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Cracking down on compliance pays for HMRC

New figures show HMRC’s “customer compliance” efforts are yielding substantial sums.

In early August, HMRC issued its annual report and accounts for 2018/19. While not everyone’s choice of holiday reading, it did contain some eye-opening information about the “compliance yield” – how much HMRC raised from its work in countering tax avoidance schemes, tax evasion and plain fraud.

HMRC puts the figure at £34.1bn out of total revenue raised in 2018/19 of £627.9bn. Of that £34.1bn, £13bn was hard cash collected as a result of investigations, a 27% increase on investigations from the previous year. The sharp rise was partly due to individuals settling with HMRC ahead of April’s introduction of the controversial Loan Charge, targeting disguised remuneration schemes.

UHY Hacker Young, the accountants, suspect that HMRC’s improved compliance cashflow could also be due to last year’s offshore tax campaign. This established a ‘requirement to notify’ HMRC of undeclared income or gains by September 2018, or face penalties of up to 200% of the amount due, plus interest.

There was probably also a boost from the implementation of the OECD’s Common Reporting Standard, generating automatic exchange of information between national tax authorities. This may have become apparent from the appearance of questions about tax residence in many financial documents or from existing institutions with which you hold investments.

In its accounts, HMRC highlights that it places about 500,000 ‘Wealthy Individuals’ into their own separate ‘customer group’. To join this select group requires an income of over £150,000 or assets above £1 million. Those lucky members are the focus of special teams with “an in-depth understanding of the finances, behaviours and compliance risks of wealthy individuals” and “strong data-led approaches to identify who is not paying the right tax”.

The unspoken message from HMRC is that sidestepping tax, whether by contrived avoidance schemes, evasion or fraud, is becoming ever more unlikely to succeed. On the other hand, there remain plenty of straightforward planning opportunities with which we can help you.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

How do you feel about taking a pension at 75?

Is a state pension age (SPA) of 75 looking more likely?

Recommendation
The SPA should better reflect the longer life expectancies that we now enjoy and be used to support the fiscal balance of the nation. The SPA in the UK is set to rise to 66 by 2020 (Pensions Act 2011), to 67 between 2026 and 2028 (State Pension Act 2014) and to 68 between 2044 and 2046 (State Pension Act 2007). We propose accelerating the SPA increase to 70 by 2028 and then 75 by 2035.

The statement above in the report Ageing Confidently – Supporting an ageing workforce, released in August by the Centre for Social Justice (CSJ), is slightly misleading. A SPA of 68 is pencilled to be phased in between 2037 and 2039. Further legislation will not be introduced until after another SPA review is completed, which, by coincidence, won’t happen until after the next election is due.

The CSJ is not a think tank that regularly makes the headlines, but it does have a high-profile chairman – Iain Duncan Smith, the former Conservative leader and former Secretary of State for Work & Pensions. During that tenure he pushed through some of the SPA increases outlined above. With this in mind, the statement by the CSJ could be interpreted as kite-flying on behalf of the Conservative government, just as the Institute of Public Policy Research (IPPR) plays a similar role for the Labour Party.

The CSJ’s argument for raising SPA with such haste is financially driven. The report notes that at present there are 28.2 pensioners for every 100 people of working age, but by 2050 this is projected to increase to 48 per 100 – almost one pensioner for each two working age members of the population. As the state pension system is funded on a pay-as-you-go basis, that jump has serious consequences even before the impact of rising healthcare costs is considered. Raising SPA to 75 by 2035 would keep the ratio at between 20 and 25 per 100.

Such a steep rise in SPA would be politically problematic as the ongoing protests and resulting court cases about increases in women’s SPA prove. However, the CSJ’s point about whether the current SPAs will continue to be affordable isn’t going away. If nothing else, it’s a reminder that supplementing the state pension with private provision is a surer path to a reliable retirement income.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances.

 

Probate delays affecting estate settlements

There are currently long delays in gaining probate on the estates of the recently deceased.

Late in 2018, the government issued a written statement announcing its intent to go ahead with controversial increases in probate fees for England and Wales. Instead of the current flat fees of £155 for applications through a solicitor and £215 for individual applications, draft legislation was issued with a sliding fee scale that rose to £6,000 for estates valued at over £2m. To many, the measure looked more like a new tax than a fee increase.

A start date wasn’t set, but the legislation was widely expected to come into force around the end of April 2019. However, the statutory instrument to bring about the change has not yet been presented to the House of Commons. HM Courts and Tribunals Service (HMCTS), which administers probate, has recently told the Law Society that it does not know when, or if, any fee changes will happen. The delay could be due to Brexit dominating parliamentary business, the near universal criticism of the measure and/or a possible election coming up.

Alongside this uncertain legislative approach, HMCTS has launched a new probate administration regime that has already encountered teething problems. This in turn has run into an acceleration in probate applications as solicitors and executors have rushed to pre-empt the planned fee increase and pushed through the paperwork.

The result has been a backlog at probate registries throughout England and Wales. HMCTS is now advising solicitors not to chase any applications until at least eight weeks have passed. However, HMRC has said it will make no concessions on when it will start charging interest on inheritance tax, which is due by the end of the sixth month after the month of death.

Bereavement is already a difficult time for many families, so these delays could cause more stress and remind us that winding up an estate can be painfully slow. If you have life assurance policies, one way to sidestep that delay – and potentially save inheritance tax – is to place the policies in trust. Alas, trusts carry their own complications, so do seek professional advice before taking any action to change policy ownership.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax or trust advice.

 

Who are the top 1% of income tax payers?

A recent report looking at who pays the most income tax reveals some interesting findings.

The Institute for Fiscal Studies (IFS) published a briefing note in early August with a detailed answer to the question of what it takes to enter the 1% club. Around 310,000 people make up this cohort, with some predictable and not so predictable traits:

  • They have taxable income of at least £160,000 in 2014/15. The historic nature of the data reflects both HMRC’s systems and the fact that the 2015/16 numbers were distorted by the introduction of new dividend tax rules in the following year.
  • Typically, they are male aged 45–54 based in London, with an additional £550,000 of income. To quote the IFS, the 1% club is “disproportionately male, middle-aged and London-based”.
  • They live in 10% of the 650 parliamentary constituencies, which contain half of the top 1% population. In 2000/01, 78 constituencies were needed to reach the halfway mark.
  • They have over a quarter of their income made up from partnership and dividends, as the pie chart shows. This reflects the fact that many are business owners.
  • They manage fluctuating income levels. The top 1% is not a stable group, which may be some solace if you do not currently have the necessary membership credentials. The IFS found that roughly a quarter drop out each year and only half remain for five consecutive years. The corollary is that there is a much higher chance of being in the top 1% at some point in your life than in any given year. The IFS calculated that 3.4% of all people (and 5.5% of men) born in 1963 were in the top 1% at some time between 2000/01 and 2015/16.

However, being a member of the 1% taxpayers club also means accounting for 27% of all income tax collected by HMRC. So failing to qualify may reflect some careful and expert financial planning…

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

 

Money purchase annual allowance penalties – pick a number

A Freedom of Information (FoI) request has revealed a gap in HMRC’s knowledge about how many people have been hit with penalties around the annual allowance.

The annual allowance, which effectively sets the tax-efficient ceiling on annual pension contributions, used to be a subject of little interest, even among pension professionals. When it started life in 2006 at £215,000, it was of limited relevance beyond a small minority of highly paid executives.

These days the annual allowance is one of the most contentious aspects of pension legislation. The table below, using data provided under an FoI request published at the start of this year, helps to explain why.

While the taper rules for the annual allowance have been causing many problems in the public sector, for example the widely reported issues among NHS consultants, there is another aspect of the annual allowance rules which has just had a light shone on it by the new FoI request.

Withdrawing income

Since 2015/16 there has been a reduced allowance – the money purchase annual allowance or MPAA– which applies, regardless of income level, as soon as you first draw retirement income using pension flexibility. To enforce this, the law says that within 31 days of starting flexible income, your provider must supply you within a ‘flexible access statement’. You then have 13 weeks to inform any money purchase scheme to which you or your employer are contributing. Failure to do so is subject to penalties of an initial £300 plus further amounts of up to £60 a day until HMRC are notified.

The FoI request asked a simple enough question: how many people had suffered the penalties? HMRC’s reply was that it did not have an answer and it would be too costly for it to find out.

Whatever you feel about that response, it is a reminder of how complex the rules for pension contributions have become, even for those who police them. The safest course of action is to seek expert advice before making any change to your pension arrangements to make sure you don’t become an under-reported casualty.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. 

Flexing a ten-year old muscle…

The US Federal Reserve has cut its main interest rate for the first time in ten years, but will it have a knock-on effect?

 Source: US Federal Reserve

The last time the US central bank, the Federal Reserve, cut its main interest rate was in December 2008, in response to the fallout from the financial crisis. That last drop was preceded by nine interest rate cuts since September of the previous year.

The final 2008 cut, ten days before Christmas, took the Federal Funds rate down from 1.00% to a range of 0.00-0.25%. As the straight line on the graph shows, the rate remained there, just above zero, for the next seven years. It was subsequently gradually nudged up, a quarter of a per cent at a time, reaching 2.25%–2.50% last December.

The new 0.25% cut announced from the beginning of August was widely anticipated, although there were some investors who had forecast a 0.50% reduction. The backdrop to this cut, however, is very different from that of December 2008. Now the US economy is close to full employment and, while growth did cool in the second quarter, it is still running year-on-year at 2.3%. In other times, such conditions would not prompt a rate cut. The central bank is acting now because it wants to prevent the economy slowing any further, at the end of an unusually long period of growth.

On this side of the Atlantic, the European Central Bank has hinted that it could cut interest rates soon. Although the bank took no action in July, it did change its meeting statement to say that it “expects the key ECB interest rates to remain at their present or lower [our italics] levels at least through the first half of 2020”.

The Bank of England’s next interest rate move remains unclear after maintaining the current rate again for August. The various Brexit scenarios could see rates increased to protect a falling pound or as a gradual return to ‘normality; or rates could be cut to stimulate the economy.

‘Lower for longer’ has been a description of the path of interest rates since 2008. It is now beginning to become ‘lower for ever’. Make sure that if you have cash on deposit beyond a rainy-day reserve, you have a good reason for doing so.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Light at the end of the tunnel for inheritance tax simplification?

The Office of Tax Simplification (OTS) published its long-awaited second report on inheritance tax (IHT) in July with a range of useful proposals.

The report, focused on simplifying the structure of IHT, contained some surprises, not only in the recommendations it makes, but also in those areas it has left untouched.

Gifts

The OTS suggests that the annual exemption (£3,000 since 1981) and the wedding gifts exemption (a maximum of £5,000 and a minimum of £1,000, unchanged since 1975) should be combined into a single ‘personal gift allowance’. While no specific number was pinned on the new allowance, the OTS did note that the annual allowance would be £11,900 in 2019/20, had it been inflation proofed.

Currently you need to survive seven years for any lifetime gifts not to form part of your estate on death and, in some instances, gifts made up to 14 years before death could affect the level of tax payable. The OTS says that only gifts made within five years of death should be relevant. That sounds like good news, but there is a sting in the tail: the OTS wants to scrap taper relief, which currently reduces the tax payable – if any – on gifts made more than three years but less than seven years before death.

Reliefs

While the paper discusses the criticisms received about the complexities of the relatively recent residence nil rate band (RNRB), the OTS says it is too early to propose any changes. However, it does quote an HMRC estimate that for the same tax cost, scrapping the current £150,000 RNRB would only allow the main nil rate band to be increased by £51,000.

The OTS paper discusses the availability of 100% business relief for holdings of AIM shares, but to the surprise of some does not propose the relief’s withdrawal. However, it does make some recommendations about business relief generally and its twin, agricultural relief, which could have a major impact.

The OTS report will now be considered by the (new) Chancellor. What changes Mr Javid puts through will in part depend upon parliamentary arithmetic and for how long the government survives. In the event of a Labour Party win in a potential general election, IHT could be replaced by a much harsher lifetime gifts tax. All of which means that if you are thinking about estate planning, waiting for the dust to settle could be a risky strategy.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

New prime minister, new tax policies

July ended with a new prime minister in Boris Johnson and a new chancellor in Sajid Javid, both with different ideas from their immediate predecessors.

There is already speculation about what Mr Javid might produce in his first Budget and more importantly, what some much publicised tax proposals could cost.

At the start of his campaign, Boris Johnson’s main tax proposal emerged as raising the higher rate threshold to £80,000 from its current £50,000 level and applying the same increase to the ceiling for full rate National Insurance Contributions (NICs). The combination was potentially unwelcome news for high earners north of the border, as Scotland currently sets their own higher rate threshold (£43,430 in 2019/20), but not the NICs limit.

In the rest of the UK, the proposed reform would boost income for about 3.6 million people, according to calculations made by the Institute for Fiscal Studies (IFS). The biggest winners would be pensioners with income of over £80,000, who would save up to £6,000 of income tax, but not suffer the extra NICs of up to £3,000.

The IFS calculated that three quarters of the fall in tax liabilities would go to those in the top tenth of the income distribution. It also assessed the cost of the changes at a net £9 billion, the financing of which Mr Johnson did not address.

Later in his campaign, the prime minister appeared to backtrack on his tax proposals which became ‘an ambition’ and up for ‘debate’. He then switched to focus on reform of stamp duty land tax, including cuts to the higher rates and considering the switch of the tax liability from the property purchaser to the seller. A range of other spending priorities has emerged since Mr Johnson took office, not least of which is increased spending against a no deal Brexit.

We may have a clearer idea of Mr Johnson’s actual tax and spending plans in September – there are already suggestions of an emergency pre-Brexit Budget as ‘insurance’ against the consequences of a no-deal exit. In the meantime, the situation is as it was under Mrs May and Mr Hammond: if you wish to save tax, rely first on having the right personal planning in place.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Implications from the over-75 TV licence row

The BBC’s decision to scrap universal free TV licences for the over-75s is part of the larger debate about our growing ageing population.

Free TV licences for the over-75s were introduced by Gordon Brown in his 2000 Budget. It was a classic rabbit-out-the-hat Budget measure, designed to please at a relatively modest initial cost.

Wind forward to 2015 and a government looking to ease spending cuts discovered a neat way to deal with the rising cost of free TV licences: it passed the problem onto the BBC. In exchange for government agreement on a financing deal that provided an index-linked licence fee and closed loopholes on catch-up TV, Auntie accepted the poisoned chalice of responsibility for the free licence scheme from 2020.

While the BBC’s recent announcement has been met with predictable political outcries, it always looked as if the broadcaster would be forced to drop the universality of the over 75 free licences. As the corporation has pointed out, maintaining the status quo would cost £745m – a fifth of its total budget.

A look at population numbers casts an interesting light on the problem. National Statistics data and projections show:

  • In 2000 the UK had 4.37m people aged 75 and over.
  • By 2020 the corresponding figure is projected to be 5.84m – an increase of 1.47m or about one third.
  • The overall population is projected to have grown by about a seventh over the same period – less than half the pace of the growth in over-75s.

Simply on the basis of the growth in the over-75 population and the increase in licence fee, the cost in 2020 would be double that of 2000. So the argument around free TV licences is a microcosm of the much larger issue of an ageing population and intergenerational fairness. It is also a reminder of the dangers of relying on the government to fund a comfortable retirement. Private pension provision is a must…if only to fund later life TV viewing.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Student fees may be coming down

A government-commissioned report has proposed significant changes to the funding of university students in England.

Students resident in England (different rules apply in other parts of the UK) pay a maximum university tuition fee of £9,250 per year, financed by a student loan. Further loans to cover maintenance plus interest at RPI+3% mean that at the end of a three-year course graduates can start working life with £50,000 of debt. That debt is currently written off after 30 years, but until then repayments must be made at the rate of 9% of income above a threshold presently set at £25,725.

At the time of the last General Election, the Labour Party’s manifesto proposed scrapping future tuition fees at an estimated cost of £11.2bn a year – the party’s most expensive single measure. The idea was predictably popular in many university towns and may have been enough to swing the vote in some of them. After the election the government responded by setting up an independent review of 18+ education in England.

That review, headed by Philip Augar, published its report in June. There was a long list of recommendations, including:

  • Reducing the maximum tuition fee to £7,250;
  • Cutting the earnings threshold for repayments by £2,000;
  • Introducing means-tested maintenance grants of up to £3,000;
  • Reducing the interest rate to match inflation during the period of study;
  • Capping total loan repayments at 120% of the loans drawn, revalued in line with inflation; and
  • Extending the loan repayment period to 40 years.

The proposals have one consequence which has raised a few eyebrows: they would reduce the total outlay for the highest earning graduates while increasing it significantly for middle earners.

Whether or not these ideas are adopted, they are a reminder of the eye-watering expense of higher education, both for students and the government. If you have children or grandchildren heading to university, the sooner you start planning for that cost, the better.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.