Tax avoidance – time to get tougher?
The Treasury Select Committee has called for a revision of the Government’s tax avoidance plans.
The Government’s plans to clamp down on tax avoidance face “great uncertainty” and must be reviewed, according to the Treasury Select Committee. Referring to last year’s Autumn Statement, the Committee said projections for some previous schemes had been revised down heavily.
The Chancellor, George Osborne, unveiled a series of measures in the Autumn Statement designed to close tax-avoidance loopholes that, it was hoped, would raise £6.8 billion. But the Select Committee noted that several previous tax crackdowns have failed to reach their revenue targets. The Committee highlights a deal with the Swiss Government to collect tax from UK citizens who had been hiding money in Swiss bank accounts. The agreement came into force in January 2013 and was originally projected to raise £5.3 billion over six years.
By the Autumn Statement, this estimate had been revised down by almost two thirds, to £1.9 billion. “Given the great uncertainty that surrounds the fiscal effects of tax avoidance measures, the reduction in the estimated yield of the UK-Swiss tax agreement should not be a great surprise,” the Committee report said.
It further stated that the Chancellor’s latest forecasts are “vulnerable to similar uncertainties”. “This perennial problem has now assumed particular fiscal importance given the size of the revenue being forecast,” the report adds. In addition, it said that estimates of the yield of anti-avoidance measures have to be made every year, “in the face of great uncertainty about the outcomes”. It called on the Office for Budget Responsibility (OBR) to do all it can to report on whether yields were attained as originally costed. Where this is not possible, it said the Government should limit the extent to which it may account for such projected gains.
The Treasury said it would consider the Committee’s report before responding, but added that the OBR had certified that the costings in the Autumn Statement were reasonable given the information currently available.
European Union cross-border debt recovery
EU ministers have endorsed European Commission proposals to help businesses recover cross-border debts.
The endorsement of European Commission (EC) proposals for new rules will make it easier for companies to recover claims across borders, the EC announced on 4 March.
The EU’s internal market allows businesses to enter into cross-border trade and boost their earnings. However, many find it too daunting to pursue expensive, confusing lawsuits in foreign countries to recover debts and end up writing the debt off, albeit unnecessarily. The European Account Preservation Order could be crucial in debt recovery proceedings as it would prevent debtors from moving their assets abroad during ongoing procedures to obtain and enforce a judgment. This should improve the prospects of successfully recovering cross-border debts.
The new regulation is expected to help businesses recover millions in cross-border debts, by allowing creditors to preserve the amount owed in a debtor’s bank account. “Small and medium-sized enterprises are the backbone of European economies – making up 99% of businesses in the EU. Around 1 million of them face problems with cross-border debts”, said Vice-President Viviane Reding, the EU’s Justice Commissioner. “After two and a half years of work on this proposal, the European Account Preservation Order is now close to a final adoption. This is good news for Europe’s SMEs – in these economically challenging times, companies need quick solutions to recover outstanding debts”.
In order to become law, the EC’s proposal needs to be adopted jointly by the European Parliament and by the EU Member States. It is expected that the European Parliament will vote in April, paving the way for a first reading adoption in June. Companies doing business abroad should benefit by these tighter rules.
Lifetime allowance reduction
Pensioners could face a tax penalty of up to 55%.
People saving for their retirement through a UK pension could face a future 55% tax rate as a result of the lifetime allowance being reduced from £1.5 million to £1.25 million on 6 April 2014, the Association of Chartered Certified Accountants (ACCA) said on 6 March. Those amassing substantial pension benefits – whether personally or via an employer’s scheme – need to act quickly to minimize the impact on their pension savings.
Once the new limit comes into force, benefits in excess of the £1.25 million could be taxed at 55% if drawn as a lump sum, which might discourage people from over-saving for retirement, says ACCA. If benefits are drawn in the form of a regular pension, the excess is taxed at 25%.
When the Government announced the changes to lifetime allowance alongside the Autumn Statement in 2012, the Chancellor, George Osborne, said that only the wealthiest 1% of the population – those who could afford to put aside this amount into a pension – would be hit.
ACCA head of taxation, Chas Roy-Chowdhury, said that “while £1.25 million might seem like a lot, the limit is not a penalty specifically on the rich. For those in their 30s and 40s,
£1.25 million or more might resemble a not uncommon-sized pension pot by the time they retire”.
ACCA forecasts that public sector employees will probably be most affected, as many are still in the final salary schemes that will pay out high benefits and therefore create a high value pension pot (for example, doctors who belong to the NHS Pension Scheme). It is possible that a relatively modest pay rise could result in a pension tax charge that exceeds the increase in take-home pay. Even middle managers on five-figure salaries could be affected if they are long standing members of final salary schemes.
However, ACCA says there are ways to limit the impact of this retirement tax, through the two sets of transitional relief scheme that allows retirees to protect their pension pots. However, the deadline for claiming one of these options is 5 April 2014.
The budget rolls around again
19 March marks Budget Day.
It is little more than three months since the Autumn Statement, but here we are in March with the Budget due on the 19th. Nearly all of the 2014/15 tax and National Insurance numbers were published alongside the Autumn Statement, so there are unlikely to be any surprises there. So what should you be on the look-out for?
The first thing to consider is that this month’s performance from Mr Osborne is effectively his last Budget before the general election on 7 May 2015. Parliament is due to dissolve before the end of March in 2015, so next year’s Budget will be something that can be nodded through quickly, with anything contentious left for a post-election Finance Bill, as happened with Alistair Darling’s finale in 2010. Thus the Chancellor may choose to play politics and include measures for 2015/16 which will depend upon his party retaining power. A possible shopping list includes:
- An increase in the personal allowance for 2015/16, perhaps to the level at which it is possible to scrap age allowances completely. This would be sold as removing more people from tax, although according to the Institute for Fiscal Studies, in 2014/15 the lowest 17% of workers will pay no tax anyway.
- An extension for another year of the £250,000 annual investment allowance, which is currently scheduled to drop down to £25,000 on 1 January 2015. This would be designed to encourage investment by small businesses.
- Changes to the Seed Enterprise Investment Scheme (SEIS). The 50% capital gains tax reinvestment relief is currently due to end on 5 April 2014.
- More moves to bring income tax and National Insurance Contributions (NICs) closer together. NICs are set to become a controversial topic in 2016, when the new
single-tier state pension begins and the employer and employee NIC reductions for contracting out of the current state second pension (S2P) disappear.
Plans to rename national insurance
The 100-year old National Insurance may be renamed “earnings tax”.
The Government is planning one of the biggest ever reforms of National Insurance in a bid to make the system more transparent for businesses and their employees. It is the first step towards merging income tax with National Insurance. In late February, Tory backbench MP Ben Gummer presented a Commons Bill that proposed a name change for National Insurance along with giving the salary deductions process more clarity. “This would be a really good step forward in making what the Government takes from taxpayers clearer and simpler,” he said. “The most important part is changing the name so in the public mind we can begin the two as the same, which is what they are. This is a first step.”
Mr Gummer suggested that National Insurance be renamed ‘Earnings Tax’. This proposal was welcomed by the Chancellor, George Osborne, who will influence whether or not it is pushed through. Unlike income tax, MPs are not allowed to vote on whether national insurance should be levied every year. They are rather asked to approve the level of the charge. He added that the Coalition had been “very receptive” in trying to make the tax system more transparent.
National Insurance creates billions in revenue every year for the Treasury – anyone who is employed and earns between £149 and £797 a week pays 12% of their income in NICs. A further 2% is paid on all earnings over that threshold.
It’s early days so watch this space…
