Self-assessment fines on the rise

HMRC has fined 14% more people year-on-year for late self-assessment tax filing, leaving well-intentioned taxpayers frustrated. “The pool of people at risk of being fined for late payment is now bigger than ever as self-employment continues to grow,” said Tim Woodgates, associate and tax specialist at Moore Stephens. “UK taxpayers are feeling the pinch. As a result, some do not have the money to pay the tax bill on time, even though they want to.” In 2015/16, 291,000 taxpayers were penalised for late payments, while that figure jumped to 331,000 in 2016/17 (the latest full year available).

In 2017/18, HMRC has already raised 233,000 fines says Moore Stephens. The jump in fines may be attributed to the record number of self-employed individuals, which has soared by 180,000 in just one year to make a grand total of 4.93m in March 2019. Moore Stephens suggests that new taxpayers are unfamiliar with tax deadlines and suffer as a result while appeals are increasingly in vain. If the taxpayer is 30 days or more late in paying their tax returns, they are issued with a fine of 5% of all the outstanding tax. At six months, they are issued with a further fine of 5% of all the tax due at that date and repeated again at 12 months.

Insolvency Changes – New Legislation

From 6 April 2020, when a business enters insolvency, more of the taxes paid by its employees and customers, and temporarily held in trust by the business, will go to HMRC rather than being distributed to other creditors.

Legislation will be introduced in Finance Bill 2019/20 to make HMRC a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business. This means HMRC will move ahead of holders of floating charges (mainly financial institutions) and other non-preferential unsecured creditors, but, remain below holders of fixed charges (also primarily financial institutions) and higher-ranking preferential creditors.

The legislation will apply to England, Wales and Scotland. For Scotland, a legislative consent motion may be required. The Government will apply this change to insolvencies that begin on or after 6 April 2020. In February, HMRC published a consultation document outlining how its new status will differ from existing rules when a business goes into insolvency. HMRC has now published the outcome of that consultation, along with draft legislation.

This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE income tax, employee national insurance contributions, and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer national insurance contributions.

The Government has confirmed that it will not set a time limit within which tax debts are included. The original consultation document said that any penalties or interest arisen from these taxes would also form part of HMRC’s preferential claim. However, most respondents were of the view that penalties and interest arising from tax debts should not be claimed preferentially. Views were also expressed that including penalties would increase administrative burdens on insolvency practitioners who would need to undertake significant work to challenge penalties, particularly those based on behaviour.

The Government has therefore now confirmed that these elements will not form part of HMRC’s preferential claim. (HMRC penalties and interest are aimed at encouraging compliance, and are not charges paid by employees or customers, but are charges on the business.) Any penalties or interest due on taxes which rank preferentially will be claimed non-preferentially alongside other non-preferential claims.

This measure will have no effect in relation to any insolvency proceedings commencing before the implementation date of 6 April 2020 and only relates to floating charges that are still due when a business goes insolvent. Most respondents, mainly lenders and professional advisors, commented that the measure should only apply to floating charges created after 2020. However, the Government’s view is that if the measure does not apply to pre-existing floating charges, such an approach could skew behaviour by providing an impetus to retain pre-2020 floating charges unnecessarily, as they would be deemed more valuable than post 2020 floating charges. It believes this could also distort the asset-based lending market.

While the Government anticipates some impact on creditors, it does not expect this reform to significantly impact access to finance. Financial institutions holding fixed charges over assets will remain above HMRC in the creditor hierarchy, and any debts financial institutions will no longer recover on floating charges as a result of this change would represent a very small fraction of total lending in the UK. The Office for Budget Responsibility made no adjustment to its macroeconomic forecast as a result of this measure.

A golden opportunity?

When one of the world’s leading fund managers, renowned for his passion for equities, says every investor’s portfolio should have a heavy dose of exposure to gold, it is time to sit up and listen. That is exactly what happened when veteran manager Mark Mobius, a long-time investor in emerging markets, said he ‘loved’ gold and that investors should have at least 10% of their assets in the precious metal. His comments came as its price climbed to a six-year high of more than $1,413 (£1,125) an ounce.
According to experts at trader BullionVault, gold prices for UK savers have only ever been higher on 20 other occasions throughout history. It confidently predicts that by the end of the year, the all-time peak of £1,195 – reached in the summer of 2011 when debt crises were sweeping across Europe and the United States – could look ‘cheap’. The surge in gold prices has been fuelled by a number of factors including mounting geopolitical tensions in the Middle East, the continued trade war between the United States and China, and downward pressure on interest rates. This basket of concerns has highlighted gold’s status as a store of value and a safe haven during times of uncertainty.
Commentators believe that over the next decade deflation will dominate the economies of the United States and Europe, resulting in suppressed interest rates. In times of deflation, he says gold is a ‘good asset diversifier’ and proves popular as investors search for real, physical financial assets.

Weekly Market Commentary: 30th August 2019

Boris Moves to Suspend Parliament

As we march towards the Brexit deadline, Prime Minister Boris Johnson has decided to play his hand and take an unprecedented step by attempting to suspend parliament for five weeks. Much like in football when a team holds the ball close to the corner flag, Boris Johnson is simply running down the clock. By muzzling Parliament, he is either confident that the opposition is weak enough not to oust him and form a replacement government, or if they do, he will play the role of the conductor, championing the will of the people in the ensuing general election.

While proroguing parliament until 14th October shows shades of despotism, it also sends a message to the EU to either accept his deal or progress to a no-deal divorce. In the meantime, the opposition will have to come up with an effective strategy to stop Boris’s plan. It’s now close to two and half years since Article 50 was triggered and next week looks like the only opportunity to challenge a No-Deal Brexit.

US: Equity or Bond Market for income seekers?

This week the relationship between US bonds and equities turned on its head. For the first time since the financial crisis of 2007/08, income from US dividend paying stocks is higher than long-dated government debt. Dividend yield for the S&P 500 stood at 1.98 per cent marginally greater than the 30-year US Treasuries (1.94 per cent). This indicates investors looking for a steady income stream may be better off looking towards the US equity market.

However, companies will look to grow their dividends annually and will struggle to cut them even in bad times as that would be a signal to the market that the company is in trouble. This factor along with recession fears fuelled by global uncertainty may make companies susceptible to big swings in share price, in turn proving troublesome for investors who made the switch from US treasuries into equities.

M&A: Investors unhappy with Altria and Philip Morris Merger Talks

Over a decade ago Altria spun off Philip Morris [PMI]. Altria focused on improving sales in America while PMI targeted overseas markets. However, both companies were caught out by tightening regulations on tobacco, subsequently having to raise prices and trim costs in order to remain profitable. Given that PMI’s rival, British American Tobacco, became the largest publicly traded tobacco company three years following its acquisition of Reynold America, a merger between PMI and Altria would help both companies keep up amidst intense competition.

However, the planned merger, which would create the world’s largest tobacco company wasn’t well received by investors – and the devil is in the details. A ‘merger of equals’ approach could see a potential ‘take under’ for Altria. PMI has been outperforming Altria driven by its international exposure. An additional concern is Altria’s heavy investment into e-cigarette company Juul, whose popularity with young people increases the risk of PMI getting burnt by a regulatory crackdown on tobacco alternatives.

Healthcare: Johnson & Jonhson ordered to pay for Opiod Crisis

This week, drug making company Johnson & Johnson has been ordered to pay £468m for its role in adding to Oklahoma’s opioid addiction crisis. As this is the first case to
go to trial, it could open the floodgates for similar rulings on other opioid makers and distribution companies. Opioids were involved in almost 400,000 overdose deaths in the US from 1999 to 2017 and since 2002, 6000 people have died in Oklahoma alone. (Data and chart source: National Institute for Drug Abuse)

Judge Thad Balkman ruled that Johnson & Johnson bore responsibility for its part in creating the worst recorded drug epidemic in US history by pushing false claims about the safety of its range of narcotic painkillers. Surprisingly, the share price for the company went up five per cent after the ruling. Investors had feared that the cost would be much higher as the state of Oklahoma had asked for a $17bn fine.

Pension freedoms statistics: £28.37 bn from April 2015

HMRC have published their statistics showing that £28.37 bn has been encashed from pension pots since the pension freedoms were introduced in April 2015. HMRC have released figures that show pension savers have cashed in £28.37 billion from their pension pots since pension freedoms were introduced in April 2015.
Over 6.89 million taxable payments have been made using pension freedoms, with 336,000 people accessing £2.75 billion flexibly from their pension pots over the last three months, according to published HMRC figures.