24th February 2014

Avalon: Newsletter for IFAs

Measures to cut tax avoidance, evasion and tax planning have been announced by Chancellor Osborne. These changes are expected to increase government receipts by £9bn over the next 5 years; a deluge of money which hopefully can go towards our flood defences.  So what are the key anti-avoidance features, which could affect a large number of people?

Working via an agency

The chancellor has announced changes to prevent "employment intermediaries being used to avoid employment taxes and obligations by disguising employment as self-employment".  Although this sounds like an attack on personal service companies, this is not the government's intention - the changes are instead to be focused on agencies. If you work through an agency you are treated as self-employed if you meet certain specific tests. One of these tests is the right to send someone else to do the job instead of you - known as the right of substitution. If there is a right of substitution, the company you work for does not have to pay employer National Insurance, saving 13.8% on all wages over a low threshold.

Some agencies - employment intermediaries - have been using contracts which include a clause giving the individual a right of substitution, even though there is, in reality, no such right. The new rules are expected to target the use of such contrived contracts, and the changes are expected to net around £500m a year.

Avoidance schemes

If you have used a marketed avoidance scheme which HM Revenue and Custom (HMRC) believes to be ineffective, they will challenge the scheme in the courts. Usually one or two cases are selected as test cases and take several years to go through the courts. The rest - called "followers" by HMRC - sit and wait to see what happens. During this time, followers normally retain the benefit of the tax saving, and HMRC have to recover the money later if they win in the courts. New rules are expected to make two changes.

• Firstly, if the scheme is defeated at any stage in the courts, followers will be asked to concede their case. If they do not, because they hope the test case will succeed on appeal, they will be charged a penalty if the test case is eventually lost on the same point of law.
• Secondly, once HMRC have won in the courts, the followers who do not concede will have to pay over the tax which has been avoided, even though the test case itself appeals to a higher court.

The government will also consult on whether to tighten these rules further, to prevent those using tax avoidance arrangements gaining a cash-flow advantage while it is under challenge.

Charity schemes

New rules prevent a charity from being entitled to claim charity tax reliefs, such as Gift Aid, if tax avoidance is one of the main purposes of establishing the charity. The definition of a charity for tax purposes will also be amended to exclude such charities. These changes are likely to be a response to arrangements such as those set up by the "Cup Trust", in which £46m of Gift Aid was claimed by the trust, but the charity only received benefits of £155,000. 

Partnerships

In recent years there has been a surge in the number of planning arrangements under which a company becomes a member of a partnership. The new legislation is expected to clamp down on these schemes. Where the arrangements reduce tax rates for the other partners, the rules take effect from 5 December, 2013; in other cases they will take effect from 6 April, 2014.

Overall, the statement underlines the overall message of previous Budgets - that the government wants to narrow the loopholes and tighten the net on tax avoidance.

Another tax year looms and it’s a chance to ensure clients are using their tax free allowances to their own personal maximum.  Clearly we should encourage clients to invest regularly as in the world of investment, timing is everything.  But no one can predict what the market will do at any given time thus making it difficult to decide not only when to invest, but also when to pull out.  However, by regularly saving into an investment fund through an Avalon Freedom ISA, tax free benefits can be achieved from what is known as ‘pound cost averaging’.   Compared with investing a large sum at a single price – which may or may not be at the top of the market – regular saving mitigates that risk by putting in smaller sums at a variety of prices therefore smoothing out the ups & downs.

In a rising market, regular savings would underperform the growth of a single lump sum as subsequent investments would miss out on the early growth. However, in a volatile or falling market, the opposite is true; later investments buy in at lower or alternating prices and therefore gain more when the market finally rises. 

For new investors, regular saving can also be a deceptively easy way to build up a lump sum. Putting aside £50 or £100 a month can be achieved with the minimum sacrifice – and will quickly grow as the months pass without investors even noticing what is going on. It can therefore be a convenient way to dip toes into the stock market.  With only smaller amounts going in each month, the short-term ups and downs of markets will have less impact on the portfolio overall.  

IMPORTANT INFORMATION: If clients intend to take advantage of the discount by moving funds from a Portfolio to their ISA, please ensure that enough time is left to sell the shares in the Portfolio first so we can transfer the cash to the ISA account before the next tax year.  We cannot transfer stocks & shares directly due to HMRC regulations.

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