Issues in the Spring Budget 2017: Tax avoidance and Tax evasion, Salary Sacrifice, Termination Payments, Changes to the VAT threshold
The Finance Bill 2016 announced that government was seeking views on how to tackle the “hidden economy”.
Clarified in the Spring Budget 2017, the measures show how the government intends stamping out the hidden economy. A published version is online as an overview of tax legislation and rates (OOTLAR) and the subject “hidden economy” comes under the heading Avoidance and evasion (2.32).
The measures seem to go some way towards making it more difficult for businesses operating outside the tax system. On the radar among these non-paying taxpayers, I imagine are landlords, online retailers, some people operating in the trades, and anyone else not declaring income or considering not declaring what they earn as income or “other income” outside the agreed allowances.
Note that as the “hidden economy” measures come under the GAAR ? General anti-avoidance rules, it is safe to assume that it has the same well-funded focus within HMRC.
The pilot measures, intended to minimise lost revenue from the “hidden economy” and to level the playing field between compliant and non-compliant businesses, are “sanctions” and “conditionality”.
- Sanctions: include higher tax-geared “failure to notify” penalties aimed at serial tax evaders who operate in the “hidden economy”. The penalties and sanctions will rise depending on …
- How much tax is due, and
- Past behaviour
- Conditionality: this means making certain services or licences available only to businesses that have already registered with HMRC. It might include council, government, and some commercial services and licences.
In addition, HMRC intends to increase monitoring and use of its powers to snoop into the business and personal accounts, records, transactions, and assets, of anyone it suspects of operating in the “hidden economy”.
With focus on improving tax-collection by catching tax dodgers while also putting off the would-be tax evader, the government wants to encourage new businesses to register with HMRC as soon as they start trading. At the same time, the gaps that allow non-compliant businesses to trade are being closed, with heavier sanctions designed to deter would-be and existing “hidden economy” operators, and severely punish serial evaders and avoiders.
If it is made difficult or impossible to apply for or gain licenses to certain business services unless you’re registered with HMRC, it’ll definitely affect the ability to trade illegally. Existing businesses evading tax you’d hope would conform, register the business, and start declaring income for fear of the sanctions. And those who may have been tempted in the past you’d hope would just learn that we all have to work within the legal system.
Salary sacrifice: New measures to reform the benefit
Private medical insurance and pension contributions are benefits employers often provide employees in exchange for a salary sacrifice arrangement. Normally an employee agrees to reduce his or her salary by a certain amount in exchange for the provision of these sorts of benefits.
What is the advantage?
- The advantage for the employee is that some of these benefits are tax-free; and
- The advantage for the employer is that substantial savings in employee NIC contributions can be made, as the employee is “buying” benefits via the employer out of his or her pre-tax salary.
The Autumn Statement 2016 announced that the government was planning to reform a host of salary sacrifice arrangements.
The Spring Budget 2017 confirmed that the Finance Bill 2017 will legislate that salary sacrifice in exchange for the provision of benefits will be taxed as if they had been paid in cash.
Say an employee is being paid £350 a week, but £300 is paid as salary and £50 towards medical insurance and pension as a salary sacrifice. This means that the employee is only paying tax and NI on £300 and the same for employer in employer’s NI. The medical insurance component of the salary sacrifice arrangement will fall under the new rules whereas the pension contribution will remain a benefit and remain outside the new measures.
- Changes will take effect as of April 2017 for new joiners;
- All salary sacrifice arrangements entered into before 6 April 2017 will remain effective for tax purposes until 6 April 2018; and
- Salary sacrifice related to cars with CO? emissions over 75g/km, accommodation, and school fees, which were entered into before 6 April 2017, are to remain effective until 6 April 2021.
Salary sacrifice arrangements will remain in place for:
- Pension contributions and pension advice;
- Childcare vouchers;
- Work-place provided childcare and nurseries;
- Cycle to work scheme;
- Cars with CO? emissions less than 75g/km.
A published version of an overview of tax legislation and rates (OOTLAR) is available online under the general heading “Employment and benefits in kind” starting at (1.6).
Employers and employees will feel the kick as the new rules bed in, but for now, everyone should be aware of the changes, don’t make any changes to existing salary sacrifice arrangements yet. Both employee and employer stand to lose out, and all parties will have to re-sign contracts to make allowance for the change. Do nothing for now, but just be aware that the consequences of this new tax treatment will be felt in the not too distant future.
Changes to the VAT threshold
The Finance Bill 2017 clarifies the amendments announced during the Spring Budget: to insert secondary legislation that will amend the VAT ACT 1994. The amendment demonstrates how the government intends to reform the VAT threshold and change the way it collects VAT, a manner that HMRC refers to as a “split payment”.
You can read an online version of the overview of tax legislation and rates (OOTLAR) where this subject comes under the general heading “VAT” (2.27-2.30).
The VAT registration and deregistration thresholds will increase in line with inflation as of 1 April 2017, so that:
- There will be an increase from £83,000 to £85,000 for the taxable turnover threshold to determine whether a person must be registered for VAT;
- There will be an increase from £81,000 to £83,000 for the taxable turnover threshold to determine whether a person may apply for deregistration;
- There will be an increase from £83,000 to £85,000 for the registration and deregistration threshold for relevant acquisitions from other EU member states.
Who will be affected by the changes?
- Small businesses who currently fall outside VAT, who make taxable supplies or EU acquisitions between £83,000 and £85,000, and previously would have had to register for VAT from 1 April 2017; and
- Small businesses registered for VAT that make taxable supplies below £83,000 or EU acquisitions below £85,000.
What you should do
If this amendment is likely to affect you or if you’d like to discuss the implications of the VAT reforms, please don’t hesitate to contact your account manager.
The measure affecting termination payments
The Finance Bill 2017 proposes amendments to termination payments as announced during the Spring Budget. The tax structure amendments, here, demonstrate how the government intends to tighten up and clarify the rules relating to redundancy and the “winding down” of companies. You can read an online version of the overview of tax legislation and rates (OOTLAR) where this subject comes under the general heading “Employment and benefits in kind” (1.8).
The reforms of tax rules relating to termination payments will take effect as of 6 April 2018, to include:
- All contractual and non-contractual payments in lieu of notice (PILONs): from April 2018, these will be taxed as earnings;
- The first £30,000 of a genuine termination payment will remain exempt from income tax and NI;
- The employer NI rules will be aligned with the tax rules so that employer NIC will be payable on the elements of the termination payment exceeding £30,000;
- Foreign service exemptions are to be abolished.
It will come as some relief that genuine termination payments up to £30,000 are left intact, but the fear is that while the exemption may still apply, it will be restricted to genuine redundancy situations. This is an area where specialist advice should definitely be sought, as it has potential to affect both employer and employee NI contributions, and to directly affect the situation of the taxpayer receiving the payout. This area is bound to attract many dissenting voices in the coming months.