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Weekly Tax Brief - 14th February 2012

George Bull
Senior Tax Partner

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In this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments.

  • 1. More pension tax changes to come?

    As we predicted in our last Weekly Tax Brief, higher rate tax relief for pension contributions is once again in the firing line.

    Leaks from within the Coalition government suggest that two possibilities are being looked at. First, to restrict tax relief for pension contributions to the basic rate only. Second, as an alternative, to further reduce the current £50,000 ceiling on annual contributions.

    One of the reasons being given for yet more changes to the UK tax regime for pensions is that most of the tax relief for pension contributions goes to higher rate tax payers. On the face of it, that is a reasonable result in a progressive tax system where the top 10% of taxpayers pay more than half the income tax.

    Three points need to be made in respect of the current proposals.

    1.1 Tax pensions at only the basic rate?
    If tax law is to be changed again, this time to restrict tax relief on pension contributions to the basic rate, then surely pensions themselves should be taxed at no more than the basic rate of income tax?

    This is a perfectly reasonable suggestion. The UK pension tax regime has three key features which, in their symmetry, have more or less survived years of political meddling:

    • income tax relief on qualifying contributions made to a pension scheme;
    • tax-free growth within the pension scheme, provided certain limits are not exceeded;
    • when a pension is taken, it is taxed as the recipient’s income.

    In the interests of fairness in a progressive tax system, if tax relief on pension contributions is to be restricted to the basic rate, then pensions should be taxed at no more than the basic rate.

    1.2 Don’t penalise contributors as tax avoiders
    If the annual limit is to be reduced, that will have a major impact on retirement income planning for large numbers of people. That’s bad enough in itself. However, last time the limit was reduced, people who had previously paid greater amounts were branded by statute as tax avoiders and subject to a potentially penal tax regime. While the Coalition government has introduced welcome simplification in the form of the £50,000 annual limit, we urge the government to act moderately and sensibly in the way they implement any reductions in the annual limit. People who today are making reasonable provision for their pensions should not be branded tomorrow as unprincipled tax avoiders, simply because they can’t change their financial arrangements as fast as the government can change its mind.

    1.3 Certainty, please!
    On A-Day in April 2006, when the Labour government reformed the UK pension regime, we were promised stability and certainty for people making financial provision for their retirement. Frequent changes since A-Day, by both Labour and the Coalition, have made a mockery of those promises. A country deserves a tax system that looks as though it was designed to be that way. The UK will not achieve that if the government persists in the tax policy which can best be described as raising cash wherever they can.

  • 2. Don’t lose out on past losses...

    Allowable losses can be valuable in reducing your tax liability, but action is needed to avoid any change in rules. Back in 2003, HMRC lost their appeal in the case of Mansworth v Jelley which allowed taxpayers who had exercised and sold shares from share options, to claim a capital loss.

    The law was quickly changed on 10 April 2003, so that there was a nil gain / loss position which HMRC believed was more equitable.

    However, prior to the date in the change of law, there was a flurry of activity as losses under the court decision were claimed. Generally these losses are still preserved, even if they have not been set against any capital gain yet, although HMRC can still challenge the losses claimed either where the loss arose prior to 1996/97 and has not been used yet or where the loss claim is still under an open enquiry.

    In the case of the latter, the matter came to a head recently. HMRC wrote to taxpayers on 10 February notifying them that they intend to finalise the enquiries and will be using the new rules in doing so, disallowing the losses. Anyone receiving such correspondence from HMRC will need to carefully review their position.

    As we approach the end of the tax year, it is worthwhile reviewing the potential changes to gains and losses and action may need to be taken. Some examples are:

    1. Where assets are standing at a loss compared to the acquisition price, consider either selling the asset or transferring ownership within the family or to a trust to crystallise the loss. The loss can then be used against other gains in the year or in a later year.
    2. Where shares in some unlisted companies have become worthless, a loss could be claimed which is not only available to set against capital gains but, in some cases, against income, giving tax relief at rates up to 60%.
    3. Taxpayers with a foreign currency bank account should consider whether the currency has lost value against sterling. If so, the loss should be realised by 5 April 2012. After this date, foreign currency held in a bank account will become exempt from capital gains tax and means that any losses will be lost.
    4. Claim any losses realised in 2007/08. Under Self Assessment, there is a four time limit to claim losses and claims for 2007/08 expire on 5 April 2012.

    Now is good time to review personal tax affairs generally so that action can be taken prior to 5 April 2012.

  • 3. Postal services – a further blow for charities and financial services companies that use bulk mailing?

    The supply of postal services by Royal Mail has been exempt from VAT in the UK since its inception but there has been challenge over the last few years from the European Union as the exemption in the UK goes beyond that intended by the EU legislation. As a result a number of changes to the VAT liability of postal services were made in 2011 and further changes will take effect this spring.

    Royal Mail services that are still covered by the Universal Service Obligation or are under price control by the regulators will continue to be exempt but from 2 April 2012 VAT will be added to ALL bulk mailing services, regardless of the weight of the mailing. This change will increase the VAT costs for charities and financial services companies that can’t recover VAT but use bulk mailing to seek donations or advise on potential products.

    These changes are mainly in response to EU regulation and the removal of some price controls by the regulators (Ofcom). It may be possible to mitigate the VAT charge by using Downstream Access (DSA) providers. Under the agreement, the DSA provider can act as agent and secure Royal Mail final mile delivery services by taking mail to the Post Office’s regional hubs. This would mean that VAT is charged only on the ‘upstream’ element (collection and sorting by the DSA) with no VAT charged on the ‘downstream’ element (the final mile delivery by Royal Mail).

  • 4. HMRC extends Liechtenstein Disclosure Facility and promises further “tax cheat” campaigns

    HMRC has announced a one year extension of the time allowed for participation under the Liechtenstein Disclosure Facility (LDF). Commenced in 2009, the LDF provides an ideal opportunity for those with offshore tax irregularities to put things right. It will now continue through to 31 March 2016.

    Under the LDF, taxpayers wishing to own up to undisclosed UK tax liabilities in respect of offshore issues and who either already hold or go on to establish a financial interest in Liechtenstein can obtain a “Confirmation of Relevance” (COR) certificate from the Liechtenstein financial institution. The COR can then be submitted to HMRC with a request for inclusion in the LDF. HMRC state that more than 2,000 people have registered so far.

    There is a feeling that interest in the LDF had waned whilst last year’s much heralded agreement with the Swiss authorities was being negotiated and it does seem that a slowdown in LDF registrations occurred. Those now coming forward with offshore disclosures will want to consider the respective merits of both the Swiss “amnesty” and the LDF and we anticipate that many more people with offshore tax issues are now likely to seek registration under the LDF. This is because, assuming that full disclosure and payment of all taxes from 1999 onwards is made, the LDF route provides a non-prosecution guarantee and a penalty capped at just10% for the years up to 2009.

    Last week saw the acquittal on tax evasion charges of two high-profile individuals. Whilst stressing that the department accepts the jury’s verdict, HMRC makes it clear that the ongoing battle against tax evasion will continue.

    To this end, two new campaigns have been announced, one targeting tradespeople working in the home improvement market (roofers, window fitters, bricklayers and carpenters) and the other aimed at direct selling. Similar to previous “amnesties” aimed at encouraging medics, plumbers and private tutors to regularise their tax affairs, these new campaigns will provide favourable settlement terms to those in the targeted groups who come forward voluntarily. HMRC envisages the use of “new technology to search the internet for information” with a view to identifying and potentially criminally investigating those who fail to disclose.

    HMRC will also seek to focus on individuals potentially liable to higher rate tax who fail to complete tax returns on time.