In Focus: TaxMar 24 2021

Five Tax Day details you may have missed

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Five Tax Day details you may have missed
Photo: Magda Ehlers via Pexels

Rishi Sunak has detailed various measures to improve the tax system for both HM Revenue & Customs and for taxpayers, removing some red tape, improving administrative processes and tightening up on tax avoidance. 

The documents unveiled yesterday (March 23) were part of the Treasury and HMRC's 10-year plan for "Building a trusted, modern tax administration system".

They included updates on the government's 'Making Tax Digital' progress - the aim is to remove masses of physical paperwork from the reporting system.

If the chasm in the nation's finances remains taking the highest and most efficient revenue generating income streams off the table (a manifesto pledge), it must surely be reconsidered.Dixon

Among the publication of more than 30 tax updates, consultations and documents, were measures to make tax easier to administrate, and make it "more straightforward to pay and harder to get wrong".

Ultimately, the aim is to help to deliver more sustainable public finances, by reducing the tax gap. The tax gap currently stands at a record low of 4.7 per cent. 

1) Tax avoidance promotions

Among the various recommendations was to give the Revenue more power to tackle promotional material that tries to market tax avoidance schemes to UK investors. 

This is part of the government's ongoing strategy to "clamp down on deliberate noncompliance, as well as supporting taxpayers to get their tax right first time, in order to tackle the tax gap."

As a result, the government unveiled a series of consultations based on its investigations during 2020.

Proposals included:

  • Ensuring HMRC can protect their position by securing or freezing a promoter’s assets so that the penalties they are liable for are paid, tackling offshore promoters and the UK entities that support them.
  • Closing down companies that promote avoidance schemes and disqualifying their directors.
  • Supporting taxpayers to identify and exit avoidance schemes.

George Bull, senior tax adviser at RSM UK, comments: "Having been very successful in tackling tax avoidance, HMRC are still having difficulties with promoters of large-scale schemes aimed at members of the public who are often employees. Some of these schemes have no reasonable prospect of success.

"When challenged by HMRC, people who have bought into the schemes find themselves unrepresented and without advisers. HMRC have been seeking additional powers to help stamp out this type of avoidance.

2) Requirements to hold PII

Professional indemnity insurance has become a by-word for expense among UK financial advisers, with premiums skyrocketing since the pension freedom and choice regime came into being in 2015.

While it is a requirement from the Financial Conduct Authority for every practicing UK financial adviser to have PII in order to continue advising, it has not been a requirement from HMRC on tax advisers - until now. 

The government has published a consultation on how to raise standards in the tax advisory market, following a call for evidence in 2020.

The Treasury's Tax policies and consultations - Spring 2021 overview explained: "This will seek views on the definition of tax advice and a requirement to make PII compulsory for all tax advisers, with a view to improving tax advice and providing taxpayers with better access to redress where they have received bad advice."

But Bull is not worried about this new rule. He says: "Every reputable tax adviser will already have PII. In making this a requirement for all tax advisers, HMRC is endeavouring to protect taxpayers while driving unscrupulous practitioners out of business."

3) Reforming the tax administration framework

The government has published a call for evidence to begin to explore the opportunities and challenges of more frequent payment of income tax within Income Tax Self-Assessment, and of corporation tax for small companies, based on in-year information. 

Alongside this, the Treasury also announced it was publishing a call for evidence on the tax administration framework, covering the core legislation, processes and guidance which underpin obligations for HMRC, taxpayers, agents and third parties.

The call for evidence will explore "how to make tax more straightforward to pay and harder to get wrong, improve people’s experience of the tax system, and build and maintain trust between HMRC and taxpayers".

Steven Cameron, pensions policy director for Aegon, says: "As part of this, it’s important that drives to ‘improve people’s experience of the tax system’ extend to making it easier to claim all tax relief entitlements.

"Within pensions, higher and additional rate taxpayers who are in ‘relief at source’ schemes have to separately reclaim relief above the basic rate, and there’s anecdotal evidence that many forget to do so.

"Even more concerning, there are growing numbers of low paid individuals in ‘net pay’ pension schemes who because they don’t pay income tax, don’t get the 20 per cent tax relief their peers in ‘relief at source’ schemes get by default."

Aegon has therefore urged the Treasury and HMRC to prioritise doing the right thing by those who are missing out on their pension tax relief entitlements.

4) SITR

The social investment tax relief scheme is one of four venture capital schemes and helps a social enterprise raise money by offering investors tax relief on the shares they buy, or the money they lend the enterprise, as long as the enterprise and investors follow the scheme rules for at least three years. 

SITR is a state aid designed to help enterprises raise money to support the trading activity of a community interest company or charitable company or trust. 

Originally, SITR had a 'sunset clause' of April 2021, and the government conducted a review into the social investment market to assess what sort of reform might work more appropriately to support the policy objectives SITR was introduced to achieve.

However, in a 19-page consultation responses document published this Tax Day, the government said it has "considered all responses to the Call for Evidence carefully" and was confirming its Budget pledge to support the scheme for two more years.

It said: "Due to the ongoing effects of Covid-19, now is a difficult time for social enterprises, many of which are supporting communities across the UK through the pandemic.

"As such, at Budget 2021 the government announced it would extend SITR in its current form beyond its sunset clause of April 2021, for two years, in order to continue supporting investment to social enterprises in most need of growth capital."

5. Holiday homes

As part of its proposed clean-up of business rates, the government has announced it will legislate to tighten tax rules for second property owners, meaning they can only register for business rates if their properties are genuine holiday lets.

According to the document, in England, many holiday lets are liable to pay business rates, rather than council tax, when an owner declares that they intend to let their property in the next year. At present, there are no requirements for people to prove these are rented out commercially.

They may also be able to claim rates relief of up to 100 per cent.

However, under changes proposed on March 23, owners of properties that are not genuine businesses will not be able to reduce their tax liability by declaring that a property is available for let, but make little or no realistic effort to actually let it out.

Of the over 60,000 holiday lets currently on the business rates list, the Treasury claims 96 per cent have a rateable value which would likely qualify them for Small Business Rates Relief and, as a result, they pay no business rates at all.

However, this might necessitate conversations with clients who have a 'holiday home' they like to let out during the year to friends and acquaintances.

The government also published an interim report on its Fundamental Review of Business Rates, which sets out a summary of responses to last year’s call for evidence. The final report will be published in the Autumn.

Looking ahead

While capital gains tax did not get an airing this Tax Day, as had been widely anticipated, commentators believe this is only a brief reprieve - the OTS wants to simplify rates of CGT and changes are expected further down the line.

Andrew Dixon, head of financial planning for Kleinwort Hambros, says: “CGT is an obvious policy to be revisited in the Treasury’s latest review - dividends and capital gains both reflect the profits of a company but are subject to different taxes.

"That CGT remains untouched may be a relief to many business owners, but this is a direct contradiction of the proposal by the OTS to change rates and cut the annual exemption (currently £12,300) to between £2,000 and £4,000."

He also expects interaction between IHT and CGT on death to be revisited at some point.

The OTS itself is due to come under review to see if it is working - this was announced as one of the Tax Day proposals and was already flagged in the 2016 Budget.

It would be ironic if one of the outcomes of Tax Day's slew of consultations was that the body responsible for promoting tax simplification was found to be creating too much confusion 10 years after its creation.

But while there seem to have been few significant changes announced amid the morass of documentation on March 23, for Dixon, there are still too many holes to be plugged in the nation's coffers, which means and more tax changes will have to be implemented in the future.

He explains: "In line with most other countries the UK’s tax base is largely driven by income tax, NI and VAT.

"If the chasm in the nation's finances remains taking the highest and most efficient revenue generating income streams off the table (a manifesto pledge), it must surely be reconsidered.”

simoney.kyriakou@ft.com