Yes, Mike, it does The draft Tax And Civil Partnership Regulations 2005 contains (at clauses 186 et seq) provisions amending ITTOIA Chapter 5 (the settlements legislation - what used to be s.660A et seq) so that spouse and civil partner are treated identically.
It isn't just the good stuff - civil partners will have to put up with the bad stuff as well (cf. private residence relief...)
Some answers @ David Cane: All employer contributions need to satisfy the "wholly and exclusively" test. However, HMRC have indicated that they will not seek to disallow pension contributions in circumstances where an equivalent bonus would attract CT relief.
@ Kevin McGuckien: The usual place to draw the line as an accountant is product recommendation. It's fine to tell clients how much they can stash into a pension and how much tax it might save them; without FSA regulation it would be risky to go further.
@ Nick Farrow: Unlikely. Even at a 32.75% marginal rate, the sheer tax cost of a bonus (12.8% ErNIC and either 33% or 41% marginal employee costs) is almost guaranteed to outweigh the cost of an employer contribution - don't forget, the employer contribution also benefits from the high marginal rate of CT relief!
For example: employee with standard £5k salary plus divis, and a bonus of £50k. The bonus, after tax and NIC, would enable him to make a grossed-up pension contribution of c. £45,500*, at a net cost to the company of c. £38,000. By contrast, the employer could put c. £56,000 into the pension for the same cost.
* This involves investing the net bonus, then reinvesting his HR relief.
Good piece of myth-busting However, it does peddle one or two myths of its own!
"you will be able to invest the lower of: your entire annual earnings; or £215,000"
Not entirely true. You can invest as much as you like, if you are indifferent to obtaining tax relief on the contribution. £215k is merely the limit on tax-privileged contributions.
This may sound odd, especially given Nick's comment that it's all about tax breaks. however, it's a major new opportunity which gets too little coverage.
Under current rules, if you have no earned income, all you can put into pensions is £2,808 a year (grossing up to £3,600). Post A Day, you can put as much in as you want - admittedly you won't get tax relief on it, but you will gain access to the tax-free growth within the SIPP. For the first time ever, people on investment income only can contribute to pensions...
Alternatively, your employer can contribute the £215k for you regardless of the level of earned income - the old need to maintain some level of "pensionable" or "relevant" earnings will no longer be there for SME proprietors.
"there is a misconception that if you die early your surplus annuity capital goes into the life insurance company’s coffers. This is actually not the case. The money is used to pay the pensions of those who live longer and who end up getting significantly more income than they originally paid in."
From the point of view of the short-lived annuitant, precisely how is that a comfort? In any case, there is normally a large timing difference between capital forfeited to life companies on early deaths and the annuity payments made to the long-lived. The life company most assuredly profits from the cash-flow advantages of what is euphemistically termed "mortality gain".
"the SIPP providers – are quite picky about the types of property they allow."
True enough if you are talking about life companies, actuaries and the rest of the financial services industry.
But, of course, it doesn't have to be like that. ICTA 1988 s.632(1A) - and, from A Day, FA 2004 s.154(1) - allow any employer to establish a SIPP for its directors and/or employees. The trustees of the scheme, apart from an independent Pensioneer Trustee, will be the directors of the company.
I have been assisting companies to establish such schemes since it became possible in 2001. My Pensioneer takes the view that, as long as an investment is legal and justifiable, he will not place any additional fetters on the choices of the other trustees. I know he is not the only PT for whom that is the case. If you are prepared to shun the major providers, there is more freedom out there than they would have you believe...
However, I don't want to seem unduly nit-picking. Overall this was an excellent article.
Agree with Neil W and James S The "settlement" definitely lies in the fact that Mr Jones generated all the revenue and yet chose to pay himself far less than he would have accepted from an arm's length employer.
It matters not a bit exactly what the elusive "market rate" may be. All that matters is that what Jones paid himself clearly could NOT have been the market rate. That, in Park's view, is enough bounty to make a settlement.
@ Daren P: I quite agree that if another fee-earner brought in 25% of the firm's revenues, there could still be a settlement. It would be a settlement in respect of the 75% which the "settlor" brought in.
On your point re W earning a reduced admin salary, I think there could be some negotiation room there in appropriate cases. However, in Arctic, Park explicitly commented that there was no dispute that Mrs Jones' salary was fully commensurate with her work (4-5 hrs a week).
Musings: there could well be a philosophical mismatch between consultancy-based fee income and the very structure of a limited company. HMRC appear to appreciate this mismatch somewhat better than many in the profession. The mismatch I refer to is this:
On the one hand a shareholder in a company may expect to receive dividends as a return on his investment in the company, as a reflection of the company's success. On the other hand, a fee-earning consultant is bringing in revenue based almost entirely* upon his personal skills and expertise. One may argue (and HMRC do) that it is hard to see how a non-contributing shareholder's dividend based on such income can represent a "return" on his "investment"...
* Circumstances may of course differ: a consultant working for a well-known company with a "brand image" and reputation may well be seen to derive a substantial proportion of his fee income from the brand and infrastructure rather than from his personal qualities. This is almost certainly where HMRC's arguments about a "capital base" come in.
Type of business is as critical as salary level For me, one of the most interesting comments made by Park J in his judgement are these:
"the salary paid to Mr. Jones was plainly far less than his expertise was able to generate for the company"
"all of the receipts of the company, which enabled it to have profits and to pay dividends, were attributable to Mr. Jones"
The judge is clearly suggesting that there was only a possibility of a settlement because Jones himself generated all of the income; Mrs Jones could not have generated any of it. Park J's extended comments on the application of Crossland v Hawkins strongly support this view.
I don't see the asset backing as having any huge impact in Park's thinking. What counts for him appears to be the fact that a company's income is derived directly from one individual's skill, training, experience and know-how. This appears, in the judge's thinking, to make it "his" income, which he is "settling" on the fellow shareholder by taking less than he could expect to receive commercially for it as a director/employee of an "arm's length" company.
My reading of the judgement is that there are two triggers for an "Arctic" - (1) all or most of the company's revenue is derived from the skill of one shareholder and (2) that shareholder takes an uncommercially low salary. But both must be there.
I'm with you, David Sch 3 FA 2004 (Sch A2 ICTA 1988) para 3 is, as you say, quite unambiguous.
(1) in calculating the underlying rate, "if the company is entitled to and claims relief under section 13 (small companies' relief) or section 13AA (corporation tax starting rate), apply the provisions of those sections" in calculating the CT.
(2) in the absence of a claim under either of those sections, "apply the rate of corporation tax fixed for companies generally".
So, if the 0% rate is not claimed, the only options available by statute as an underlying rate are a flat 19% and 30% (in either case, untapered). In neither case would NCD be triggered.
For nil profit situations, I agree it is reasonable (although algebraically bizarre) to call the underlying rate 0% - not that it matters, since there are no profits to be matched with distributions and therefore taxed at NCD rate.
Most importantly, I agree with you that the Inspector is seeking to override legislation.
I would draw his attention to the wording of para 3(1) Step Two, which expressly requires him to ignore NCD in calculating underlying rate, and of para 3(2), which clearly sets out what rate should be used if the 0% rate is waived.
My answers
Yes, Mike, it does
The draft Tax And Civil Partnership Regulations 2005 contains (at clauses 186 et seq) provisions amending ITTOIA Chapter 5 (the settlements legislation - what used to be s.660A et seq) so that spouse and civil partner are treated identically.
It isn't just the good stuff - civil partners will have to put up with the bad stuff as well (cf. private residence relief...)
Some answers
@ David Cane:
All employer contributions need to satisfy the "wholly and exclusively" test. However, HMRC have indicated that they will not seek to disallow pension contributions in circumstances where an equivalent bonus would attract CT relief.
@ Kevin McGuckien:
The usual place to draw the line as an accountant is product recommendation. It's fine to tell clients how much they can stash into a pension and how much tax it might save them; without FSA regulation it would be risky to go further.
@ Nick Farrow:
Unlikely. Even at a 32.75% marginal rate, the sheer tax cost of a bonus (12.8% ErNIC and either 33% or 41% marginal employee costs) is almost guaranteed to outweigh the cost of an employer contribution - don't forget, the employer contribution also benefits from the high marginal rate of CT relief!
For example: employee with standard £5k salary plus divis, and a bonus of £50k. The bonus, after tax and NIC, would enable him to make a grossed-up pension contribution of c. £45,500*, at a net cost to the company of c. £38,000. By contrast, the employer could put c. £56,000 into the pension for the same cost.
* This involves investing the net bonus, then reinvesting his HR relief.
Good piece of myth-busting
However, it does peddle one or two myths of its own!
"you will be able to invest the lower of: your entire annual earnings; or £215,000"
Not entirely true. You can invest as much as you like, if you are indifferent to obtaining tax relief on the contribution. £215k is merely the limit on tax-privileged contributions.
This may sound odd, especially given Nick's comment that it's all about tax breaks. however, it's a major new opportunity which gets too little coverage.
Under current rules, if you have no earned income, all you can put into pensions is £2,808 a year (grossing up to £3,600). Post A Day, you can put as much in as you want - admittedly you won't get tax relief on it, but you will gain access to the tax-free growth within the SIPP. For the first time ever, people on investment income only can contribute to pensions...
Alternatively, your employer can contribute the £215k for you regardless of the level of earned income - the old need to maintain some level of "pensionable" or "relevant" earnings will no longer be there for SME proprietors.
"there is a misconception that if you die early your surplus annuity capital goes into the life insurance company’s coffers. This is actually not the case. The money is used to pay the pensions of those who live longer and who end up getting significantly more income than they originally paid in."
From the point of view of the short-lived annuitant, precisely how is that a comfort? In any case, there is normally a large timing difference between capital forfeited to life companies on early deaths and the annuity payments made to the long-lived. The life company most assuredly profits from the cash-flow advantages of what is euphemistically termed "mortality gain".
"the SIPP providers – are quite picky about the types of property they allow."
True enough if you are talking about life companies, actuaries and the rest of the financial services industry.
But, of course, it doesn't have to be like that. ICTA 1988 s.632(1A) - and, from A Day, FA 2004 s.154(1) - allow any employer to establish a SIPP for its directors and/or employees. The trustees of the scheme, apart from an independent Pensioneer Trustee, will be the directors of the company.
I have been assisting companies to establish such schemes since it became possible in 2001. My Pensioneer takes the view that, as long as an investment is legal and justifiable, he will not place any additional fetters on the choices of the other trustees. I know he is not the only PT for whom that is the case. If you are prepared to shun the major providers, there is more freedom out there than they would have you believe...
However, I don't want to seem unduly nit-picking. Overall this was an excellent article.
Agree with Neil W and James S
The "settlement" definitely lies in the fact that Mr Jones generated all the revenue and yet chose to pay himself far less than he would have accepted from an arm's length employer.
It matters not a bit exactly what the elusive "market rate" may be. All that matters is that what Jones paid himself clearly could NOT have been the market rate. That, in Park's view, is enough bounty to make a settlement.
@ Daren P: I quite agree that if another fee-earner brought in 25% of the firm's revenues, there could still be a settlement. It would be a settlement in respect of the 75% which the "settlor" brought in.
On your point re W earning a reduced admin salary, I think there could be some negotiation room there in appropriate cases. However, in Arctic, Park explicitly commented that there was no dispute that Mrs Jones' salary was fully commensurate with her work (4-5 hrs a week).
Musings: there could well be a philosophical mismatch between consultancy-based fee income and the very structure of a limited company. HMRC appear to appreciate this mismatch somewhat better than many in the profession. The mismatch I refer to is this:
On the one hand a shareholder in a company may expect to receive dividends as a return on his investment in the company, as a reflection of the company's success. On the other hand, a fee-earning consultant is bringing in revenue based almost entirely* upon his personal skills and expertise. One may argue (and HMRC do) that it is hard to see how a non-contributing shareholder's dividend based on such income can represent a "return" on his "investment"...
* Circumstances may of course differ: a consultant working for a well-known company with a "brand image" and reputation may well be seen to derive a substantial proportion of his fee income from the brand and infrastructure rather than from his personal qualities. This is almost certainly where HMRC's arguments about a "capital base" come in.
Type of business is as critical as salary level
For me, one of the most interesting comments made by Park J in his judgement are these:
"the salary paid to Mr. Jones was plainly far less than his expertise was able to generate for the company"
"all of the receipts of the company, which enabled it to have profits and to pay dividends, were attributable to Mr. Jones"
The judge is clearly suggesting that there was only a possibility of a settlement because Jones himself generated all of the income; Mrs Jones could not have generated any of it. Park J's extended comments on the application of Crossland v Hawkins strongly support this view.
I don't see the asset backing as having any huge impact in Park's thinking. What counts for him appears to be the fact that a company's income is derived directly from one individual's skill, training, experience and know-how. This appears, in the judge's thinking, to make it "his" income, which he is "settling" on the fellow shareholder by taking less than he could expect to receive commercially for it as a director/employee of an "arm's length" company.
My reading of the judgement is that there are two triggers for an "Arctic" - (1) all or most of the company's revenue is derived from the skill of one shareholder and (2) that shareholder takes an uncommercially low salary. But both must be there.
I'm with you, David
Sch 3 FA 2004 (Sch A2 ICTA 1988) para 3 is, as you say, quite unambiguous.
(1) in calculating the underlying rate, "if the company is entitled to and claims relief under section 13 (small companies' relief) or section 13AA (corporation tax starting rate), apply the provisions of those sections" in calculating the CT.
(2) in the absence of a claim under either of those sections, "apply the rate of corporation tax fixed for companies generally".
So, if the 0% rate is not claimed, the only options available by statute as an underlying rate are a flat 19% and 30% (in either case, untapered). In neither case would NCD be triggered.
For nil profit situations, I agree it is reasonable (although algebraically bizarre) to call the underlying rate 0% - not that it matters, since there are no profits to be matched with distributions and therefore taxed at NCD rate.
Most importantly, I agree with you that the Inspector is seeking to override legislation.
I would draw his attention to the wording of para 3(1) Step Two, which expressly requires him to ignore NCD in calculating underlying rate, and of para 3(2), which clearly sets out what rate should be used if the 0% rate is waived.