Partner Article

Autumn Statement 2015: IHT and pension tax relief under scrutiny along with a further increase in HMRC’s powers

Osborne is still under pressure to increase tax revenues, but his hands are tied due to the ‘triple lock’ on the headline income tax, National Insurance and VAT rates – which together account for almost £385bn, that is almost three quarters of all tax receipts of £515bn for 2014/15.

“So now that a straightforward percentage increase to any of the three main taxes is off-limits, Mr Osborne’s mind needs to focus on enlarging the tax base and other tweaks that will raise revenue. However, continual change causes complexity on top of what is already an opaque and very lengthy tax code,” says Lee.

He continues: “The vast majority of people are keen to pay their fair share of tax, but this growth in complexity and difficulty in getting answers from HMRC means it’s easy for people to make mistakes and unwittingly end up with hefty penalties. If our tax system was more transparent, it would be easier for people to get things right!”

“Owner-managed businesses and our entrepreneurial community often bear the brunt of tax changes as they are typically affected by developments in both personal and business taxes. At the same time, they are unlikely to have the resources that help bigger businesses to cope with tax complexity.”

“With the Autumn Statement coming up, we would benefit from some radical simplification or even a one-in-two-out policy on tax law.”

However, Lee believes this is unlikely and anticipates cuts to some popular tax reliefs, an extension in the tax base and further increases in HMRC’s powers. He provides further details below.

Tax legislation has almost doubled in number of pages over the last five years – despite the work of the Office of Tax Simplification! Smith & Williamson demonstrates in the below photo how the amount and therefore complexity of tax legislation has roughly quadrupled in the last 20 years.

Inheritance tax changes

There are growing rumours that we could see a drop in inheritance tax relief on business and agricultural property. However, if such cuts were applied it would be essential to retain the tax relief to reward long-term ownership of inherited business and agricultural assets.

Tax relief could then be targeted at supporting longer term business succession. This is essential for entrepreneurs and family businesses, especially those based on farming and the land, to avoid breaking up businesses that are passed down generations. Assets are often retained until death to prevent any CGT problems around earlier gifts. But we could see the Chancellor review this whole area.

While the planned increase in IHT allowance to a potential £1m, including a qualifying family home, will be helpful to many, especially those in the South East, the new rules are complex. A much simpler and fairer approach would be to increase the standard IHT threshold to £500,000 for any individual. This would also stop the perverse incentive for couples to upsize properties so as to maximise IHT relief when they die.

Cut in pension tax relief

I fear we could get further changes in pension tax relief, such as the forecast introduction of a flat rate of pension tax relief- possibly at 33% - so for every £2 any taxpayer puts in, HMRC adds £1. This could be seen as another attack on higher rate tax payers with defined contribution schemes, who have already been hit by low returns and the reduction in annual allowances and the lifetime cap.

The Chancellor should perhaps allow the effects of recent changes to settle in and to reconsider the disproportionate lifetime cap for those not in final salary, defined contribution schemes.

Non-doms – end of the remittance basis for long-term residents

While inevitable that there will be changes for long-term resident non-doms, one area the Government should simplify or abolish is the complex mixed fund rules for non-doms on bringing into the UK unremitted funds from prior years. Sorting this knotty issue would encourage further investment into the UK.

Drop in business tax reliefs, including entrepreneurs’ relief

The Government has been looking at several measures from restricting relief for interest costs, adjustments to entrepreneurs’ relief and tightening up IR35. We would urge the Government to think carefully about the impact on business and the economy of reducing such relief for businesses.

Owner-managed businesses and dividends

The rates of income tax on dividend income are not included in the triple lock. We already know of the proposed increased rates applying from April 2016. I would urge the government to let this area settle down before considering further change.

Growth in tax regulation

The growing tangle of tax rules means that taxpayers are increasingly having to justify their actions to HMRC.

And with the threat of more severe penalties coupled with the growing tentacles of HMRC’s data-gathering ability through its IT system ‘Connect’, tax compliance is taking on greater importance.

Proposed new tax powers may effectively require firms to prove they have appropriate due diligence systems in place when dealing with cross-border structures or in preventing fraud.

Increase in HMRC powers

From 2007, a new penalty system was gradually introduced, which was intended to be a once in a lifetime overhaul. But HMRC is consulting on taking on more powers and as part of this, yet another revamp of the penalty system with the promise of more automated penalties.

However, such penalties cannot deal with inevitable ‘grey’ areas or protect the vulnerable or those who make innocent mistakes. Sometimes honest people do just get things wrong, and this is likely to increase, given the growing complexity of the UK’s tax code.

This was posted in Bdaily's Members' News section by Smith & Williamson .