statutory obligations as company directors, so long as that was all they were doing.

The Treasury’s guidance says “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”

Of course, this statement in itself raises a number of additional questions about what a furloughed director who is an owner (shareholder) can and cannot do.

Sources:

• New Model Adviser - HMRC: 'No plans' to cover dividends in furlough scheme – dated 8 April 2020;

• Treasury Select Committee: call for evidence on the Government’s coronavirus financial package: Formal meeting (oral evidence session) – 8 April 2020.

 

Coronavirus Job Retention Scheme

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

On 20 March, when the Chancellor announced the Coronavirus Job Retention Scheme (CJRS), there were no formal Government estimates of the scheme’s cost. The Resolution Foundation (RF) put the three-month cost at £4.2bn per one million of furloughed employees. In its recent overall cost assessment, the Institute for Fiscal Studies estimated that the CJRS bill would amount to £10bn, assuming 10% of employees were furloughed through to June.

On 8 April 2020, according to a report from the BBC, the RF has suggested that the CJRS is going to cost £30bn-£40bn. The Foundation has drawn on data from the British Chambers of Commerce (BCC) which show nearly one in five smaller firms furloughing all employees, while about 50% of businesses are placing more than half their employees within the scheme. The RF says that if the BCC experience is replicated across the UK, at least one third of private sector employees will be furloughed.

To some degree the BCC findings echo what has happened across the Atlantic. In each of the last two weeks, US unemployment claims have been much greater than expected. The total US unemployment claims in the past fortnight have reached 10 million. According to the statisticians, that implies a US unemployment rate of 9.5%, against the last official published rate (for February) of 3.5%. The next set of data, out on Thursday at 1.30pm UK time, is eagerly awaited. 

In the UK, the design of the CJRS may in part be to blame as it encourages employers to put staff on furlough rather than keep them working on a reduced hours basis. The CJRS guidance says that “an employee cannot undertake work for, or on behalf, of the organization”. For both employer and employee, if the work available has halved, it is thus better to furlough half the workforce and employ the other half full time, than put everyone on half-pay. In contrast, the long-standing ‘Kurzarbeit” scheme in Germany, on which the CJRS is loosely based, also covers reduced time working and thus encourages work-spreading.

The RF numbers not only carry a major cost issue. The CJRS online service does not yet exist – neither do any definitive rules. The Government says it expects the online service “to be available by 20 April 2020”. When it does begin, it looks as if there will be very heavy demand.

Source: BBC 08/04/20

Dormant Assets Scheme: Consultation deadline extended

On 21 February the Government published a consultation on expanding the dormant assets scheme. The dormant assets scheme is an initiative to ensure that certain unclaimed financial assets are used for “good causes” rather than simply remaining with financial institutions.

The consultation

The Government has proposed that pensions be excluded from the scheme, for now, saying

“A current priority of the government in the pensions landscape is maintaining the level of trust individuals have in their pension savings, and it believes that these changes need time to fully develop. The government is supporting the pensions sector to implement pensions dashboards, which will enable people to see their pension savings in a single place online. This should make it easier to reconnect with accounts where contact has been lost. In addition, automatic enrolment may drive a shift in wider attitudes towards pension saving as it becomes the norm across the population.”

Dormant bank and building society account balances are already included in the scheme.

The Government has set out a table of the assets it is also minded to include in the scheme. The table includes:

• Dormant share proceeds - proceeds of shares in public limited companies (PLCs) and/or open-ended investment companies (OEICs);
• Dormant unit proceeds - proceeds of units in an authorised unit trust (AUT);
• Dormant investment asset distributions and proceeds - distributions and proceeds of investment assets: distributions; redemption proceeds; balances from inactive cash accounts; and orphan monies received after a fund is wound up.

The table also includes dormant insurance policy proceeds, provided they are a contract of insurance and crystallise to cash by the operation of a contractual, legal or regulatory event:

• Proceeds of life insurance policies with a contractual end date - savings endowments; term insurance.

• Proceeds of life insurance policies without a contractual end date - whole-of-life assurance; investment bonds.

The Government says it is not considering legislating to include insurance products that do not meet the test of crystallising to cash, at this time (e.g. an investment bond without a contractual end date and where the participant has not received a death claim), given the lack of evidence that these products would be feasible or desirable to include. It will likely review whether such products should be considered at a later date for possible future inclusion—once those that do crystallise to cash have bedded into an expanded scheme.

The consultation will now close at 11:59pm on 16 July 2020, following which presumably the details of the expanded scheme will be finalised and brought into operation, but no timescale for either is stated.

Job Retention Scheme and Furlough payment

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

The CEO of HMRC Jim Harra has announced that employers will be able to claim furlough payments from HMRC from 20^th April.

According to the FT, System testing indicates that the online claims portal has capacity to  cope with 450,000 applications per hour and have money to employers within 10 days.

There are around 2m employers operating PAYE and estimates (from various sources) indicate that payments under the scheme over the period of its operation could amount to anywhere between £10bn-£40bn.

HMRC do however have some concern over the risk of fraud given such large sums being at stake.

Particular areas of concern are employers specifying “fake employees” (HMRC will be verifying against PAYE records) and furloughed workers being asked to work “on the quiet” by employers.  HMRC are thought to be planning selected checks in high risk areas and are also asking employees to “whistle blow”.  The latter may be something of a challenge if employees are concerned about keeping their jobs beyond the furlough period though.  There is also a concern (given the sums involved) over the potential involvement of organised crime.

Jim Harra made it clear that HMRC had developed a mechanism to run the JRS in a month – it would usually have taken two years.

In relation to the furlough rules the chancellor has emphasised that the scheme was, necessarily, designed at pace and to be simple to operate.  He observed that as a result some people might “fall between the cracks” finding they are not eligible to be included in the JRS – and also the SEISS. One obvious example it seems could be shareholding directors wishing to furlough themselves but continue to operate with client contact and carrying out work to keep the company viable beyond the pandemic.

Temporary changes to the Statutory Residence Test – COVID-19

As a result of the pandemic, the UK is taking action to welcome talent and expertise from across the world to help the country tackle COVID-19.

The Statutory Residence Test (SRT) rules are somewhat complex, but are vital in understanding an individual’s UK tax status to determine whether they would be taxable in the UK or not.

With this in mind, the Chancellor, Rishi Sunak has written to the chair of the Treasury Select Committee to outline temporary changes to the SRT for those coming to the country to work on COVID-19 related activity. 

Broadly, the SRT will be amended to ensure that any period(s) between 1 March and 1 June 2020 spent in the UK by individuals working on COVID-19 related activities will not count towards the residence tests. This measure will be under review as the situation develops and will be targeted to selected people whose current skill set is required, to minimise the risk of abuse.

Source:  https://www.gov.uk/government/publications/covid-19-temporary-changes-to-the-statutory-residence-test

 

Reclaiming IHT on reduced value shares and collectives

(AF4, FA7, LP2, RO2)

With the significant reduction in the value of many portfolios there has been an increased amount of discussion in relation to: 

• The utilisation of capital losses in current and future capital gains tax (CGT) planning;

• The merits (in appropriate circumstances) of making lifetime gifts of reduced value assets;

• The possible reclaim of inheritance tax (IHT) where shares, or other qualifying investments left on death, are sold by the appropriate person(s), (usually the legal personal representatives, for investments in the free estate, or trustees, for investments in a settlement), within 12 months of death at a lower value than that on death.

This bulletin will consider the last of these opportunities. It’s fair to say that the rules are not straightforward. So, let’s start with a basic, simple, fact. IHT is calculated on the value of the assets at the time of death and is normally payable within six months. But what if the value of the assets drops after the death of the testator? This is particularly relevant these days in relation to investments, e.g. equities and collective investments.

Relief is available for qualifying investments which are quoted shares and securities (listed on a recognised stock exchange at the date of death), UK gilts and holdings in unit trusts and other collective investments. It doesn’t include holdings in unlisted companies, AIM-listed companies (both of which may qualify for IHT business relief) or loan notes.

It’s necessary for the investments to be sold within 12 months of a death and a claim can be made when the appropriate persons sell the qualifying investments that were part of the deceased’s estate. The claim effectively recalculates the IHT by treating the gross sale price as the value on death.

The claim applies to all qualifying investments sold by the personal representatives/trustees during the 12-month period (whether at a gain or a loss).

It is therefore possible that personal representatives/trustees should consider maximising the relief by selling, within 12 months, all qualifying investments which have fallen in value since death and maintaining (and possibly passing to beneficiaries) those which have risen in value since death.

Note that the relief is restricted if any purchases of qualifying investments take place in the period from the date of death to the end of two months after the last sale, within the 12 months after death.

The relief must be claimed on Form IHT35, signed by the appropriate persons, within five years of the date of death (i.e. within four years after the end of end of the above 12-month period.) However, it’s possible to claim provisional relief within 12 months of the date of death. If HMRC give provisional relief, they may review it later.

The appropriate person(s) are those liable for the IHT on the value of the shares or securities. If more than one group of people is liable for the tax, the appropriate persons are those who are actually paying it. All appropriate person(s) must sign the form.

In most cases the appropriate person will be the personal representatives of the deceased or the trustees of a settlement. If the investments have been transferred into the names of the beneficiary(ies) they can only make a claim if they are actually paying the tax on the investments, for example a specific legatee who is bearing the tax.

However, it’s important to note though that no relief can be given if, for example, a personal representative or trustee accounts for tax and then transfers the assets to a beneficiary who then sells at a loss. The beneficiary cannot claim because they are not, in this situation, the appropriate person, and the personal representative or trustee cannot claim because they have not sold the assets.

(Whilst not specifically covered in this bulletin, if land, buildings or interests in land, forming part of a deceased person's estate, are sold by the personal representatives within three years after the death of the deceased, the appropriate persons may also claim that the sale price (if lower) should be substituted for the value at the death.)

In closing, it’s worth noting that a sale by the personal representatives will however cause the value of the shares at death for CGT to be correspondingly adjusted, thus precluding any claim for capital losses for CGT purposes by the personal representatives.
Theoretically, it may be preferable not to lodge a claim for IHT reduction if greater tax will be saved by the personal representatives by utilising capital losses. However, given the 40% v 18% rates, this seems unlikely.

Fact sheet on CGT 30 days reporting and payment obligations

(AF1, RO3)

HMRC has now produced a fact sheet on the CGT 30-days reporting and payment obligations for UK residents disposing of residential property and for non-UK residents disposing of UK land from 6 April 2020.

The fact sheet provides a brief overview of the general position and includes a number of questions and answers which are likely to be valuable to anyone who is caught by these rules. Given that these rules have only just come into force, HMRC is allowing a period of time to adjust and will not issue late filing penalties for CGT payment on account returns received late up to and including 31 July 2020. 

The fact sheet provides answers to the following questions:

• I’m a UK resident and I want to sell a residential property in the UK, what’s changing?

• What if I don’t live in the UK? 

• What do you mean by a UK residential property?

• Are all disposals of UK residential properties within these new rules?

• When do I have to tell HMRC and pay the CGT?

• Does the 30-day period only apply to residential property disposals?

• What if I sell the house I live in?

• How do I tell HMRC about a capital gain and CGT liability on the disposal of a residential property in the UK and how do I pay the tax?

• What if I’m a UK resident and I sell a property abroad?

• What happens if I don’t tell HMRC about the Capital Gain on a UK residential property within 30 days and there is a CGT liability?

• What will HMRC do to help people during the current COVID-19 crisis?

• What do you mean by taking a “flexible approach”?

• What about other capital gains?

• Do I still have to complete a Self-Assessment (SA) Return?

• What is CGT?

• Am I taxed on the full gain?

• What does ‘dispose of’ mean?

Source: https://www.tax.org.uk/policy-technical/technical-news/hmrc-produces-cgt-30-days-fact-sheet

Child Trust Funds – a reminder

(AF4, FA7, LP2, RO2)

Child Trust Funds (CTFs) are no longer available but may still be held by eligible children born before 3 January 2011. A CTF is a tax-free savings account for children born between 1 September 2002 and 2 January 2011.

Under the scheme, vouchers for specified amounts of up to £500 were provided by the Government and had to be invested in a CTF account in the beneficial ownership of the child, but the parent could choose the account provider.

The CTF subscription limit for 2020/21 is £9,000, having increased from £4,368 in 2019/20 as announced in the Spring Budget. The limit applies for the period starting with the child’s birthday and ending on the day before their next birthday. There is no scope to carry forward any unused allowance. However, individuals could (and still can) top-up the CTF until the child attains age 18. It should be noted that any amounts paid by a parent to a CTF for their child will not be subject to the parental settlement provisions (so would not be taxed on the parent if income exceeds £100 gross in a tax year). From April 2015 it has been possible to transfer a CTF account to a Junior ISA.

With regard to investment options, there are three main types of CTF accounts available - ‘stakeholder’, share or cash account. Existing accounts are managed by the child’s ‘registered contact’ (usually the parent) who has certain responsibilities until the child is 18, or until the child takes over the responsibility for management of the account. Broadly, once the child turns 16, they can either:

• take over the account by contacting the CTF provider; or

• leave the ‘registered contact’ in charge of the account until they turn 18, at which point they take over the account.

During the child’s minority, the parent (or other registered contact) is able to change the investments within the existing account via the provider, move the account to an alternative provider or change the type of account e.g. from cash to stakeholder.

The first CTF accounts will mature in September 2020 and the account holder will have the ability to transfer the investments to a cash ISA or a stocks and shares ISA without the transfer counting as a new ISA subscription.

Where the CTF provider has received no instructions on the future of the investments from the account holder, those investments must be placed, at maturity, and ‘at the option of the account provider’, in a ‘protected account’ pending instructions. The ‘protected account’ can be a ‘matured account’ or a cash ISA or stocks and shares ISA offered by the current CTF provider thereby ensuring that the funds continue to grow in a tax-free environment.

Investment planning

UK dividend payments are set to fall sharply

(AF4, FA7, LP2, RO2)

The regularity of our Bulletins of Link Asset Services quarterly dividend monitor have almost been exactly matched by the frequency with which we have remarked about the concentration of dividend payments among just a handful of companies. In the final quarter of 2019, just 15 companies accounted for 64% of dividend payments by value. In that Bulletin we also noted that the Banking and Finance industry has accounted for the largest share of dividend payments by industry since 2012. In 2019, its share was 24.1%.

The risk in those concentrations are now becoming clear to investors:

• The main UK listed banks (HSBC, Lloyds, RBS, Barclays and Standard Chartered) have all suspended dividends, following pressure from the Prudential Regulatory Authority. As the next dividends due were all final payments, that alone accounts for a loss of £7.5bn – nearly 7% of total 2019 UK dividend payments.

• The banks had to be cajoled into holding back payments, while other companies have needed no encouragement. Most of the major housebuilders, who have been payers of special dividends in recent years, have pulled the dividend plug, as have two of the largest real estate investment trusts. The hotel and leisure sector have predictably decided to hang on to their cash.

• So far, the one big dividend paying part of the UK market that has not announced any reduction is the oil majors. For now, both BP and Royal Dutch Shell, which regularly appear in Link Asset’s quarterly list of the top five dividend payers, are standing by their quarterly payments. That means cutback in other areas for those majors to help finance the payments. How long they will stick with that stance remains to be seen: the market’s skepticism can be judged by the fact that BP has a 10% historical yield and Shell, 10.8%.

• FTSE 100 dividend futures are implying a fall of 40% in dividend payments this year and 30% in 2021.

• For comparison, during the financial crisis UK dividends fell by 0.1% in 2008 and 10.9% in 2009. They did not return to above their 2007 level until 2011 in nominal terms and 2015 once inflation is allowed for.

There will be a natural lag before income funds start reducing their dividends, but cuts look inevitable.

Source: Link Asset Services January 2020 FT.com 6/4/20

Pensions

FCA produces COVID-19 guidance for pensions and retirement income firms

(AF3, FA2, JO5, RO4, RO8)

The guidance explains the deferral of the implementation date for the final suite of Retirement Outcomes Review remedies: Investment Pathways, active decision to invest in cash and actual charges disclosure rules.

The new implementation date is now 1 February 2021.

The guidance also sets out how firms can and should support consumers that seek to access to their pension savings during the current pandemic. 

The second part of the guidance is in relation to defined benefit (DB) transfers in the current climate and a reminder of what the Financial Conduct Authority (FCA) expect of them. In particular the FCA say:

“Firms should not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for individual clients. Firms should also address any misconceptions clients may have as a result of the crisis. For example, clients may think:

• ‘Cash equivalent transfers (CETVs) are at an all-time high’. Firms should not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds. They should consider the client’s circumstances and attitude to transfer risk if DB schemes offer larger CETVs.
• ‘Death benefits will be better in a DC scheme’. Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under 2 years.
• ‘My employer is going under, so my pension scheme will too’. Firms are generally not experts in employer covenant assessments. So, where clients have concerns about the sponsoring employer continuing in business, they must provide a fair assessment of the benefits of the Pension Protection Fund.”

Comment

It is great news that the FCA are considering the implication on providers and advisers at this time, as well as trying to continue to protect consumers. Delaying the implementation of changes that can be very time consuming for providers when their offices may be all but closed will be welcome across the industry.

PPF publishes updated PPF 7800 index - April 2020

(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. 

April 2020 Update Highlights

• The aggregate deficit of the 5,422 schemes in the PPF 7800 Index is estimated to have increased to £135.9 billion at the end of March 2020, from £124.6 billion at the end of February 2020.
• The funding ratio decreased from 93.2 per cent at the end of February 2020 to 92.5 per cent.
• Total assets were £1,680.5 billion and total liabilities were £1,816.4 billion.
• There were 3,606 schemes in deficit and 1,816 schemes in surplus.
• The deficit of the schemes in deficit at the end of March 2020 was £254.1 billion, up from £244.8 billion at the end of February 2020.

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

FOS publishes its Plan and Budget for 2020/21

(AF3, FA2, JO5, RO4, RO8)

Following and earlier consultation, the Financial Ombudsman Service (FOS) has published its finalised Plan and Budget for 2020/21. It still expects the majority of its complaints to be in respect of PPI with only a small projected increase in investment and pension cases from 11,200 estimated for last year to 12,500 for this year. Seemingly FOS do not expect to be inundated with DB transfer complaints.

HMRC Annual Allowance

(AF3, FA2, JO5, RO4, RO8)

HMRC has updated it annual allowance and carry forward guidance which includes a link to its carry forward tool.

PPF publishes Business Plan 2020/21

(AF3, FA2, JO5, RO4, RO8)

The Pension protection Fund (PPF) has published its Business Plan 2020/21, which outlines how the PPF will continue to protect its members in a volatile market whilst setting new standards. PPF Chief Executive Oliver Morley said: “The work to make sure we have a sustainable and appropriate funding strategy is on track. We’re setting new standards for the industry in customer service, innovation and efficiency. Our compelling employee proposition is enabling us to attract and retain high calibre talent and build industry-leading diversity.” Commenting on the implications of COVID-19, Mr Morley added: “The extent of the impact is, of course, unknown at this stage. We have chosen to leave our objectives as they stand but we accept that there may be challenges to achieving our objectives within the next 12 months.”

MaPS reports on progress of pensions dashboards

(AF3, FA2, JO5, RO4, RO8)

The Pensions Dashboards Programme, established by the Money and Pensions Service (MaPS), has published a report on the progress made so far and the work that still needs to be done before the service launches to the public. MaPS also announced the publication of two further documents on the scope of dashboards and the data elements required from pension providers.

Chris Curry, Principal of the Pensions Dashboards Programme at MaPS, said: “Throughout the evolution of pensions dashboards, people have understandably wanted to know when they will be widely available for public use. Even when the impact of the coronavirus pandemic has decreased, timescales depend heavily on factors including technological developments and the progress of government legislation. We plan to lay out a more detailed timeline by the end of the year, but a staged onboarding process should be expected to allow data providers to get ready and for all the necessary user testing to be carried out.” MaPS confirmed that regular progress reports will be published every six months.

PPI: How could changes to price indices affect Defined Benefit schemes?

(AF3, FA2, JO5, RO4, RO8)

The Pensions Policy Institute (PPI) has published Briefing Note 118: How could changes to price indices affect Defined Benefit schemes? The Briefing Note, sponsored by the BT Pension Scheme (BTPS), explores the implications of the Government's proposed reforms to RPI (as announced in the Budget) on DB pension scheme members, investments, liabilities and funding positions. The Government's consultation on reforming the RPI methodology is due to close on 22 April 2020. According to the report, a 65-year-old pensioner in 2020 could receive up to 21% less per year in a DB pension, by the age of 90, depending on the timing of the change.

Tiffany Tsang, PLSA Policy Lead for DB and LGPS, commented in a Press Release: “The PPI's figures quantify the enormous scale of the potential cost to the members of defined benefit pension schemes of aligning the Retail Price Index and Consumer Price and Housing Index and are an important contribution to the policy debate. RPI is a flawed measure of inflation, but plans to phase it out must take into consideration the £60–80bn impact on pension schemes, which have made RPI-linked investments in the interests of their members, in good faith. Workers’ savings must not be unduly compromised by an administrative change in the measure of inflation that acts, in effect, as a stealth tax on retirees.”