Update: estate planning

Auto-enrolment under the pensions bill

On 13 January 2011 the government's new pensions bill received its first reading in parliament. The bill builds on reforms set out in the Pensions Act 2007 and the Pensions Act 2008 and one of its measures is the introduction of auto-enrolment.

As of 1 October 2012 there will be a duty on an employer to automatically enrol its employees into a qualifying pension scheme if their salaries fall within specified parameters. Unless the employee opts out of the scheme, the employer must make a contribution towards a defined contribution scheme or NEST (the national employment savings trust). Payments are to be phased in. Initially employers will only have to contribute one per cent, but by 2017 the employer will have to make a minimum contribution of three per cent.

The auto-enrolment rules will apply to all employees aged between 22 and state pension age who earn over £7,475 and under £33,540 per year (2010/11). This lower limit matches the personal allowance for income tax. Employers will also have an ongoing duty to maintain qualifying pension provisions for existing members.

For new employees, the bill introduces an optional waiting period of three months before the employee is automatically enrolled, but employers will have a duty to maintain qualifying pension provision for existing members of a scheme. The regime is to be brought in gradually and will apply to all employers, including small businesses, by September 2016.

The effect of auto-enrolment is that it entitles all employees to participate in a pension scheme. While this is beneficial for the employees, there will be an additional burden of administration and cost for employers. It is expected to cost employers an additional £3.5bn a year and to bring seven million new employees into the system.

Large companies may try to encourage employees to opt out of the scheme or use avoidance mechanisms. Alternatively it is possible that the employer's customers may ultimately fund the additional cost through an increase in prices, particularly in the retail sector as currently only 20-25 per cent of employees in retail are in a pension scheme.

It is more likely that employees will end up paying for an employer's additional costs, through potential redundancies, an offset against pay increases or a requirement to make a 'salary sacrifice'.

Disclosure of tax avoidance schemes

The disclosure of tax avoidance schemes (DOTAS) regime was introduced in part 7 of the Finance Act 2004 and associated regulations came into effect on 1 August 2004. The requirement for disclosure has enabled HMRC to close over £12bn tax avoidance opportunities (that being the figure given by HMRC in December 2009).

Disclosures under the DOTAS regulations highlight to HMRC the various tax avoidance schemes in circulation. Under a disclosure, promoters are required by law to disclose the main components of the scheme to HMRC. Promoters are those who are responsible for the design of the tax scheme and make the scheme available. Where a disclosure is not made by a promoter, the scheme user must make the disclosure.

Further measures were included in schedule 17 of the Finance Act 2010, to take effect from 1 January 2011, which were designed to improve the identification of scheme users and the speed with which HMRC receives information on the avoidance schemes.

Failure to make a disclosure will result in a penalty, which has increased for defaults arising on or after 1 January 2011. Failure to disclose a scheme by the deadline will result in a maximum penalty of £600 per day from that date to the date of disclosure or the determination of the penalty by the First-tier Tribunal.

Before 1 January, the maximum penalty was £5,000, but this was seen as an acceptable part of the cost of implementing a scheme by some providers, particularly where there was a large amount of tax at stake. HMRC also has a discretion to increase the penalty up to £1m, depending on the fees earned by the promoter or the tax advantage sought from the scheme.

The Finance Act 2010 has tightened HMRC's control on disclosure, by compelling an 'introducer' (a person who makes marketing contact regarding a scheme) to provide HMRC with the identity of the person who provided the introducer with information about the scheme and the reasons why the promoter did not disclose the scheme. An introducer will have to provide this information when it can be shown that HMRC has reasonable grounds to suspect that there has been non-compliance to a particular scheme.

Schemes which require disclosure to HMRC are identified by 'hallmarks', which are the offending components to any arrangement. As of 1 January 2011, HMRC has widened the scope of the disclosure regime by increasing and revising the number of hallmarks.

A new 'trigger point' for the disclosure of actively marketed schemes was introduced. The trigger point was previously the making of the scheme 'available for implementation', but HMRC felt that this was being abused with promoters deliberately delaying the process. The trigger point is now the point at which a promoter first communicates information about the scheme to a third party. This seeks to ensure that HMRC can stop the avoidance scheme at the earliest possible time.

The DOTAS regime currently applies to income tax, capital gains tax (CGT), corporation tax (CT), stamp duty land tax and national insurance contributions. Last year, HMRC issued a consultation document with a proposal to extend the regime to include inheritance tax and on 6 December 2010 a report on the summary of the responses to HMRC's consultation was published. The report suggested overall support to extending DOTAS to inheritance tax and new regulations covering inheritance tax are expected to take effect from 6 April 2011.

The regulations will seek to identify new, innovative schemes which avoid the payment of inheritance tax and are not concerned with existing arrangements. There will be no hallmark test but HMRC is to publish a list of known schemes and arrangements which will not require disclosure.

Trusts and mistakes

Following a recent flurry of cases relating to the ability to set aside a gift owing to a mistake on the part of the transferor, a further case has been heard which confirms the principle in Re Hastings Bass that a trust entered into by mistake can be set aside.

In the recent case of Maskell v Abrahamson and associates (decided on 8 December 2010) a widow created a trust into which her husband's death benefits from his pension scheme could be paid. The intention behind the creation of the trust was to avoid adverse tax consequences.

However, the trust inadvertently excluded the widow as a beneficiary. The court set aside the discretionary trust created by the widow as it was clear that it had been created by mistake and held that setting aside a discretionary trust created by mistake was an 'established principle'.

This will be of comfort to the professional adviser who has overlooked potential taxliabilities (as long as the application to court for rectification or to set the transaction aside does not become more costly than the taxliability).

Simplifying the tax system

With Britain having 'one of the most complex and opaque tax codes in the world' (George Osborne) the Office of Tax Simplification (OTS) was created on 20 July 2010 to provide the government with independent advice on simplifying the UK tax system.

On 13 December 2010 the OTS published an interim report detailing its review of 13 of 74 tax reliefs to be reviewed. The OTS is to publish a full review of all 74 reforms in the 2011 Budget. The objective is to identify those tax reliefs which can be repealed or simplified to provide a simpler tax system.

The interim report felt that the following three reliefs should be preserved:

• The tax relief on capital gains on the disposal of a private residence '“ there may have been some political element to this, following claims for main residence relief on second homes by certain members of parliament. The OTS felt that the relief encouraged home ownership and was necessary to ensure the fluidity of the residential property market. The repeal of this relief would result in 800,000 people having to complete a self-assessment tax return, making the process administratively cumbersome.
• Income relief for players in the UEFA Champions League Final '“ for sportspersons not resident in the UK.
• Income tax relief for repair and maintenance of work equipment '“ because it ensures that employees who are necessarily obliged to incur expenses in relation to their work equipment are not disadvantaged in comparison with those employees whose employers meet the expense directly.

The OTS felt that the following reliefs were too complex and in need of simplification:

• VAT: supplies to charities/sales by charities.
• Gift Aid.
• Lease premium relief.
• Capital allowances '“ enhanced capital allowances for energy and water efficient technologies.
• Research and development tax relief.

The OTS felt that the following reliefs should be abolished:

• The exemption for benefit charge for late night taxis '“ as it creates tax distortions and has been deemed unfair.
• Vaccine research relief '“ this is currently only available to ten companies, so the administrative burden outweighs its benefits.
• Millennium Gift Aid.
• Income tax relief for national savings bank ordinary account interest.
• Luncheon vouchers '“ daily income tax relief for the first 15p.

Treasury minister David Gauke said that once the 74 reliefs have been reviewed the tax system will be free of any 'unnecessary complexities', but many tax advisers will be surprised '“ and perhaps disappointed '“ if that were to be the case.