As has been the case in most recent budgets, the 2017 Spring budget included several anti-avoidance measures. Some refer to quite technical schemes which would not normally impact on the advice we give – for example the closure of a loophole that allowed companies to convert capital losses to trading losses through appropriations to trading stock. But there were a couple of measures I believe will be of interest to many advisers.
Although the use of a QROPS can have its place in normal investment planning, such schemes have often been used to avoid tax. For example, high earners have often used a QROPS in order to avoid the tax they would otherwise pay for breaching the Lifetime Allowance. The 2017 Spring Budget has moved towards closing the QROPS tax loophole by introducing a 25% charge for transfers into a QROPS unless certain conditions are met. Those conditions should allow the use of QROPS for the original, genuine need for which it was introduced, but make it less favourable to use for tax avoidance purposes.
The most significant Anti-Avoidance measure was a tightening of the definition of “Promoter” for the purpose of the “Promoters of Tax Avoidance Schemes” legislation. This legislation was introduced in the 2015 Finance Act. Effectively it makes it very difficult for anyone to create and market schemes to avoid tax.
Advisers should welcome these moves. Most of us encourage our clients to mitigate their tax liabilities. We do this by using tax legislation in ways intended by parliament when the legislation was introduced. For example, we suggest clients invest in pensions and use their ISA allowances. Where clients are more adventurous and happy to take significant risks we may recommend the use of EIS and VCTs. Other than the need to protect client confidentiality these are not actions we have to take in secret, behind closed doors. Parliament created these incentives to encourage certain economic behaviours, and we are enabling our clients to do exactly what parliament intended.
Many of us will have encountered clients who decide not to use the mitigation opportunities we present to them. Their reason for not doing so is that another adviser has shown them how to save a lot more tax using much more aggressive techniques. Some advisers moved into “avoidance planning” on the basis of “if you can’t beat them, join them!” But most of us would prefer to continue advising clients using mitigation techniques rather than avoidance. Any actions the government takes which make tax avoidance more difficult should make it easier for us to advise clients without worrying about them being poached by tax avoidance promoters.
The chancellor also took action against a couple of tax “loopholes” that are more mitigation than avoidance.
One action was to reduce the Dividend Allowance from £5,000 to £2,000. This allowance was only introduced in last year’s budget, so perhaps this is the new Chancellor’s way of saying his predecessor went too far. He announced it as particularly a way of discouraging sole traders and partnerships from incorporating purely for tax purposes, with the intention of taking a significant element of their remuneration as dividends. But the measure will also impact on, for example, some retired individuals who have invested their retirement capital in large unit trust and investment trust portfolios in order to obtain a much better return than they can get from savings accounts.
The other action, which has received a lot of publicity since the budget, was to increase the National Insurance the self-employed have to pay on their profits. The increase will be from 9% to 10% in April 2018 and from 10% to 11% in April 2019. This measure makes it less tax efficient for a taxpayer to trade as self-employed than was previously the case. The balance still tends to favour self-employed over employed where all the profit of the business is taken as income, but this change has certainly moved the goalposts a little.
With both of these changes we should encourage our business clients to look again at their remuneration strategies, especially if they do not need to take all their profits as income.
Hidden in the small print were hints of some other measures that may be taken in the near future.
The Chancellor has promised (or perhaps threatened) to look more carefully at other differences between the tax treatment of the self-employed and the employed, especially when it comes to reimbursement of expenses. I do not imagine he intends making it easier for the employed to claim expenses, so watch this space!
He has also promised to look at the “Rent-a-Room” tax relief. At the moment this can be used to obtain tax-free income from very short lets, including holiday lets. Some clients are quite happy with the idea of sharing part of their house for a few months in order to create some tax-free income, but might balk at the idea of permanently renting out a room. The implication of the announcement is that the Chancellor is considering making the relief target longer term arrangements.