Taxation update
Carol Mead discusses offshore bank accounts, tax credits filing deadline, employee car ownership schemes, state pension reform, complex personal tax returns teams, retirement annuities and the national minimum wage
The Finance (No 2) Bill 2006 was published on 7 April 2006, following the Budget. It is still going through Parliament, with the Finance Act 2006 expected to be passed in July 2006.
The Finance Bill proposals regarding the changes to trusts have caused much concern and the key representative bodies are working together to try and secure amendment to the draft legislation. It is anticipated that the date for the Standing Committee debate of these controversial clauses will be 13 June 2006.
The main areas of concern are to ensure the protection of the current spousal exemption and to highlight concerns over changes to accumulation and maintenance (A&M) trusts, which will lower the age at which beneficiaries can become absolutely entitled, without financial (tax) penalties, from age 25 to 18 years. Since few A &M trusts currently provide for assets to pass outright at age 18, or before, in practice, this will mean that the terms of trusts will need to be amended by 5 April 2008 if they are to continue to retain their protected status.
Many family wills set up a trust for the surviving spouse and children for valid social reasons, including to:
- provide and protect the children in the event of the spouse's remarriage;
- look after a child who is unstable or financially reckless; and
- limit access to money until the children are 25 years' old.
Offshore bank accounts
Following the decision by the Special Commissioners in the case of Revenue & Customs Commissioners v Financial Institution (No 2) SpC 536, Barclays Bank will be required to disclose details of its offshore account holders to HM Revenue & Customs (HMRC). HMRC is concerned that UK-domiciled and resident taxpayers have not been declaring interest earned on offshore accounts, as a sample of cases where information was held by HMRC revealed that some people with offshore accounts had not filed self-assessment tax returns.
As a result of the recent publicity of this case, HMRC's website states: 'Following media publicity it is apparent that some customers or their representatives wish to contact HMRC to make disclosures in respect of assets held offshore, where there may be unpaid duties. HMRC is keen to facilitate such approaches and has set up a single point of contact to handle your queries.' Taxpayers who may be affected should contact their professional advisers for guidance in the first instance.
The Offshore Fraud Project group was formed in 2005 as a new unit of HMRC to identify funds held offshore by UK residents and to recover any tax underpaid on those funds. It is estimated that funds held offshore by UK residents amount to over £200bn and that a significant proportion of these are derived from sources of income not declared in the UK. Following the outcome of the recent tax case against Barclays Bank, it is likely that HMRC will extend its requests for information to other UK financial institutions. It is estimated that HMRC will obtain details of more than 400,000 offshore accounts held by UK residents, which is likely to result in a significant increase in inquiries by HMRC.
Tax credits filing deadline
Paymaster General Dawn Primarolo has announced further administrative changes to the tax credits system. The major change already announced is that the deadline for claims or renewals has been shortened by one month to 31 August. The deadline for notifying changes in income or personal circumstances will also be reduced.
This change is likely to pose problems for those claimants who are self-employed, as they will need to have prepared accounts as a basis of their claim, which, in turn, will put pressure on their accountants to complete this work earlier.
The tax credits system provides support to 6 million families and 10.1 million children. Due to the complexity of the tax credits system, claimants were overpaid credits of £2.2bn in 2003/04 and £1.8bn in 2004/05. Action is being taken to improve the system and tackle errors; it is hoped that these overpayments will be significantly reduced in future years.
Where overpayments have arisen as a result of errors in the system, the claimant will not be required to repay those sums and, as a result, £1bn of overpayments were written off in 2003/04. In a bid to reduce these overpayments, the following changes will be made.
l The level at which a claimant's income can increase before it will affect the award of tax credits is increased from £2,500 to £25,000 per annum.
- HMRC will be able to withhold 'accrued underpayments' of tax credits where it is judged that a claim for additional support has been based on an overestimate of the reduction in income.
- Provisional payments will be made at the start of the tax year based on the previous year's income and updated, assuming a renewal application is made before the new deadline of 31 August.
- The period of notification of a change in family or personal circumstances has been reduced from three months to one month.
HMRC published the second stage review of ECOS in the Budget on 22 March. The review identified that there has been a reduction of about 400,000 company cars since 1999, partly due to the change in the taxation treatment of company cars based on their emission levels in 2002.
The report on company car reforms indicates that there has been a decrease in the tax and National Insurance (NI) collected as a result of employees switching to lower emission cars and also due to many employees giving up their company cars in favour of a privately owned vehicle. Due to these changes, it is estimated that the loss to HMRC is about £100m in tax and NI each year.
Employees who are no longer provided with a company car are often given a salary increment as compensation for the loss of a company car and to enable them to acquire their own cars, usually within a specified finance arrangement. This increment is subject to tax and NI in the usual way and the employee then makes a claim to his employers for business mileage, which may be paid at a low rate per mile on the basis that the employer has already met part of the cost of business journeys by way of the salary increment. If the business mileage rate claimed is less than the authorised mileage allowance payment of 40p per mile for the first 10,000 miles and 25p per mile over 10,000 miles, employees can claim the difference through their self-assessment tax return, reducing their tax liability and possibly securing a repayment of tax.
HMRC is now reviewing the taxation of ECOS and the benefits employees derive from them, with a view to possible changes
State pension reform
A recent government White Paper has unveiled a reform of the UK pension system. This follows a three-year investigation by Lord Turner, whose final report was issued in April. Under the new proposals, the state pension qualifying age will rise from 65 to 66 years between 2024 and 2026, to 67 years between 2034 and 2036, and to 68 years between 2044 and 2046. No one over the age of 47 now will be affected by the changes.
The increase in the retirement age is designed to provide a more generous state pension for everyone and it is estimated that, by 2050, anyone who has been in employment or caring throughout their working life will receive about £135 (in today's terms) or more a week in retirement. In addition, there will be a link between the state pension and average earnings, subject to affordability and the fiscal position, which is expected to start in 2012.
The White Paper also proposes a new system of personal pensions savings accounts, which is expected to be introduced in 2012. All employers will have to offer automatic enrolment in the scheme unless they have a more generous occupational pension scheme that enrols employees automatically. The proposal is that employers will be required
to make a compulsory contribution of 3 per cent of an employee's salary to the scheme, with employees paying 4 per cent and the government 1 per cent.
The money will be invested on behalf of employees in a variety of savings vehicles, such as stocks, bonds and property. It is proposed that the employer's contribution is phased in over three years, with a longer period for small businesses.
Complex personal tax return (CPR) teams
HMRC CPR teams deal primarily with individuals whose self-assessment tax returns show high income or wealth and complex features such as large amounts of foreign or trust income, residence or domicile issues, significant land and property income or significant capital gains or losses.
During 2006/07, the cases dealt with by the Westminster team will be transferred to a new CPR team in South Wales. The CPR team will be writing to those taxpayers affected by the change and their tax advisers.
The CPR teams will also continue to identify taxpayers whose tax affairs no longer warrant being dealt with by a CPR team. The responsibility for these will be transferred to other offices, enabling the CPR teams to identify and deal with other taxpayers whose tax affairs have become more complex, requiring the additional expertise of the CPR teams.
Retirement annuities
Retirement annuities are currently paid after deduction of tax at the basic rate, currently 22 per cent, unless the level of the annuity falls below the personal allowance when a claim can be made for it to be paid without deduction of tax.
From 6 April 2007, this will change and collection of the tax due will be paid through the Pay As You Earn (PAYE) system. HMRC will be issuing letters to taxpayers where further information is required to enable a PAYE code number to be issued.
National minimum wage (NMW)
The NMW will be increased with effect from 1 October 2006, as follows.
- Adult rate '“ from £5.05 to £5.35 per hour.
- Youth rate for 18-21-year-olds '“ from £4.25 to £4.45 per hour.
- The rate for 16-17-year-olds will increase from £3.00 to £3.30 per hour.
Email: carol.mead@smith.williamson.co.uk www.smith.williamson.co.uk