BREXIT: POST-POLL TAXING THOUGHTS 

Now the Brexit choice has been made, it looks like any decision on an emergency budget will need to be taken by David Cameron’s successor.

There we have it. The UK has voted for Brexit and Sterling has already dropped by about 10% against the US Dollar and over 13% against the Japanese Yen, the new safe haven currency.

Earlier this month, before the polls opened, the Treasury published the government borrowing figures for May along with an updated estimate for 2015/16 borrowing. Such was the focus on Referendum debate, the numbers garnered little attention. However, as consideration turns to the Brexit world, the Treasury’s data is a useful starting point to answering the ‘What next?’ question:

  • The revised borrowing number for 2015/16 was £74.9bn, £2.7bn higher than the March 2016 Budget projection from the Office for Budget Responsibility (OBR), but £16.7bn below 2014/15 outcome. In the grand scheme of things, £2.7bn is a small difference, but one in the wrong direction.
  • The OBR’s projection for 2016/17 borrowing is £55.5bn, which it now turns out is £19.4bn below last year’s figure rather than £16.7bn less.
  • After two months of 2016/17, borrowing has totaled £17.9bn, £0.2bn up on the same period last year. To be on track, the number should have been £13.1bn.
  • The math’s means that to hit target, borrowing in the next ten months must be £19.6bn lower than 2015/16, i.e. about £2bn a month less, on average.

 

Thus even before the vote, the Treasury data suggested that Mr Osborne was not going to hit his 2016/17 borrowing target, regardless of the outcome of the Referendum. He was facing a difficult Autumn Statement, in part due to cooling UK economic conditions brought about by government-induced Brexit uncertainty.

Now that the vote has come down in favour of Leave, there is a new large dose of uncertainty to deal with and, unlike the Referendum, this one has no clear end date. Mr Osborne’s continued role as Chancellor is part of that uncertainty. The Leave camp want to oust Mr Osborne because of his support for Remain and the Treasury’s assorted and curiously precise warnings about the economic consequences of Brexit. His dire Budget warning of 15 June produced 57 Conservative MPs saying that they would vote against it to mean the threatened increased tax and reduced spending measures would only pass if Labour supported them – an unlikely scenario to put it mildly.

Add to that the fact that the short term recessionary economic outlook suggests any fiscal move should be towards stimulation rather than tightening and realistically the chances of an austerity Budget in the short term is probably close to zero.

The Treasury – whoever is at its head – will want to see how markets settle before deciding on next steps. Interestingly, the Office for Budget Responsibility will be publishing its annual Fiscal Sustainability Report on 12 July. This will have to now reflect the Brexit consequences, a scenario ignored in earlier OBR (and Bank of England) projections.

In the near term, action is more likely from the Bank of England, which will want to calm markets – the FTSE 100 opened down 500 points, with bank shares off 25%. If anything, the resignation of Mr Cameron has added to the Bank’s responsibility for managing the short term reactions.

Financial advisers are likely to be confronted by some worried clients this morning. The lesson of the past is that making any changes at times of extreme volatility is dangerous, if not foolhardy. There could well be an element of bungee jumping in the precipitous falls we have seen overnight. Yes, the world had changed, but how is far from clear at this stage.

NO BREXIT WITHOUT AN ACT OF PARLIAMENT

A law firm is taking action to ensure the formal process for the UK leaving the EU is not started without an Act of Parliament but does this mean there is still scope to block Brexit?

Lawyers at prominent law firm Mishcon de Reya, have been in correspondence with government officials to seek assurances over the process that it will follow to enact the result of the EU referendum – which is not in itself legally binding. Acting on behalf of an anonymous group of clients, the firm argues that it would be unlawful for any prime minister – current or future – to trigger the withdrawal process, laid down in Article 50 of the Lisbon Treaty, without a full debate and vote in Parliament.

According to news reports this week, the firm take the view that any prime minister using executive powers to start the process would be acting unlawfully because they would be overriding the 1972 European Communities Act that enshrines UK membership of the EU.

The law firm, who have retained the services of a number of senior constitutional barristers, says that constitutionally only legislation can override legislation and an act of Parliament is required to give the prime minister legal authority.

Kasra Nouroozi, Partner, Mishcon de Reya, said: ‘We must ensure that the government follows the correct process to have legal certainty and protect the UK Constitution and the sovereignty of Parliament in these unprecedented circumstances. The result of the Referendum is not in doubt, but we need a process that follows UK law to enact it.’

The passage of such an Act would, of course, provide the opportunity for MPs (a majority of whom favour Remain) to express their views on Brexit and in theory vote according to their consciences.

While the parliamentary process required to enact legislation could in theory provide Britain with another chance to block the UK leaving the EU, it is highly unlikely that that MPs will vote against the outcome of a national referendum.

Once notification of intent to withdraw from the EU is given under Article 50, the UK has two years to conclude negotiations. If talks are not concluded after two years (and the time limit is not extended – which can only be done with the unanimous agreement of the remaining 27 member states); Britain reverts to world trade organisation terms, requiring tariffs to be imposed.

INSURANCE CONTRACT LAW REFORM – INSURABLE INTEREST

Progress has been made in this area and a draft Bill was published last April followed by another short consultation which closed on 20 May 2016.

On 10 April 2015, the Law Commissions (LCs) published their last consultation paper on this on 27 March 2015 (having previously consulted on insurable interest in 2008 and 2011). The LCs’ proposals were well received and the LCs published the responses to consultation last April. This was followed by a short consultation on the draft Bill which closed on 20 May. The LCs expect to publish their report and the final draft Bill later this year.

The LCs have stated that the proposals are intended to be relatively permissive to ensure that broadly speaking, insurance products which insurers want to sell and policyholders want to buy, could be made available without technical concerns about insurable interest due to the current narrow definitions.

The draft Bill introduces the concept of ‘life-related’ insurance. A contract of life-related insurance includes any contract of insurance under which the insured event is the ‘death, injury, ill-health or incapacity of an individual’. Thus the same rules are to apply to life assurance and critical illness, personal accident etc. policies. It would also cover investment linked insurance products which have life insurance element and annuities.

Here are the key provisions of the current draft Bill

  • The requirement for insurable interest to exist at the outset is to remain.
  • The Bill confirms the current law about automatic insurable interest in one’s life and the life of a spouse and civil partner but extends this to cover co-habitants as well as the children and grandchildren.
  • However there is to be no automatic right to insure parents and grandparents.
  • Trustees of pension schemes and other group schemes will have automatic insurable interest in the lives of the scheme members.
  • Where a person takes out a contract for the benefit of others, there will be automatic insurable interest in the lives of those beneficiaries. This will allow an employer to take out a policy for the benefit of an employee of their family without having to prove the existence of insurable interest.
  • The concept of ‘pecuniary and recognised by law’ interest which currently applies to situations where there is no automatic insurable interest is to be replaced by a broader ‘economic interest’ test. Insurable interest will exist in such cases when there is a ‘reasonable prospect of suffering economic loss’.

 

There are slightly different provisions proposed for non-life insurance, as well as a set of provisions on the consequences of the lack of insurable interest.

It is promising to see the progress being made on this. It is hoped that the final draft Bill when produced will be suitable for the special parliamentary procedure for uncontroversial Law Commission Bills and that finally the 1772 Act will be repealed and the law brought up to the 21st century standard.

TRANSFER OF MARRIAGE ALLOWANCE AND BOND GAIN 

If the taxpayer remains a basic rate taxpayer because of top slicing relief they remain eligible for the transfer of the marriage allowance.

A recent enquiry raised an interesting question of the impact of a chargeable event gain arising on encashment of an investment bond (technically speaking a non-qualifying life assurance policy) on the transfer of the personal allowance between spouses (a transfer of the so-called marriage allowance).

Whilst for most income tax purposes it is the total income that is relevant and for the purpose of ‘total income’ you need to include the entire chargeable event gain (i.e. without top slicing relief), the legislation dealing with this particular allowance is drafted in a different way.

The HMRC website includes a warning that, to qualify for the allowance this tax year, the recipient spouse’s ‘annual income must be between £11,001 and £43,000’.

This figure would seem to refer to the total income which would include the entire chargeable gain.

However, the actual legislation (Ch. 3A ITA 2007, ss 55A-55E inserted by FA2014) specifically refers to recipients being liable to tax at ‘a rate other than the basic rate, the dividend ordinary rate or the staring rate for savings’. So, if the gain after top-slicing does not take the recipient into the higher rate bracket, then on the words of the legislation they should be eligible.

We therefore wrote to HMRC to clarify the position. We used the following example to illustrate the issue.

The husband has total income of £24,000 and the wife has total income of £8,000 so they are eligible to transfer £1,100 personal allowance from wife to husband. The couple invested jointly in a non-qualifying UK life assurance policy which they surrender for a chargeable event gain of £40,000, i.e. £20,000 each. The bond has been in force for 15 years and so neither of the couple would become higher rate taxpayers taking account of top-slicing relief. Given that for the purposes of calculating total income one would normally take account of the entire chargeable event gain (see above), the husband’s total income of £44,000 would take him over the higher rate tax threshold of £43,000.

Based on these figures, it seemed that the individuals in this example would not be able to make a claim for this allowance via the HMRC website as husband’s total income is £44,000.

However, based on the wording of the legislation, they should be eligible. Furthermore, presumably other reliefs, such as gift aid or pensions contributions, could also lift the annual income threshold above £43,000.

HMRC confirmed to Technical Connection that the guidance on the Marriage Allowance online service is simplified to explain eligibility in a way that is applicable to the majority of customers, and is therefore based on the monetary threshold. However, there are a minority of customers (such as in the example above) that will be eligible and for whom the monetary amount is not relevant and that such customers are still able to make their application using the online service.

The clarification is very useful even though the scenario outlined above may not be that common. It also confirms that there are still ways to save tax by arranging property affairs between spouses/civil partners in a most efficient way.

BRING A CLIENT’S STAGING DATE FORWARD

Aspects about bringing forward a staging date.

It is possible for an employer to bring forward their staging date.

The Pensions Regulator (TPR) has made a change to help simplify the process. The requirement for employers to give TPR a month’s notice if they want to bring forward their staging date has now been removed. They will still need to let TPR know they’re doing it, but it can now be at any point on or before their new staging date.

It is worth noting though, that employers who do have staff to automatically enrol need to agree the new date with the pension provider first, and the staging date will still need to be the first of the month.

However, employers without anyone to automatically enrol can now bring forward their staging date to any date they choose. They can also declare their compliance at the same time, so their duties are completed.

These employers no longer have to set up a pension scheme; unless a worker asks to join one, or if they subsequently have staff to automatically enrol.

AUTOMATIC ENROLMENT DECLARATION OF COMPLIANCE

How to complete a client’s automatic enrolment declaration of compliance.

It is possible, as an adviser, you may be asked to help to (or actually) complete a declaration of compliance for a client. This Bulletin will set out what information you need to provide to The Pensions Regulator (TPR) and by when it needs to be done.

Your client must provide information to TPR to show how they have met their automatic enrolment duties. This means completing a declaration of compliance within five months of their staging date. If this is not submitted in time, then they could be fined.

It is a legal duty to complete the declaration of compliance correctly and on time. If you’re having difficulties with the automatic enrolment process or with gathering the right information to complete a declaration of compliance by the specified deadline, contact TPR without delay for assistance.

The following Q&A may prove useful to advisers who are not already familiar with this process, it used the following headings:

  • General declaration of compliance questions
  • Getting started
  • Employer details (Section 3 of the declaration)
  • Pension scheme details (Section 5)
  • Workforce details (Section 6)

 

General declaration of compliance questions

Q       Can someone else complete the declaration on behalf of an employer?

A       Anyone can complete the declaration of compliance for an employer, providing that they have the authority to do so and they have all of the required information. However, although the declaration can be completed by someone else (such as an accountant, a financial adviser or member of staff), it is still the employer’s legal responsibility to ensure that it’s completed correctly and on time.

Q       Does the declaration need to be completed just once or does it have to be done every three years?

A       The initial declaration of compliance must be completed within five calendar months of the staging date.

Every three years when as a part of the auto re-enrolment duties, there is a need to submit a re-declaration of compliance to inform TPR of the situation at that time. The re-declaration will need to be completed within five calendar months of the third anniversary of the staging date. This process will need to be completed at every third anniversary.

For example, if the staging date was 1 May 2013, the re-declaration will need to be completed by 30 September 2016.

Q       Where the employer only has one member of staff and they do not want to be in a pension scheme. Does a declaration still need to be completed?

A       Yes; every employer with at least one member of staff will need to complete a declaration of compliance. If they only have one member of staff who needs to be put into a scheme, they’ll still need to be put into the scheme before they can ask to leave it.

Q       What happens if the declaration is not completed within the time frames? Can it still be completed even if it is late?

A       It is the employer’s legal duty to complete their declaration of compliance correctly and on time. If they are having difficulties with the automatic enrolment process or with gathering the right information to complete the declaration of compliance by the deadline, please contact TPR without delay.

Q       Can the declaration be completed with approximate figures and then confirm them at a later date? Can this information be updated after the declaration is submitted? If so, how long is allowed to update it?

A       The employer is legally responsible for making sure that the information submitted as part of their declaration is correct and complete and they will be required to confirm on the declaration that this is the case.

So accurate figures must be provided. A declaration must not be submitted with inaccurate information as it’s an offence to knowingly or recklessly mislead TPR. If, after completion, it is discovered that some of the details included were incorrect, this information should be corrected as soon as possible. The employer will then need to re-confirm the legal declaration.

Q       Most of the staff were already in a pension scheme which can be used for automatic enrolment on the staging date. Why don’t TPR require details of these pension schemes at the declaration?

A       The law only requires the employer to give TPR information about the pension schemes that employers have used to automatically enrol members of staff who need to be put into a pension scheme.

Q       As a part of the declaration, is it necessary to confirm that all of the right information was sent to the staff on time?

A       No. it is not necessary to provide information in the declaration about whether staff communications have been made on time.

Q       The employer has signed up for a Government Gateway ID and it says they have enrolled, but the employer has not had to provide any information apart from my letter code and PAYE reference number; – does this mean the declaration has been successfully completed?

A       No it doesn’t. When an employer successfully signs up for a Government Gateway account, they will receive a message confirming this. It doesn’t mean that they have completed their declaration; it just means that they have created a Government Gateway account. They will then be able to complete their declaration of compliance online.

Getting Started

Q       What is the letter code and where can it be found?

A       The letter code is a 10-digit reference and can be found on the letter TPR sent to the employer.

Employer details (Section 3 of the declaration)

Q       Who should be noted as the employer contact?

A       The employer contact should be the owner or most senior person in the company and is responsible for making sure the legal duties are met. This person will be sent letters to keep them up to date with the tasks they need to complete and by when.

TPR also has a series of emails to help with employer duties. If the employer is using someone else to help manage some of the tasks (such as an accountant, a financial adviser or member of staff) TPR should be provided with their email address.

Pension scheme details (Section 5)

Q       What are EPSR numbers, and where can they be found?

A       An Employer Pension Scheme Reference (EPSR) is a unique reference given to an employer by the trustees or managers of personal pension or multi-employer occupational schemes. For personal pensions, this may be known as the group policy number. For the National Employment Savings Trust (NEST), this is known as the unique employer NEST ID.

Q       What are PSR numbers, and where can they be found?

A       A Pension Scheme Registry (PSR) number is allocated to the pension scheme by The Pensions Regulator and can be obtained from the trustees or managers of the pension scheme. It is an 8-digit number starting with a 1. It’s not to be confused with the Pension Scheme Tax Reference (PSTR), which is a reference allocated to pension schemes by HM Revenue and Customs (HMRC). This is not required for the NEST pension scheme.

Q       The pension provider operates from multiple locations. Which address should be provided when completing the declaration of compliance?

A       Provide the address used to contact the pension provider.

Q       Where multiple pension schemes are used, do they all need to be included?

A       Only need to include the pension schemes being used for automatic enrolment. There is no need to inform TPR about schemes that can be used for automatic enrolment that are being used for existing employees. There is only the need to inform TPR of the number of staff in such schemes.

Workforce details (Section 6)

Q       The employer delayed working out who to put into a pension scheme (used postponement) and during this time some staff left. Where is this information included?

A       Information about these staff is included under the ‘workforce details’ section, in the field titled “how many workers do not fall into the categories above?”.

Q       Should information about staff who joined after my staging date be include?

A       No, staff who started employment after the staging date shouldn’t be included in the ‘workforce details’. This information is provided on completion of the declaration of compliance.

Q       Where are details of staff who asked to join the scheme while during postponement?

A       Staff who ask to join a scheme during the postponement period should be included in the ‘workforce details’ section, in the field titled “how many workers do not fall into the above categories?”

Q       When entering staff details, should numbers be included from the staging date or the date assessment date?

A       Provide:

  • The total number of staff on the staging date
  • The number of staff who were already in a pension that can be used for automatic enrolment on the staging date
  • The number of staff that need to be put into a pension on the staging date
  • If postponement was used for some or all of the staff; provide the number of staff that were enrolled on the later assessment (deferral) date.

 

Q       The number of staff provided at declaration will not match the number of staff in the PAYE scheme, does this mean that the difference needs to be accounted for and, if so, where?

A       At declaration, provide the figures for the total number of staff in employment at the staging date.

Note:    This may not necessarily be everyone included in the PAYE scheme. For example, if the PAYE scheme contains individuals who’ve left employment but receive a pension, they do not need to be accounted for in the declaration.

Q       In respect of the last box in the declaration checklist. If all staff employed at the staging date were reported, how can those who ask to join or leave be accounted for?

A       TPR must be notified about every member of staff employed on the staging date, whether they’ve been put into a pension scheme or not. Those not accounted for in the previous boxes will be:

  • staff who’ve asked to join or leave a scheme between the staging date and the date of completion of the declaration
  • staff who aren’t aged between 22 and the state pension age and don’t earn over £10,000 a year, or £833 a month or, £192 a week (2016/17 figures).
  • staff who’ve left employment between the staging date and the declaration date
  • new starters between the staging date and the declaration date
  • staff who’ve been contractually enrolled between the staging date and the declaration date.

 

TRANSFERS AND A PROTECTED PENSION AGE

This considers some of the practical issues over transfers where there is a protected pension age in an occupational pension scheme.

The Pensions Tax Manual page sets out the requirements for an individual who has a protected pension to retain this upon a transfer to another registered pension scheme. In simple terms, so long as the transfer meets the conditions for it to be treated as a block (aka buddy) transfer, then the new pension scheme can honour the protected pension age.

We were recently asked a question in respect of a potential block transfer for an individual who was a deferred member of an occupational pension scheme and, had the right to take benefits from the OPS from age 50, provided they were no longer employed by the sponsoring employer.

If a block transfer is made to a new PPP/SIPP then that facility to take pension benefits from age 50, will be retained. However, that ability will still be contingent on the individual no longer being employed by the sponsoring employer of the original occupational pension scheme.

It will therefore be necessary to ensure that the new PPP/SIPP carries out the necessary checks if benefits are crystallised prior to the normal minimum pension age of 55, to ensure that the individual is no longer employed by the former sponsoring employer. If benefits are paid, prior to age 55, and the individual is still employed by the sponsoring employer, then we believe HMRC would treat the payment of benefits as an unauthorised member payment.

This means (as taking benefits under these rules, mean all the member benefits under the scheme must be taken at the same time) the unauthorised member payment will exceed the 25% surcharge threshold. This in turn means the actual penalty will be:

  • The 40% unauthorised payment charge, plus
  • The 15% unauthorised payments surcharge, plus
  • The 15% scheme sanction charge.

 

Making a total penalty of 70%.

 

If you would like to know more about further financial planning services we offer please e mail or call us to discuss.

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