Blog

28/02/19
2018 was not a good year for UK companies. The stock market suffered its worst year in a decade, falling 12.62% over the calendar year. However, while the collective worth of British companies fell, their earnings held up better. This is good news for investors as it means the dividends these companies pay are on more solid ground. And UK dividends are actually thriving: the dividend yield of the UK stock market stands at an average of 4.8%, with a number of our largest companies paying well in excess of this. Importantly, nine out of 10 sectors saw dividends rise in 2018, so there is plenty of choice for investors. Even the banking sector – which was hit hard after the financial crisis – is in better shape: The Royal Bank of Scotland recently paid its first dividend in 10 years and Standard Chartered paid its first dividend since 2015. Lloyds is distributing more than it did before 2008. Moreover, the dividend cover (a measure of a company’s ability to pay dividends in the future) of the UK stock market also looks healthy for large, medium and small businesses.

The strength of UK dividends is important not only for investors seeking an income, but also for those looking for healthy total returns. For example, while the UK stock market fell more than 12% last year, if dividends paid by UK companies had been reinvested, the fall was a slightly more palatable 8.82%.
26/02/19
The annual review of the automatic enrolment earnings trigger and qualifying earnings band for 2019/20 has now been published. The Secretary of State does have some flexibility in the level to which the amounts for the earnings trigger and qualifying earnings band are set. There are 3 principles that are considered at each review:

1) Will the right people be brought in to pension saving? In particular, at what level will the earnings trigger bring in as many people as possible who will benefit from saving?
2) What is the appropriate minimum level of saving for people who are automatically enrolled? Everyone who is automatically enrolled should pay contributions on a meaningful portion of their income.
3) Are the costs and benefits to individuals and employers appropriately balanced?

Results of the review
Earnings Trigger
This will remain at £10,000. This represents a real terms decrease in the value of the trigger when combined with assumed wage growth and will bring in an additional 40,000 individuals into the target population.

Qualifying earnings band lower limit

The Secretary of State has decided to maintain the link with the National Insurance Contributions Lower Earnings Limit at its 2019/20 value of £6,136 by setting this as the value of the lower limit of the qualifying earnings band for 2019/20.

Qualifying earnings band upper limit

The upper limit of the qualifying earnings band caps mandatory employer contributions . National Insurance Contributions Upper Earnings Limit at its 2019/20 value of £50,000 is the factor that should determine the upper limit of the qualifying earnings band. Retaining the link between National Insurance Contribution levels and the qualifying earnings band limits, provides an important element of consistency for employers, the pensions industry and payroll services.

The relevant legislation will be laid in early 2019 giving effect to the new numbers.
18/02/19
A Treasury Committee inquiry into the future of the UK’s financial services once the UK has left the EU.

The Treasury Commons Select Committee is examining what the Government’s financial services priorities should be when it negotiates the UK’s future trading relationship with the EU and third countries and will be taking evidence from industry, regulators, ministers and officials.

The Committee will also look at how the UK’s financial services sector can take advantage of the UK’s new trading environment with the rest of the world, and whether the UK should maintain the current regulatory barriers that apply to third countries.

Commenting on the launch of the inquiry, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“The UK may converge, seek equivalence, or diverge from the EU. As part of our new inquiry, the Treasury Committee will examine the risks and rewards of each of these choices.”

“We’ll also explore the opportunities outside Brexit, such as FinTech, on which we should be capitalising.”

“We’ll also seek to conclude whether it would be in the long-term interests of the UK to align closely with EU financial rules, or to forgo financial services trade with the EU and pursue trade with other third countries.”

Terms of Reference
The Committee will be considering the following questions:
• What should the Government’s financial services priorities be when it negotiates its future trading relationship with the EU?
• What should the Government’s financial services priorities be when it negotiates with third countries in the rest of the world in order to allow UK financial services access to their markets?
• What regulatory actions are required for each specific segment of the UK financial services industry in order to maximise access to EU markets?
• How can the UK financial services sector take advantage of the UK’s new trading environment with the rest of the world?
• Should the UK open its financial services markets to external competition from countries outside of Europe, or should the UK maintain the current regulatory barriers that apply to third countries?
• What skills and immigration policy will the UK financial services sector need once the UK has left the EU?

There is no set deadline for the submission of written evidence to this inquiry. However, the submission page suggests written evidence should be submitted by 30 April 2019.

Next steps
After taking evidence from industry, regulators, ministers and officials, the committee will make a series of recommendations to the Government and regulators about what it should prioritise in negotiations with the EU and the rest of the world.
11/02/19
HMRC has published a new policy paper on cryptoassets (like crypto currency and bitcoin).

Over more recent years we have seen the popularity of cryptoassets grow. However, very rarely do we come across queries in relation to how such assets are taxed – although this could well change in the years to come!

Previous HMRC guidance suggested that highly speculative transactions in cryptoassets might be considered gambling, which is effectively outside the scope of tax. However, in a change of position, HMRC’s latest guidance confirms that they no longer consider that the buying and selling of cryptoassets will be the same as gambling.

The new policy paper sets out HMRC’s view - based on the law as it stands at the date of publication – about how individuals who have cryptoassets are taxed. The paper does not consider the tax treatment of cryptoassets held for the purposes of a business carried on by an individual, however HMRC will produce more information on this at a later date.

Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:
• Transferred;
• Stored; or
• Traded electronically.
HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report (CATF). The CATF have identified three types of cryptoassets: exchange tokens; utility tokens; and security tokens.
HMRC’s paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens.

In its guidance, HMRC confirms that:
• Most individuals hold cryptoassets as a personal investment and, as such, will be subject to capital gains tax (CGT) on gains and losses.
• S104 pooling applies, subject to the 30-day rule for 'bed and breakfasting'.
• A capital loss may be claimed in the event that a cryptoasset becomes of a negligible value – although evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
• It will be rare for investment in cryptoassets to be regarded as trading, although 'mining' or ‘airdrops’ (see below) are likely to indicate a trading activity and, as such, income tax will take priority over capital gains tax and will apply to profits (or losses).
• If an employer awards cryptoassets, these are taxable as employment benefits.
• If they fall within the description of readily convertible assets they are subject to PAYE.
• HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme.
• Cryptoassets will be property for the purposes of inheritance tax.

‘Mining’ is where an individual uses a computer(s) to carry out computational tasks as part of the underlying digital ledger and can receive cryptoassets as payment. Where the individual is not trading, such fees are treated as miscellaneous income. ‘Airdrops’ are allocations of cryptoassets where the individual may or may not have to perform a service to receive the allocation. If the individual does not have to perform a service, and is not trading, then the receipt can be tax-free. Otherwise, the receipt will be considered miscellaneous income.

HMRC has also produced guidance for individuals to check if they need to pay income tax or national insurance contributions when they receive cryptoassets or if they need to pay CGT when they sell cryptoassets.
05/02/19
The run up to the tax year end is a good time to consider tax planning to maximise the use of an individual’s allowances, reliefs and exemptions for the current tax year. Some of these will be lost if not used before the tax year end. For those people who currently pay income tax at the higher rate (40%) and additional rate (45%), tax planning is absolutely vital as a means of minimising tax payable and so maximising net income, capital gains and wealth.
As well as last-minute tax planning for the tax year ending 5 April 2019 (2018/2019), now is also a good time to put in place strategies to minimise tax throughout 2019/2020. Although, while arranging your affairs to save tax is an important part of financial planning, it is not the only part. It is also essential that any tax planning strategy that is being considered also makes commercial sense. In this newsletter we cover the main planning opportunities open to UK resident individuals. All references to spouse include civil partners and all references to married couples include registered civil partners.

INCOME TAX PLANNING
The following are the main income tax factors that are relevant for 2018/2019:
  1. The personal allowance is £11,850. This is expected to increase to £12,500 for 2019/2020. Since 6 April 2015 it has been possible for one spouse to transfer 10% of their personal allowance to the other spouse provided neither spouse is a higher or additional rate taxpayer.
  2. The threshold for the start of higher rate tax on taxable income (outside of Scotland) is £34,500 in 2018/2019. This is expected to increase to £37,500 for 2019/2020.
  3. A 45% tax rate applies to taxable income that exceeds £150,000.
  4. People with income in excess of £100,000 lose some, or all, of their standard personal allowance.
  5. A 0% starting rate tax band of £5,000 for savings income, other than dividends (eg bank and building society interest). This tax band is only fully available where earned income (eg salary, benefits in kind, pensions, etc.) does not exceed the personal allowance, and it reduces to the extent that earned income does exceed the personal allowance. So, for example, if earned income is £12,350, the 0% starting rate for savings income reduces from £5,000 to £4,500. Also, this 0% tax band is not a true exemption as it uses up part of the basic rate tax band.
  6. A £2,000, a year, 0% tax band also applies to dividend income. Above this 0% tax band dividends are taxed at:
  • 7.5% for basic rate taxpayers;
  • 32.5% for higher rate taxpayers; and
  • 38.1% for additional rate taxpayers.

Shareholding directors who draw remuneration from their company in the form of dividends will need to base any tax planning on the above dividend allowance and tax rates. Investors who receive more than £2,000 a year in dividends from investments may also need to review their investment strategies.
  1. The personal savings allowance means that savings income of up to £1,000 a year (basic rate taxpayer) and £500 a year (higher rate taxpayer) is tax free.
The 2019/2020 increases in the personal allowance and basic rate tax threshold will mean that the number of people who pay higher rate tax is reduced. The impact of the thresholds at (iii) and (iv) above continuing to remain frozen at their original levels, is that the number of people with income of more than £100,000 and £150,000 will increase. As a result, more people will be required to pay rates of income tax of up to 60% on some of that income.
  • Tax increases can be combatted in a number of ways including:
  • Maximising the use of all of a couple’s allowances, reliefs and exemptions.
  • Planning to use the allowances on savings income.
  • Planning around dividend taxation.
  • Using tax-efficient investments.

We will now consider these in more detail.


04/02/19
The Government acts on concerns raised about its October 2018 changes to entrepreneurs’ relief. In the 2018 Budget the Chancellor announced two key changes to entrepreneurs’ relief which are likely to have a significant impact on the number of individuals/shareholders benefitting from the relief. In answer to concerns raised, the Government is now amending the draft Finance Bill to broaden the new definition of a personal company for shareholders looking to obtain entrepreneurs’ relief.

The two key changes were broadly:
1. An extension to the qualifying holding period from one year to two years; and
2. A tightening of the rules governing the definition of a personal company – so the share rights an individual must benefit from before they qualify for the relief - introduced with effect from 29 October 2018. This change requires the claimant to have a 5% interest in both the distributable profits and the net assets of the company.

However, alarm was raised about how the new rules governing the definition of a personal company would operate in practice as the changes seemed to result in a range of potential unintended consequences. As a result, the Government has tabled an amendment to the new Finance Bill wording, details of which can be found here.

The rules regarding the definition of a personal company essentially govern the share rights to which an individual must be entitled in order to qualify for entrepreneurs’ relief. The above change means that an individual must:
• Be an employee or officer of the company;
• Hold at least 5% of the “ordinary share capital”;
• Have at least 5% of the voting rights by virtue of that holding of ordinary share capital; and

from 29 October 2018, either:
• Be entitled to at least 5% of the company’s distributable profits; and
• Have a right to at least 5% of the net assets of the company available to equity holders on a winding-up; or

if the above Government amendment is passed into law:

• Be entitled to at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.

Further guidance on the changes is expected from HMRC. However, the Chartered Institute of Taxation has received the following comment from HMRC:

“Thank you all for taking the time to share your concerns about and suggestions on the recent entrepreneurs’ relief changes with us, whether at the meeting last week, or in writing. I’m writing to let you know that on the basis of your advice and recommendations, the government has now tabled an amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole [of the ordinary share capital in the]* company, which can be used instead of the tests based on profits available for distribution and assets on a winding up. The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons and does not rely on the definitions in the Corporation Tax Act 2010.”

*Addition by CIOT for clarification.

For disposals before 6 April 2019, the additional requirements set out above will apply for one year to the date of disposal. For disposals on or after 5 April 2019, these additional requirements will apply for two years to the date of disposal, except where the company ceased trading before 29 October 2018.

In cases where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018, the existing one-year qualifying period will continue to apply.
25/01/19
HMRC has published a new policy paper on cryptoassets (like crypto currency and bitcoin). Over more recent years we have seen the popularity of cryptoassets grow. However, very rarely do we come across queries in relation to how such assets are taxed – although this could well change in the years to come!

Previous HMRC guidance suggested that highly speculative transactions in cryptoassets might be considered gambling, which is effectively outside the scope of tax. However, in a change of position, HMRC’s latest guidance confirms that they no longer consider that the buying and selling of cryptoassets will be the same as gambling.

The new policy paper sets out HMRC’s view - based on the law as it stands at the date of publication – about how individuals who have cryptoassets are taxed. The paper does not consider the tax treatment of cryptoassets held for the purposes of a business carried on by an individual, however HMRC will produce more information on this at a later date.

Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:
  • Transferred;
  • Stored; or
  • Traded electronically.

HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report (CATF). The CATF have identified three types of cryptoassets: exchange tokens; utility tokens; and security tokens. HMRC’s paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens.

In its guidance, HMRC confirms that:
  • Most individuals hold cryptoassets as a personal investment and, as such, will be subject to capital gains tax (CGT) on gains and losses.
  • S104 pooling applies, subject to the 30-day rule for 'bed and breakfasting'.
  • A capital loss may be claimed in the event that a cryptoasset becomes of a negligible value – although evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
  • It will be rare for investment in cryptoassets to be regarded as trading, although 'mining' or ‘airdrops’ (see below) are likely to indicate a trading activity and, as such, income tax will take priority over capital gains tax and will apply to profits (or losses).
  • If an employer awards cryptoassets, these are taxable as employment benefits.
  • If they fall within the description of readily convertible assets they are subject to PAYE.
  • HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme.
  • Cryptoassets will be property for the purposes of inheritance tax.

‘Mining’ is where an individual uses a computer(s) to carry out computational tasks as part of the underlying digital ledger and can receive cryptoassets as payment. Where the individual is not trading, such fees are treated as miscellaneous income. ‘Airdrops’ are allocations of cryptoassets where the individual may or may not have to perform a service to receive the allocation. If the individual does not have to perform a service, and is not trading, then the receipt can be tax-free. Otherwise, the receipt will be considered miscellaneous income.

HMRC has also produced guidance for individuals to check if they need to pay income tax or national insurance contributions when they receive cryptoassets or if they need to pay CGT when they sell cryptoassets.
24/01/19
The Department for Work and Pensions (DWP) has stated that is it committed to fully evaluating the effects of the workplace pension reforms, as set out in its evaluation strategy, which was refreshed in 2017. Evaluation reports have been published annually since 2013, following a baseline report in 2012 which described the landscape before the implementation of automatic enrolment. This report brings together the latest evidence, including evidence published within the last 12 months and new analysis conducted for the report, showing what has happened since automatic enrolment began.

Key findings in the report
  • Data collected up to 2017 found that the number of eligible employees participating in a workplace pension has increased to 17.7 million, 84%, up from 10.7 million, 55% in 2012. Overall, eligible employees are continuing to save persistently.
  • The annual total amount saved by eligible employees across both sectors (public and private) stands at £90.3 billion in 2017, an increase of £4.3 billion from 2016. Annual total amounts increased in both public and private sectors from 2016. The public sector increased by around £0.3 billion and the private sector by £4.0 billion.
  • Rates of opt-out and cessation (stopping saving into a pension after the optout period) have at the end June 2018 remained consistent with levels before the first planned contribution increase in April 2018.
  • Those who are enrolled due to staging have higher opt-out rates than those enrolled due to starting a job with an employer who already has ongoing automatic enrolment duties.
  • Males and females have the same levels of opt-out, but males have slightly higher levels of cessation.
  • Generally, older age groups have higher opt-out rates, but those aged 22 to 29 and 60 to State Pension age have the highest cessation rates – although these rates are at relatively low levels.
  • Higher earners tend to have higher opt-out rates than lower earners, while (with the exception of the highest earners who have the highest cessation rates) there is not much variation in cessation rates by earnings level.
  • In 2017, over 7 million eligible private sector employees saving into a workplace pension received an employer contribution of two per cent or above (above the then-minimum contribution rate); of these, 5.5 million received an employer contribution of four per cent or above.
  • More than 92% of eligible employees in the private sector contributing between three and four per cent received a matching (or higher) employer contribution rate.
  • Approximately 5.9 million eligible employees were already meeting the April 2019 minimum contribution rates, based on data from April 2017. However, around 5.1 million eligible employees were still contributing below April 2018 minimums at that time, and around 6.1 million will have to increase their contributions by April 2019, if not earlier.
  • The rate of levelling down (reducing the generosity of contributions or outcomes for existing pension scheme members) has increased slightly since 2012. However, findings from the Employers' Pension Provision Survey 2017 suggest that where employers have experienced increased contribution costs as a result of automatic enrolment, only one per cent of employers have adopted levelling down as a strategy to absorb increased contribution costs.
  • Findings from the DWP’s communications tracking research (June 2018 wave) found that majority of individuals interviewed viewed automatic enrolment as a good thing for them personally (82%); agreed saving into a workplace pension was normal for them (80%); and knew where to go if they wanted to find more about workplace pensions (83%).
  • The emerging findings from forthcoming DWP research with new employers, to be published in 2019, suggest that the reality of implementing automatic enrolment was usually less burdensome than employers had anticipated. The financial burden among those interviewed, over and above the ongoing cost of employer contributions, was either small or even non-existent.

Comment - The next evaluation report published in 2019 will take account of the increased in contribution rates, which may have an impact on the opt out rates of auto enrolment.
17/01/19
The Government acts on concerns raised about its October 2018 changes to entrepreneurs’ relief.

In the 2018 Budget the Chancellor announced two key changes to entrepreneurs’ relief which are likely to have a significant impact on the number of individuals/shareholders benefitting from the relief. In answer to concerns raised, the Government is now amending the draft Finance Bill to broaden the new definition of a personal company for shareholders looking to obtain entrepreneurs’ relief.

The two key changes were broadly:

1. An extension to the qualifying holding period from one year to two years; and
2. A tightening of the rules governing the definition of a personal company – so the share rights an individual must benefit from before they qualify for the relief - introduced with effect from 29 October 2018. This change requires the claimant to have a 5% interest in both the distributable profits and the net assets of the company.

However, alarm was raised about how the new rules governing the definition of a personal company would operate in practice as the changes seemed to result in a range of potential unintended consequences. As a result, the Government has tabled an amendment to the new Finance Bill wording, details of which can be found here.

The rules regarding the definition of a personal company essentially govern the share rights to which an individual must be entitled in order to qualify for entrepreneurs’ relief. The above change means that an individual must:

• Be an employee or officer of the company;
• Hold at least 5% of the “ordinary share capital”;
• Have at least 5% of the voting rights by virtue of that holding of ordinary share capital; and

from 29 October 2018, either:

• Be entitled to at least 5% of the company’s distributable profits; and
• Have a right to at least 5% of the net assets of the company available to equity holders on a winding-up; or

if the above Government amendment is passed into law:

• Be entitled to at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.

Further guidance on the changes is expected from HMRC. However, the Chartered Institute of Taxation has received the following comment from HMRC:

“Thank you all for taking the time to share your concerns about and suggestions on the recent entrepreneurs’ relief changes with us, whether at the meeting last week, or in writing. I’m writing to let you know that on the basis of your advice and recommendations, the government has now tabled an amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole [of the ordinary share capital in the]* company, which can be used instead of the tests based on profits available for distribution and assets on a winding up. The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons and does not rely on the definitions in the Corporation Tax Act 2010.”

*Addition by CIOT for clarification.

For disposals before 6 April 2019, the additional requirements set out above will apply for one year to the date of disposal. For disposals on or after 5 April 2019, these additional requirements will apply for two years to the date of disposal, except where the company ceased trading before 29 October 2018.

In cases where the claimant’s business ceased, or their personal company ceased to be a trading company (or the holding company of a trading group), before 29 October 2018, the existing one-year qualifying period will continue to apply.
Author
14/01/19
The annual review of the automatic enrolment earnings trigger and qualifying earnings band for 2019/20 has now been published. The Secretary of State does have some flexibility in the level to which the amounts for the earnings trigger and qualifying earnings band are set.

There are 3 principles that are considered at each review:
1) Will the right people be brought in to pension saving? In particular, at what level will the earnings trigger bring in as many people as possible who will benefit from saving?
2) What is the appropriate minimum level of saving for people who are automatically enrolled? Everyone who is automatically enrolled should pay contributions on a meaningful portion of their income.
3) Are the costs and benefits to individuals and employers appropriately balanced?

Results of the review
Earnings Trigger

This will remain at £10,000. This represents a real terms decrease in the value of the trigger when combined with assumed wage growth and will bring in an additional 40,000 individuals into the target population.

Qualifying earnings band lower limit

The Secretary of State has decided to maintain the link with the National Insurance Contributions Lower Earnings Limit at its 2019/20 value of £6,136 by setting this as the value of the lower limit of the qualifying earnings band for 2019/20.

Qualifying earnings band upper limit
The upper limit of the qualifying earnings band caps mandatory employer contributions . National Insurance Contributions Upper Earnings Limit at its 2019/20 value of £50,000 is the factor that should determine the upper limit of the qualifying earnings band. Retaining the link between National Insurance Contribution levels and the qualifying earnings band limits, provides an important element of consistency for employers, the pensions industry and payroll services.

The relevant legislation will be laid in early 2019 giving effect to the new numbers.