Consultation on draft legislation for Finance Bill 2011Friday, December 17th, 2010
The policy of the Coalition government is to confirm most of its new tax measures at least three months before the introduction of a Finance Bill. The draft text of the legislation that will appear in the Finance Bill 2011 was published on 9 December and is open for technical comment until 9 February 2011. The Finance Bill will be published on 31 March 2011, shortly after the Budget on 23 March 2011. Most of the measures in the Finance Bill 2011 will be those announced in the June 2010 Budget.
The measures that are relevant to this newsletter are as follows:
Basic rate limit
The basic rate limit – the level of taxable earnings above which the 40% tax rate applies – is set at £35,000, replacing the automatic, index-linked increase to £39,200. There is no change to the higher rate limit, currently £150,000.
The personal allowance for those aged under 65 is set at £7,475, replacing the automatic, index-linked increase to £6,785. There are no similar adjustments to any of the other automatic, index-linked increases to the age-related personal allowances and other allowances.
The higher rate tax threshold – the sum of the basic rate limit and the personal allowance – will therefore be £42,475. The NICs upper earnings limit will be reduced to the same figure by means of separate legislation.
Employer supported childcare – the “open generally” condition
One of the qualifying conditions for the limited tax exemption for the provision of employer-supported childcare (i.e. childcare vouchers and employer-contracted childcare) is that the scheme must be “open generally” to employees. That condition is often not met where the benefits are delivered through salary sacrifice or flexible benefits schemes but the salaries of employees earning at or just above the national minimum wage cannot legally be reduced. By excluding such low-paid employees from the salary sacrifice or flexible benefits scheme, the “open generally” condition is not met and entitlement to the tax exemption is lost.
The Finance Bill provides that the “open generally” condition does not fail to be met simply because the scheme is not open to “relevant low-paid employees”. Such employees are defined as:
“any of the employer’s employees who are remunerated by the employer at a rate such that, if the relevant salary sacrifice arrangements or relevant flexible remuneration arrangements applied to them, the rate at which they would then be so remunerated would be likely to be lower than the national minimum wage.”
This concession has been made because lower-paid employees are likely to be entitled to the childcare element of the Working Tax Credit which offers up to 70% of childcare costs up to a maximum of £175 per week for one child, and £300 per week for more than one child.
The legislative amendment applies retrospectively from the start of the 2005/06 tax year, the time at which the current childcare voucher and employer-contracted childcare tax exemption was introduced. It means that there will be no outstanding tax liability for schemes that did not meet the “open generally” condition when they were introduced in earlier tax years.
Employer supported childcare – reduction in relief for higher earners
Tax relief on the provision of employer-supported childcare (i.e. childcare vouchers and employer-contracted childcare) is currently limited to an exempt amount of £55 per week, plus administration costs. With effect from the 2011/12 tax year, the Finance Bill changes this universal £55 exempt amount to
- £28, for employees with an “employment income amount” that is estimated to exceed the basic rate limit but not the higher rate limit for the tax year,
- £22, for employees with an “employment income amount” that is estimated to exceed the higher rate limit for the tax year,
- £55 otherwise.
An employee’s “employment income amount” for a tax year is
- the amount of any salary, wages or fees, and any other contractual earnings from the employment to which the employee is entitled (but not any discretionary payments),
- plus the amounts of any benefits-in-kind and any payments that are treated as earnings from the employment (i.e. sickness payments, notional payments, payment of a director’s tax, payments for restrictive undertakings),
- less “the amount of any allowance under Part 3 of [the Income Tax Act 2007] to which the employee is shown to be entitled in the code determined in accordance with PAYE regulations for use by the employer in respect of the employee for the tax year”.
With reference to points 1 and 2, if an employee starts in the employment during a tax year, the “employment income amount” is determined for a full year by dividing the total earnings in the rest of the tax year by the number of days in the rest of the tax year and multiplying by 365.
With reference to point 3, the tax allowances listed in Part 3 of the Income Tax Act 2007 are limited to:
- the personal allowance (under age 65)
- the personal allowance (age 65 to 74) (reduced as appropriate where earnings exceed the income limit)
- the personal allowance (age 75 and over) (reduced as appropriate where earnings exceed the income limit)
- the blind person’s allowance (adjusted as appropriate by the transfer provisions)
- the allowance for married couples and civil partners (reduced as appropriate where earnings exceed the income limit, and adjusted as appropriate by the transfer provisions).
The legislation does not indicate that the tax code figure itself is used to determine the amount at point 3. The specific reference to Part 3 of the 2007 Act indicates that only the total of the allowances to which an employee is actually entitled are used to reduce the “employment income amount”. Unfortunately, the guidance notes that accompany the draft clauses of the Finance Bill do not indicate how an employer would identify the total amount of allowances from the tax code – employers have no statutory access to an employee’s P2 coding notice where that level of detail is available. We have asked HMRC to comment on the practicalities of this procedure.
The employer must estimate the employee’s “employment income amount” for the tax year at “the required time”, namely
- if the employee “joins the scheme” at a time during the tax year, at that time, and
- otherwise at the beginning of the tax year.
An employee “joins the scheme” when the employee agrees to provide vouchers or childcare, as appropriate to the scheme, and there is a child in relation to the employee as required by the qualifying conditions for tax exemption.
However, none of these changes apply for a tax week if
- the employee joined the scheme before 6 April 2011,
- the employee has been continuously employed by the employer during the period from 6 April 2011 to the current tax week, and
- during that period there has not been a continuous period of 52 weeks throughout which vouchers and/or childcare were not being provided for the employee under the scheme.
Restricting pensions tax relief
The Finance Bill includes provisions to restrict pensions tax relief for individuals by reducing the annual allowance from £255,000 to £50,000 from April 2011, and the lifetime allowance from £1.8 million to £1.5 million from April 2012.
Related changes that will have effect on or after April 2011 are:
- the annual allowance charge will be linked to the individual’s marginal tax rate
- any unused annual allowance can be carried forward for three years
- the valuation factor used to calculate the value of defined benefits pension savings will increase from a factor of 10 to a factor of 16
- the opening value of rights under defined benefit schemes will be subject to a revaluation rate
- the annual allowance rules will normally apply in the year of taking benefits and also for those people with enhanced protection although there will be exemptions in the year of death or where the individual retires because of severe ill health
- inflation-linked increases in expected pensions for deferred members of schemes will not count towards the annual allowance charge
- transitional rules apply from 14 October 2010 where individuals have pension savings relating to a pension input period that started before 14 October 2010 and which will end in the 2011/12 tax year and is therefore subject to the new annual allowance limit
- those with savings above £1.5 million or who believe the value of their pension pot will rise to above this level through investment growth without any further contributions or pension savings will be able to apply for a new personalised lifetime allowance of £1.8 million, providing they cease accruing benefits in all registered pension schemes before 6 April 2012.
Maximum pension age
Provisions in the Finance Bill remove, with effect from April 2011, the current pensions tax rules that require members of registered pension scheme to secure an income, usually by buying an annuity, by age 75. The measure involves changes to annuitisation requirements and to the pensions tax treatment and rules applying to income drawdown arrangements.
The Finance Bill includes legislation to remove any unintended tax consequences in three areas from the introduction of pension personal accounts and the National Employment Savings Trust (NEST) from 2012, namely
- removal of the current tax charge where borrowing by a scheme exceeds a prescribed limit – this provision would have affected NEST and would have directly affected the value of pension funds
- removal of the current tax charge that would apply to jobholders if the employer has to pay interest to a jobholder’s pension account because of paying over contributions to the pension scheme late
- new powers for the government to make regulations to remove any future unintended tax charges during the implementation phase from 2012.
Anti-avoidance – disguised remuneration
HMRC estimates that at least 5,000 employers are using schemes that have been devised to avoid, defer or reduce tax and NICs liabilities on payments, benefits and loans provided from trusts set up with monies provided by the employer and from employer-financed retirement benefit schemes (EFRBS). The premise on which these schemes operate is that the employees concerned have no legal right to the money or assets and that tax and NICs are only due, if at all, on the use by the employees of the money and assets provided during the period of employment and not on their full value.
The Finance Bill includes new detailed and complex legislation that will be inserted into the Income Tax (Earnings and Pensions) Act 2003. A new employment income charge will apply where:
- sums or assets that are earmarked for employees by trusts or other intermediaries will be treated as though the amount of the sum or the value of the asset concerned is a payment of PAYE income provided by the employee’s employer to the employee
- loans provided to employees by trusts and other intermediaries will be treated as though the value of the loan provided is a payment of PAYE income provided by the employee’s employer to the employee
- assets provided to employees by trusts and other intermediaries will be regarded for tax purposes as a payment of PAYE income by the employer where specified conditions are met.
All tax and NICs liabilities arising under these new provisions will be handled by employers through the payroll. Equivalent legislation for the NICs liabilities will also be introduced.
Payment of a security where PAYE tax and NICs are at risk
The Finance Bill includes a measure that would allow HMRC to make PAYE regulations requiring employers who choose not pay over PAYE tax and NICs to pay a security. Such securities would be a cash deposit held by HMRC, or a payment into a joint HMRC/taxpayer interest-bearing banking facility, or a guarantee provided by a bank. Requiring a security would apply only where PAYE is seriously at risk. It would also become a criminal offence for an employer not to pay a security when one is required. Similar powers already exist in connection with payment of VAT.
In order to prepare appropriate regulations, HMRC also published a consultation document on the subject on 9 December, with comments required by 9 February 2011. The document clarifies the very limited circumstances in which a security would be required:
- employers with short-term financial problems would be supported by means of ‘time to pay’ arrangements
- employers who delay payment until the last moment will be affected by the new penalty rules for late payment
- employers who wait for HMRC legal action or who cannot pay will be subject to debt enforcement action or insolvency.
Security payments will only be required from employers who repeatedly refuse to make payments and are likely to contrive insolvency and leave large unpaid tax and NICs debts, and then set up a new company – a process known as “phoenixism”. This is a term used to describe the practice where directors carry on the same business or trade successively through a series of two or more companies. Each of the companies in turn becomes insolvent, leaving large unpaid tax and NICs debts. A company will typically transfer its business, minus its debts, to the next company. Only essential trade suppliers are paid in full before the transfer, so that tax and NICs often remain deliberately outstanding. You can read the consultation document on the HMRC website.
The new legislation that is introduced by means of the Finance Bill will replace some 25 existing and varied information gathering powers governing all of the taxes that HMRC administers. A single set of general provisions is included which identify each group of data-holders who hold data that HMRC could need and the specific types of data that they may be required to disclose. HMRC will have powers to issue a Notice requiring the supply of data, defining the format in which it must be provided, and specifying the penalties that may apply for failure to comply. A right of appeal is provided for the first time.
In the context of the taxation of salaries, fees, commissions etc, there are four types of data-holders, namely
- persons concerned in making payments to or in respect of another person’s employees with respect to their employment with that other person
- approved agents in the context of payroll giving
- persons carrying on a business in connection with which relevant payments are or are likely to be made.
HMRC also published a consultation document on 9 December 2010 in order to obtain views on the additional draft Regulations that have been prepared to support the new data-gathering legislation. The deadline for responses to the consultation document (available at the HMRC website) is 9 February 2011.