The lack of available workers has been all over the news in recent weeks, Tom Pugh, UK economist at RSM details the reasons why and how this problem will ease over the coming months
As long as we are right about labour shortages and big wage rises being limited to a few sectors then underlying pay growth across the economy as a whole should remain relatively steady. In this case, the Monetary Policy Committee (MPC) will probably continue to signal that rate hikes remain some way off. But if labour shortages start to push up pay growth more widely and inflation expectations start to rise, then the MPC may act to tighten monetary policy in the first half of next year before the economy has properly recovered from the crisis.
The lack of available workers has been all over the news in recent weeks, but labour shortages will start to ease over the rest of this year. There are three key reasons for that.
First, the government’s furlough scheme ends this month. According to the latest official data, there are still almost two million people on the scheme. While most of them will probably return to their jobs, other workers will find their old jobs are no longer viable and seek employment elsewhere.
Second, the number of people fully vaccinated against coronavirus continues to grow. Even though around 350,000 people were asked to self-isolate in the first week of August, that’s a significant drop from the height of the ‘pingdemic’ in June, when almost 600,000 people a week were told to stay home. The number in self-isolation should continue to fall as this fourth, and hopefully final, wave of the pandemic eases.
Third, university students have been learning from home so have not taken up their normal part-time jobs. Students in this position aren’t technically unemployed because they are classed as ‘inactive’ ie haven’t looked for a job for at least four weeks.
The number of ‘inactive’ students has risen by about 250,000 compared to before the pandemic, a number that more than accounts for the total ‘inactivity’ rise across the UK of 160,000. Many of these students should re-enter the workforce once universities go back to in-person learning in September.
Workers in all three situations are already classified as either employed, if they’re on the furlough scheme or have a job but are self-isolating, or inactive if they’re students, so their return to work won’t affect the unemployment rate, which will probably still be around 4.7% by the end of the year.
Instead, it’s the labour force participation rate that will change. It will probably rise from 63.3% to about 64% as inactive people become employed. The large number of people becoming available to work over the next few months will ease most of the labour shortages, especially in areas like retail and hospitality. What’s more, this influx of labour should prevent wages rising too quickly and feeding into higher inflation and interest rates. That said, shortages will persist in certain sectors, especially those that have been heavily reliant on labour from the EU. To boost output, it will be essential for middle market business leaders in these areas to invest in productivity-enhancing technology, rather than relying on hiring more labour.
The surge in flexible working has meant that a large number of formerly office-based workers have moved out of cities – particularly London – in search of bigger homes and more green space.
This has shifted some demand for goods and services out of London but left the supply of labour roughly the same. Think of fewer coffees being served around central London Tube stations and more served in local town centres.
As a result, at 6.4%, London’s June unemployment rate was the highest in the country. The south west of the UK, which has experienced a boom in staycation visits, had an unemployment rate of just 3.6%. It will take some time for the labour market to adjust to where the new demand for goods and services is.
The million pound question is how much of the labour shortage can be attributed to Brexit and is likely to be permanent. Of course, it’s impossible to distinguish between the impact of Brexit and the pandemic, but it’s probably not a coincidence that the industries that traditionally have relied most on labour from the EU are experiencing the biggest rise in vacancies.
The government has made it clear that it has no intention of relaxing visa requirements for affected industries and it can take a long time to train people (it can take three months to become a qualified lorry driver), so labour shortages and disruptions in these industries are likely to continue well into next year.
The policy response
The labour shortages have led to eye-catching headlines about bonuses and pay rises in some industries. The shortages have also prompted worries that a jump in pay growth will push up inflation and cause the Bank of England’s Monetary Policy Committee to raise interest rates prematurely. These concerns seem well founded, given that headline wage growth, which is measured as a three-month average of the annual rate (3myy), was a whopping 8.8% in June.
However, pay growth has been heavily distorted by the pandemic. More low-paid workers lost their jobs early in the pandemic and this bumped up average pay without anyone being paid more money. After all, if the shortest person in a room leaves the average height of those left in the room increases, despite none of them getting any taller.
The furlough scheme also had an impact when millions of workers took a temporary pay cut this time last year. As a result, the annual rate of pay growth has been pushed sharply higher. Once we take account of these factors pay growth looks much more reasonable. We estimate that underlying pay growth is around 2.5% 3myy, roughly in line with its long-run average.
So what does this mean for the MPC’s next move?
There is clearly a risk that the prospect of large pay rises spooks the MPC into tightening monetary policy in the first half of next year, before the economy has properly recovered from the pandemic. But as long as underlying pay growth across the wider economy remains relatively steady and inflation expectations don’t jump then the MPC will probably continue signalling that rate hikes are still some way off.
In a statement to MPs today, new financial secretary to the Treasury Lucy Frazer has confirmed that the introduction of Making Tax Digital (MTD) for income tax will be postponed by a year
The quarterly digital reporting for landlords and the self employed was due to start in 2023, but it will be pushed back by 12 months, the second delay to the digitisation programme.
‘The government recognises the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic over the last year. In recognition of this and of stakeholder feedback, we will now be introducing MTD for ITSA a year later, in the tax year beginning in April 2024,’ said Frazer in a written statement.
‘General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025.
‘The date at which all other types of partnerships will be required to join will be confirmed later.’
This delay will also affect the introduction of the new penalty scheme for late filing and late payment of tax for ITSA. This will now be introduced for those who are mandated for MTD for ITSA in the tax year beginning April 2024, and for all other income tax self assessment customers from April 2025.
Alongside the regulations – statutory instrument – laid in parliament today, HMRC has also published a tax information and impact note (TIIN) setting out the projected benefit and cost impacts of MTD for ITSA, as well as a policy paper to help different businesses understand what their transition to MTD could look like in more detail.
‘A later start for MTD for ITSA provides more time for those required to join to make the necessary preparations and for HMRC to deliver the most robust service possible, affording additional time for testing in the pilot,’ Frazer said.
‘HMRC will continue to work in close partnership with business and accountancy representative bodies and software developers to ensure taxpayers are well supported as they adopt MTD for ITSA.’
Nimesh Shah, CEO of Blick Rothenberg said: ‘HMRC are buying themselves some time by not introducing MTD for income tax, especially with the new social care levy and the backlog from covid. There’s also the recent consultation on moving the tax year, and aligning the basis period, and various proposals from OTS.
‘This give HMRC some time to deal with the IT infrastructure which is notoriously difficult and to do proper testing of the systems. Government IT projects are fraught with problems and the extension would give HMRC a better chance of ensuring that everything works smoothly.
‘It might even be possible for them to align the MTD changes with the basis period, to bring the tax year in line for all businesses. We’ll have to wait and see what else the government says.’
HMRC estimates a transitional cost for MTD adoption by businesses of around £1.3bn and a net increase in the ongoing costs of tax compliance of around £152m for those businesses mandated to use MTD for ITSA. This equates to an average transitional cost of £330 per business and an annual cost of £35 per business within scope.
This delay has also had a knock-on effect on the plans to introduce basis period reporting for the self employed and partnerships, which is currently out for consultation and has come in for some criticism due to the rushed nature of the original time scale, particularly as businesses were recovering from the pandemic.
‘The government has also recently consulted on a reform of the complex basis period rules that govern how self-employed profits are allocated to tax years,’ Frazer said. ‘Many respondents said that the reform was a sensible simplification but asked for more time to implement the changes.
‘In recognition of these concerns, these changes will not come into effect before April 2024, with a transition year not coming into effect earlier than 2023. The government will respond to the consultation in due course providing the next steps.’
The move was welcomed by the Chartered Institute of Taxation (CIOT) as there was a general view that there had been little time for full testing of the rollout or a communications effort to educate taxpayers about the upcoming changes.
Richard Wild, head of tax technical at the CIOT, said: ‘We are pleased that the government has listened to feedback from stakeholders such as ourselves and today announced a deferral of the start date for MTD for Income Tax Self Assessment so that it will now commence from April 2024 (and April 2025 for general partnerships).
‘There is still much to be done to ensure that MTD delivers its purported benefits without adding significant costs and burdens for businesses and their advisers. We would urge HMRC to prepare and publish a detailed implementation roadmap to ensure there is adequate time for software development, testing and communication before April 2024.’
David Menzies, director of practice at ICAS, said: ‘ICAS supports the need for a modern, digital tax administration but the various steps towards this need careful planning and preparation to make it work and to have public trust.
‘There are huge pressures on members’ practices and businesses at the moment as we come out of the pandemic, and changes to tax compliance need to be factored in carefully, so this delay is very welcome.’
Frazer took over from Jesse Norman who lost his Treasury job in last week’s reshuffle and had been instrumental in pushing through the government’s ambitious tax digitalisation programme.
On Wednesday it was announced that Green Supplier and Avro Energy had gone bust which brings the total to six energy companies to have gone under in September 2021
The collapse of the latest two energy companies has affected 735,000 customers and with Pfp Energy, MoneyPlus Energy, Utility Point and Peoples energy having all gone into administration this month, over 1.5m people have now been affected.
It was also revealed that that energy company Bulb was seeking a cash injection to help improve its finances although the company along with Octopus have told their customers ‘not to panic’.
Many of the smaller energy companies failed to hedge prices for the winter which put them under increasing financial pressure, exacerbated by low margins and soaring prices in a highly competitive market.
There has been concern in recent weeks that more companies are under pressure over the skyrocketing cost of natural gas and its impact on energy prices. In a statement in parliament today, business secretary Kwasi Kwarteng said that the government’s primary focus was ‘protecting consumers’ and that they will continue to protect consumers with the energy price cap, which keeps bills capped at £1,277 from 1 October.
He also stated that the government ‘will not be bailing out failed energy companies’.
In a Business, Energy, and Industrial Strategy Select Committee earlier this week, Kwarteng told MPs that the government was ‘looking at all options’ in response to the crisis, with the business secretary not ruling out an introduction of a windfall tax on businesses that have benefitted from soaring wholesale gas prices, referencing what is currently happening in Spain.
Kwarteng also indicated that he would be prepared to appoint a ‘special administrator’ that would see the energy companies taken on by the government, but he dismissed calls to scrap green levies to help alleviate the pressure on companies.
After crisis talks with Ofgem on Monday, Kwarteng said that there were ‘well-rehearsed plans’ in place to ensure consumers were not cut off with Ofgem announcing that customers will continue to receive gas or electricity even if the energy supplier goes bust as the regulatory body will move customers’ accounts to a new supplier.
The origins of this crisis can be traced back to last winter, which was particularly harsh and saw cold weather extend into April, depleting many natural gas stockpiles which has driven up the price of gas by 250% since January 2021.
The falling supply and rising demand is the overarching factor with data from Gas Infrastructure Europe showing that the continent’s natural gas stockpile is at 75% of what it was this time last year, the lowest level for the time of year since 2013.
This has put energy companies under pressure to increase consumer prices as their own costs have soared by 70% in August alone according to industry group Oil & Gas UK. There is some protection for customers as companies cannot charge above the price cap which has been set by the energy regulator Ofgem. This is set to rise by an extra £139 to £1,277 in response to the crisis from 1 October.
The government plans to overhaul tipping practices, helping around 2 million people top up their income by ensuring all tips are given to staff rather than retained by business owners
All tips will go to staff under new plans to overhaul tipping practices set out by the government, providing a financial boost to hospitality workers across the country.
Legislation on tipping will be supported by a statutory Code of Practice, developed in partnership with workers and employers to set out the principles of fairness and transparency.
Most hospitality workers – many of whom are earning the national minimum wage or national living wage – rely on tipping to top up their income. But research shows that many businesses that add a discretionary service charge onto customer’s bills are keeping part or all of these service charges, instead of passing them onto staff.
The government will make it illegal for employers to withhold tips from workers. The move is set to help around 2m staff working in one of the 190,000 businesses across the hospitality, leisure and services sectors, where tipping is common place and can make up a large part of their income.
This will ensure customers know tips are going in full to workers and not businesses.
Kate Nicholls, CEO of UKHospitality said: ‘UKHospitality supports the right of employees to receive the deserved tips that they work incredibly hard for. The hospitality sector as it begins to rebuild after 18 months of restrictions and enforced enclosure is already creating new jobs and driving the jobs recovery. Ensuring employees receive the tips they earn will further strengthen the sector’s ability to create jobs and support the wider economic recovery.
‘For hospitality businesses, though, customers tipping with a card incurs bank charges for the business, and many also employ external partners to ensure tips are fairly distributed among staff. With restaurants, pubs and other venues struggling to get back on their feet, facing mounting costs and accrued debts, we urge the government to continue to work closely with the sector as it introduces this legislation to ensure this works for businesses and employees.’
Tipping legislation will build on a range of government measures to protect and enhance workers’ rights. In the past 18 months, the government has introduced parental bereavement leave, protected new parents on furlough, and given millions a pay rise through a higher minimum wage.
Labour markets minister Paul Scully said: ‘Unfortunately, some companies choose to withhold cash from hardworking staff who have been tipped by customers as a reward for good service.
‘Our plans will make this illegal and ensure tips will go to those who worked for it. This will provide a boost to workers in pubs, cafes and restaurants across the country, while reassuring customers their money is going to those who deserve it.’
Moves towards a cashless society have accelerated dodgy tipping practices, as an increase in card payments has made it easier for businesses to keep the funds.
80% of all UK tipping now happens by card, rather than cash going straight to staff. Businesses who receive tips by card currently have the choice of whether to keep it or pass it on to workers.
The legislation will include:
- a requirement for all employers to pass on tips to workers without any deductions;
- a Statutory Code of Practice setting out how tips should be distributed to ensure fairness and transparency; and
- new rights for workers to make a request for information relating to an employer’s tipping record, enabling them to bring forward a credible claim to an employment tribunal.
Cash tips are taxable but are not generally liable for National Insurance, and have to be included on self assessment tax returns. When tips are pooled together and shared out – this is called a tronc. The person who looks after it is called the ‘troncmaster’ and they are responsible for making sure income tax is paid through the PAYE system.
Tronc systems pool tips and service charges and distribute them through a separate payroll. Where a troncmaster or other independent person determines how the funds will be distributed, no National Insurance contributions are due.
‘The most effective way to ensure fairness amongst employees and to comply with the expected new legislative requirements, is to have an independent troncmaster oversee the process and I am glad the government has recognised this,’ said Peter Davies, managing director at WMT Troncmaster Services.
‘We are concerned that the proposals will force businesses to absorb costs and deductions from tips imposed by others (such as card companies) and that not all businesses will be able to afford this in the current financial climate.’
Under the changes, if an employer breaks the rules, they can be taken to an employment tribunal, where employees can be forced to compensate workers, often in addition to fines.
Tipping legislation will form part of a package of measures which will provide further protections around workers’ rights.
UK businesses and consumers have paid 42% more in customs duties on goods since Brexit came into force on 1 January 2021.
The jump to £2.2bn in customs duties from January to July 2021 is a new record and is up from £1.6bn in the same period last year.
These increased costs are due to new tariffs which have arisen as a result of leaving the EU. The main increase in customs costs comes from the rule of origin tariff, which applies to goods imported from the EU which were originally made, or contain components made, outside of the EU.
The increased cost of customs duties places further burden on UK businesses who have already been hit hard by the pandemic and increased staffing costs caused by the change in Brexit immigration rules.
Importing goods from the EU has also become far more complicated and time-consuming for UK businesses due to the bureaucracy involved. In some cases, hauliers have needed to supply documentation of up to 700 pages long at borders, causing significant delays.
‘UK businesses weren’t given enough time or help to prepare for the cost of Brexit or the masses of paperwork.
‘The result is that the cost of tariffs and extra paperwork is now causing serious difficulties for many businesses who are already struggling to stay profitable in the face of mounting pandemic-induced costs.’
Businesses are set to face further issues from 1 October, when a new import ban on EU products of animal origin is being implemented for goods such as chilled mincemeat. This new ban will likely cause longer queues at borders, leaving businesses with increased disruption and costs.
HMRC is warning university students to be wary of potential scams, especially if they have a part-time job and are new to interacting with the tax office
University students taking part-time jobs are at increased risk of falling victim to scams, HMRC said.
By June this year, more than 680,000 students had applied to university, and over 900,000 held part-time jobs during the 2020 to 2021 academic year.
Higher numbers of students going to university this year means more young people may choose to take on part-time work. Being new to interacting with HMRC and unfamiliar with genuine contact from the department could make them vulnerable to scams.
In the past year almost one million people reported scams to HMRC.
Nearly half of all tax scams offer fake tax refunds, which HMRC does not offer by SMS or email. The criminals involved are usually trying to steal money or personal information to sell on to others. HMRC is a familiar brand, which scammers abuse to add credibility to their scams.
Links or files in emails or texts can also download dangerous software onto a computer or phone. This can then gather personal data or lock the recipient’s machine until they pay a ransom.
In the two-month period April to May this year, 18 to 24-year olds reported more than 5,000 phone scams to HMRC.
Mike Fell, head of cyber security operations at HMRC, said: ‘Most students won’t have paid tax before, and so could easily be duped by scam texts, emails or calls either offering a ‘refund’ or demanding unpaid tax.
‘Students, who will have had little or no interaction with the tax system might be tricked into clicking on links in such emails or texts.
‘Our advice is to be wary if you are contacted out of the blue by someone asking for money or personal information. We see high numbers of fraudsters contacting people claiming to be from HMRC. If in doubt, our advice is do not reply directly to anything suspicious, but contact HMRC through gov.uk straight away and search gov.uk for ‘HMRC scams’.’
In the last year (September 2020 to August 2021) HMRC has:
- responded to 998,485 referrals of suspicious contact from the public. Nearly 440,730 of these offered bogus tax rebates;
- worked with the telecoms industry and Ofcom to remove 2,020 phone numbers being used to commit HMRC-related phone scams;
- responded to 413,527 reports of phone scams in total, an increase of 92% on the previous year. In April last year we received reports of only 425 phone scams. In August 2021 this had risen to 3,269;
- reported 12,705 malicious web pages for takedown;
- detected 463 Covid-19 related financial scams since March 2020, most by text message; and
- asked internet service providers to take down 443 Covid-19 related scam web pages.
The Chancellor has confirmed that government spending plans will be outlined at the Spending Review on 27 October alongside a second Budget
This will be the second Budget of the year, following the March Budget which happened in mid-March, the week before the country went into lockdown due to covid-19.
The three-year review will set government departments’ resource and capital budgets for 2022-23 to 2024-25 and the devolved administrations’ block grants for the same period.
Mean core departmental spending will grow in real terms at nearly 4% per year on average over this parliament, the Treasury confirmed. By 2024-25 that means that core departmental spending will be £140bn more per year in cash terms than at the start of the parliament.
Part of the Spending Review will focus on plans to level up across the UK to increase and spread opportunity; ways to improve outcomes UK-wide where they lag and working closely with local leaders; and strengthen the private sector where it is weak. There will also be more detail about the government’s ambitions to lead the transition to net zero across the country.
Chancellor Rishi Sunak said: ‘At the Spending Review later this year, I will set out how we will continue to invest in public services and drive growth while keeping the public finances on a sustainable path.’
Core day-to-day departmental spending will follow the path set out at spring Budget 2021, with the addition of the net revenue raised by the new Health and Social Care Levy and the increase to dividend tax rates. The government will make available around an additional £12bn per year for health and social care on average over the next three years.
In total, day-to-day spending will increase to £440bn by 2024-25, increasing by nearly £100bn a year in cash terms over the parliament.
The spending increase is part of a broader plan to return public finances to a sustainable footing over the medium-term after the pandemic. The Treasury added that the ‘spending plans and focused tax changes to fund the Health and Social Care levy, alongside the measures taken at the last Budget, show that we are determined to get our fiscal position back on track, so that we can continue to fund excellent public services in the future’.
Departments have been asked to identify at least 5% savings and efficiencies from their day-to-day budgets as part of these plans.
The government has confirmed that the state pension will rise by 2.5% from April 2022, breaking the pension lock as a result of the impact of the pandemic
In a busy day in parliament, the minister of state told MPs that this would be a one-year intervention and that the normal increase in line with average earnings increase would be reinstated from the 2023-24 tax year.
As happened last year, once again the state pension will rise at a fixed rate below the RPI rate of inflation.
Secretary of state for work and pensions, Thérèse Coffey MP, said: ‘[Last year], we legislated to set aside the earnings link, allowing me to award an uprating of 2.5% as this was higher than inflation. If we had not done this, state pension would have been frozen.
‘Thanks to our vaccination programme which started with the eldest and most vulnerable in our society, we have seen that as the economy and businesses have reopened and millions have moved off furlough and returned to work, the labour market has shown strong signs of recovery and earnings have risen at an unprecedented rate and we face a distorted reflection of earnings growth.
‘So tomorrow, I will introduce the Social Security (Up-rating of Benefits) Bill. For 2022/23 only, it will ensure the basic and new state pensions increase by 2.5% or in line with inflation, which is expected to be the higher figure this year. And as happened last year, it will again set aside the earnings element for 2022/23, before being restored for the remainder of this parliament.’
In addition to those receiving basic and new state pensions, this will apply to those receiving standard minimum guarantee in pension credit and widows’ and widowers’ benefits in industrial death benefit.
Coffey added: ‘Since 2010, the full yearly basic state pension has increased by over £2,050 in cash terms. There are also 200,000 fewer pensioners in absolute poverty – both before and after housing costs – than in 2009/10.’
The launch of a social care levy from 2022 will see all taxpayers facing a 1.25% tax charge under government plans, while dividend tax will also rise
From next April the government will create a UK-wide, 1.25% health and social care levy on earned income, hypothecated in law to health and social care, with dividends rates increasing by the same amount. There will also be changes to the amount of savings people can retain when facing a move into care costs and a cap on total cost liability for anyone paying for care home accommodation and care.
The new tax is set to raise £12bn a year and marks a major departure from the Conservatives’ manifesto which committed to the triple lock on income tax, national insurance and VAT. An estimated £5.5bn of the levy will be allocated to social care, while the balance will be used for NHS funding to catch up with the backlog of operations after the pandemic.
Although it was originally floated as an increase in national insurance contributions (NICs), it will now be ringfenced purely for health and social care costs. The levy will be paid by businesses and individuals, including the self employed, from April 20222, and this will be extended in April 2023 to workers who continue to work after state pension age. Legislation will be passed to ensure that the charge is an independent tax, discrete from NICs and it will take a year for HMRC to update its systems to accommodate the levy as a separate charge, as opposed to a NICs’ increase on payslips.
This means that people earning £24,000, less than the average wage, would pay an additional £260 a year for the levy, which will be clearly indicated as the social levy on pay slips. Anyone earning less than £9,680 will not have to pay the levy.
A typical higher rate taxpayer earning £67,100 will contribute £715. Additional rate taxpayers make up just 2% of individuals affected but will contribute nearly 20% of the revenue raised from individuals.
The dividend tax, which will see the current rate of 7.5% rise to 8.75%, and is expected to raise an estimated £600m; this will be legislated in the next Finance Bill. The government said that additional and higher rate taxpayers are expected to contribute over 70% of the revenue from this increase in 2022-23.
In a speech in parliament, the prime minister Boris Johnson said: ‘We will fix the long-term problems of health and social care. From next April we will create a health and social care levy of 1.25% and the dividend rate will rise by the same amount with the levy going to social care across the whole of the UK.’
He added: ‘We need reform and change, we need to build back better. When Covid started, 30,000 beds in hospitals were used by people waiting for care home beds. Governments have ducked this problem for decades. There can be no more dither and delay, and we cannot rely on insurance as the premiums would be too high.’
Johnson said the plan to create a specific levy as opposed to raising income tax, for example, was to ensure that the charge was spread across individuals and businesses.
‘Our new levy will share the cost between individuals and businesses, and everyone will contribute according to their means, including those above state pension age, so those who earn more those who earn more will pay more,’ said Johnson.
‘Income tax is not paid by businesses so the whole burden would rest on individuals. The new levy will fall on businesses and individuals. And the highest earners will pay the majority.
‘And because we are also increasing dividends tax rates we will be asking better-off business owners and investors to make a fair contribution too.’
He stressed that the highest earning 14% will pay around half the revenues, no-one earning less than £9,568 will pay the levy, and the majority of small businesses will be exempt, with 40 per cent of all businesses paying nothing at all.
This will raise an estimated £12bn a year, with money from the levy going directly to health and social care across the whole of the UK.
Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in freeports will not pay the levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new freeport employees.
James Ross, partner at law firm McDermott Will & Emery, said: ‘As far as individuals are concerned, the government has made some attempt to address the inequities of increased taxation on earned income by increasing the rate of tax on dividends (in order to reduce the benefits of routing income through service companies).
‘This, however, introduces asymmetries elsewhere in the tax system. The top rate of tax on dividends will increase to 39.35% – nearly twice the 20% top rate of tax on capital gain. Individuals who hold material shareholdings in trading or investment companies will have clear incentives to try and structure their returns as capital gains rather than dividend income.’
Care cost cap
There will also be wide-ranging changes to the costs paid by people facing residential care. The PM set out plans for a limit on what people can be expected to pay. From April 2023, no-one starting care will have to pay more than £86,000 towards their care.
Currently, anyone in England with assets over £23,250 must pay for their care in full.
The savings limit will also be increased to £20,000 from the current £14,000, which means that they will not have to make any contribution to care costs.
Meanwhile anyone with assets between £20,000 and £100,000 will be eligible for some means-tested support. This new upper capital limit of £100,000 is more than four times the current limit. However, if a person’s total assets are over £100,000, full fees must be paid.
The supporting document primarily sets out ongoing issues with NHS backlogs and plans to address this, but also gives brief details on how the new asset limits will work.
When these reforms are implemented, around 150,000 people will directly benefit at any one point in time.
A white paper on integrated health and social care will be released later this year setting out more detailed plans.
HMRC launched 278 civil investigations into suspected tax evasion during the first 10 months of the Covid-19 pandemic.
The 278 civil investigations, which were opened between 1 April 2020 and 31 January 2021, were otherwise known as Code of Practice 9 enquiries (COP9).
These are opened into the affairs of taxpayers who are suspected of committing serious tax fraud. This includes deliberately paying less tax than is due, overclaiming tax reliefs or misclaiming government grants.
Under a COP9 enquiry, HMRC has the right to seek recovery of tax, interest and penalties for as far back as 20 years. Despite these far-reaching investigatory powers, many will see this as a far preferable alternative to a criminal investigation.
Taxpayers will be required to provide details of the amount of tax they have evaded which saves HMRC from using its resources to investigate such matters. HMRC sees Cop9 enquiries as a much quicker and less costly process than having to enter criminal proceedings.
It is expected that HMRC may use the COP9 tool to encourage more suspected furlough fraudsters to come forward. ‘HMRC is throwing taxpayers a lifeline by issuing these COP9 enquiries. It’s an opportunity for those who know that there are serious misgivings within their tax affairs to bring this to light and avoid the possibility of a substantial prison sentence.
‘HMRC’s offer of a COP9 deal doesn’t last forever, so tax evaders who receive an offer shouldn’t ignore it. If they do spurn the approach from HMRC then they could find themselves facing a full-blown criminal prosecution.’
Dependent on the severity of the tax evasion that has been engaged in, the financial penalties imposed under the COP9 investigations can be up to 200% of the tax HRMC believes is owed.
If the individual chooses to fully cooperate with the investigation they will receive immunity from criminal prosecution. Taxpayers can also avoid the possibility of prison by requesting to make a disclosure and voluntary entering into a COP9 agreement with HMRC. This is known as a contractual disclosure facility (CDF). ‘Given the severity of the financial penalties under COP9 enquiries, including the possibility of being publicly named and shamed, they are most definitely not an amnesty nor an easy route out.
‘However, taxpayers who have deliberately misrepresented their affairs are likely to have a more favourable outcome if they fully cooperate with HMRC and own up to committing tax fraud.’