AFM TAX TRAINING DAY. Hosted by Deloitte 16 June 2015

Transcription

1 AFM TAX TRAINING DAY Hosted by Deloitte 16 June 2015

2 Corporation Tax 2015 Update Adjusted BLAGAB management expenses Step 4 Jon Garrett 16 June 2015

3 The new life tax regime - mutuals An example computation Item BLAGAB I E profits Taxed at 20% Less: Income tax suffered* Tax liability *Income tax deemed to have been suffered on unfranked dividend distributions referable to BLAGAB and non-blagab X X (X) X 3 Corporation Tax

4 BLAGAB I E profits What goes in to I E profits Steps 1 to 5 Step 1 Income referable to BLAGAB and not LTBFC Step 3 Research and development expenditure credits Step 5 Adjusted BLAGAB management expenses Step 2 Chargeable gains referable to BLAGAB and not LTBFC Step 4 Add Steps 1 to 3 Deduct nontrading deficit on loan relationships Step 6 I E profits/ (BLAGAB excess expenses) = Step 4 + Step 5 4 Corporation Tax

5 BLAGAB I E profits Income Step 1 Property income Loan relationships and derivatives Miscellaneous charges Annual payments not otherwise charged Imputation of reinsured investment return Intangibles Taxable distributions Non-UK income not otherwise charged Income from unauthorised unit trusts Sales of foreign dividend coupons Insofar as referable to BLAGAB and not LTBFC 5 Corporation Tax

6 BLAGAB I E profits Step 2 - Chargeable gains Chargeable gains and allowable losses Normal rules apply except for intragroup NGNL rules Deemed disposal of holdings in collectives Deemed disposal on box transfers NGNL on seeding authorised contractual schemes NGNL on transfers of business Allowable losses transfer on transfer of business 6 Corporation Tax

7 BLAGAB I E profits Adjusted BLAGAB management expenses Step 4 Based on figures in financial statements Adjust for: - Acquisition expenses spread over 7 years - Deemed expenses - Brought forward expenses Expenses of management Complicated set of rules for refunds and reversals Not defined rely on case law 7 Corporation Tax

8 Recent updates Disregard regs 30 June deadline for elections into Regs Default setting for derivatives is follow the accounts Can opt-in to old-gaap tax treatment - 30 June deadline Consultation on transfers of business regulations Reinsurance regulations Draft expected soon Loan relationships repeal of late paid interest rules 8 Corporation Tax

9 Tax on sold annuity income streams How the insurance company is taxed CORPORATION TAX PENSION BUSINESS Life assurance business is pension business if - it consists of the effecting or carrying out of contracts entered into for the purposes of a RPS, or is reinsurance of such business unless the pension scheme ceases to be a RPS as a result of withdrawal of registration [s58 FA 2012] CORPORATION TAX - LIFE INSURANCE BUSINESS includes the effecting or carrying out of contracts of insurance that are contracts to pay annuities on human life [s56 FA 2012, Part 2 Sch 1 FISMA (RA)O 2011] 9 Corporation Tax

10 Tax on sold annuity income streams How the purchasing company is taxed Open for consultation current proposal Not pension income If bought as a trading asset, taxed as part of that trade so follow GAAP accounts Otherwise, tax as miscellaneous income but how is this to be measured? Exemptions (e.g. for investment income of a pension fund) remain 10 Corporation Tax

11 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0)

12 Solvency II Tax: A mutual perspective Dan Gallon 16/06/2015

13 Agenda Solvency II: Where does tax fit in? Pillar 1: Economic Balance Sheet Pillar 1: Loss absorbency of deferred tax I-E Business Pillars 2 and KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

14 Solvency II: Where does tax fit in?

15 Solvency II: Where does tax fit in? Why is tax important? Tax can potentially reduce the SCR by a material amount Some mutuals are reducing their SCR thanks to the associated deferred tax asset Mutuals failing to maximise this opportunity may face a competitive disadvantage and disadvantage members Mutuals recognising a deferred tax asset need to provide evidence to the PRA of both tax logic and non-tax assumptions on future profits BUT valuation is judgemental and regulators look to be taking a cautious/prudent approach Before starting work on complicated methodologies consider whether the potential benefit justifies the effort Deferred tax assets can be a source of capital Deferred tax assets as a source of capital - appropriate action can convert Tier III to Tier I 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 15

16 Solvency II: Where does tax fit in? Why does deferred tax arise? Actual position Hypothetical post-stress position Tax base/ tax balance sheet IFRS or GAAP balance sheet SII economic balance sheet Poststress balance sheet DT on differences (if they are temporary) DT on differences For a mutual, what differences is DT required on? DT on differences, the loss absorbency of deferred tax (LADT) 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 16

17 Pillar 1: Economic Balance Sheet

18 Pillar 1: Economic Balance Sheet Why does deferred tax arise The economic balance sheet Similar to the UK GAAP balance sheet Different disclosure and valuation requirements IAS 12 is mandated temporary difference approach looking at Balance Sheet differences C.f. UK GAAP timing difference looking at P+L timing differences Key is to identify valuation differences and decide whether item is a temporary difference or not Temporary differences arise where if an item were settled at that value there would be tax on the difference to the tax basis Non-BLAGAB not taxed for mutual business - temporary differences only on BLAGAB share 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 18

19 Pillar 1: Economic Balance Sheet Example showing where deferred tax can arise Consider a mutual, taxed only on the I-E basis. (BLAGAB share of assets and liabilities). Asset/ liability UK GAAP (tax base) Solvency II Difference Temporary difference possible under I-E? Deferred tax asset / (liability) at 20% Bonds Yes (0) Derivatives Yes 1 Claims reserves/ BEL Risk margin No n/a No n/a 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 19

20 Pillar 1: Economic Balance Sheet Netting DTA and DTLs converts Tier III to I DTA Tier III Tier I DTL Capital DTA Tier III Tier I DTL Capital Assets Liability Net DTLs and DTAs Assets Liabilities Total capital available remains unchanged but more of it is Tier I. Important as there are restrictions on amount of Tier 3 capital KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 20

21 Pillar 1: Loss absorbency of deferred tax

22 Solvency II: Where does tax fit in? What is loss absorbency of deferred tax? Net assets 1 in 200 year loss SCR 100m Net assets SCR 80m DTAs 20m Net assets Simple example for a proprietary company Other net assets If deferred tax effects can be recognised in full SCR is reduced by 20% 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 22

23 Tax in Solvency II Supporting the LADT: How might shock losses be recovered? Simple example for a proprietary company Net assets/ own funds Capital requirement /shock effective tax rate = potential LADT Loan relationships / capital losses? Carry back tax loss Investment return on own funds New business /relax contract boundary Other group profits? Release risk margin? Management actions Gap minimised Hold bonds to maturity? Offset with DTLs Sensitive to modelling assumptions Post stress own funds Future Economic profit Increasing cost/increasing benefit 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23

24 Tax in Solvency II Profits from in-force business BEL on the SII economic balance sheet includes all cashflows However some items not in BEL - Investment yield on Own Funds IAS 12 mandates probable basis:- Differential between investment yield and unwind of discount on liabilities PRA consider this complex. What about matching adjustment? IAS 12 ED assessment of future taxable profit For proprietary companies, risk margin needs considering Contract boundaries differences mean cashflows not in BEL can be considered? Other BEL considerations: Interaction of tax in BEL and explicit DT balances Policyholder interest in DTAs unit pricing policy Impact of tax logic on BEL Can provide evidence to support DTAs? 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24

25 I-E Business

26 I-E Business Considerations Mutuals not taxed on trading result only I-E tax applies Not covered in PRA supervisory statement, SS 2/14 Post-2012 now far simpler to model and becoming increasing so as old protection and transitional run off Important considerations for I-E tax relief: Tax relief on asset shocks what proportion of SCR? Real world or risk free assumptions Net or gross yields Impact of I-E tax on asset shares and unit reserves do DTAs belong to policyholders? Differences between IAS 12 valuations and unit pricing policies Can DTAs mitigate cost of guarantees Tax allocations to WPFs / RFFs Tax relief can be much greater than 20% - example on next slide 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 26

27 Example The tax effect could be large relative to the SCR m Base Stress Assets 1, Liabilities 1, m Pre-tax capital requirement 50 I-E loss 200 Tax credit at 20% 40 Post-tax capital requirement 10 Guarantee bites But is the tax credit shared with policyholders (e.g. unit pricing policy)? 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 27

28 I-E Business Supporting a DTA Identify the drivers of the SCR Asset shock or liability increase? Do components of this lead to a tax loss? What type of asset? Bonds Equities OEICS/AUTs? Carryback rules differ Carry forward rules: Bond losses (taxed as loan relationships) flexible Equity-related capital losses can only shelter capital gains KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 28

29 Keeping focused on what matters What is material and what isn t? Where are the quick wins loss carryback and offset with DTL? Are capital losses useful? If not, focus on gilts and bonds. Is b/f XSE recognised in full on the current balance sheet? How important are market stresses, particularly interest rate stresses, to the SCR? Are there interest rate stresses which have a small capital impact but a large impact on asset valuations? I-E tax needs to be dealt with adequately in BEL models to avoid material errors in either the future I-E tax liabilities or policyholder liabilities included in BEL 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 29

30 Pillars 2 and 3

31 Pillars 2 and 3 Pillar 2 Tax and pillar II Tax risks Are there any tax exposures not reflected in the standard formula? Is there operational risk relating to operating tax processes not reflected in the standard formula? If so, could take ICA view or partial internal model view. Tax and pillar II tax on alternative basis Do you have measures of capital or capital requirements that differ from pillar I? If so, there will be incremental tax effects. Are you forecasting future balance sheets and/or future SCRs consider what LADT will be in future 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 31

32 Pillars 2 and 3 Pillar 3 Accelerated reporting timeframe Solvency II requires fast reporting quarterly reporting within 5 weeks! How long does it currently take to do a tax provisioning computation? Will this be a limiting step, constraining speed of reporting? What simplifications or automation are possible? Can DTA recoverability assessments be made ahead of year end? Is a Q3 or November roll forward possible? 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 32

33 Questions to go away with

34 Questions to go away with Questions to ask What is the % decrease to the SCR due to LADT? How does that compare to your local tax rate? If it is low, Is you capital requirement too high? Are you disadvantaging members? If it is high, What evidence do you have to support recoverability? How have you validated it? 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 34

35 Thank you Daniel Gallon Tax Senior Manager KPMG LLP 15 Canada Square Canary Wharf London E14 5GL UK Tel +44 (0)

36 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

37 AFM Tax Training Day VAT update John Brooks, LV= David Fownes, Deloitte 16 June 2015

38 VAT Update Agenda Special Investment Funds and VAT The Adecco case VAT treatment of supplies re temporary staff HMRC s revised guidance on Introducer Appointed Representatives ( IARs ) The ITC case making VAT claims outside the 4 year cap Partial exemption: current issues The BRE Ubezpieczenia case: CJEU reference on claims handling

39 Special Investment Funds and VAT 39 Before 1 October 2008 in the UK VAT exemption applied to the management of unit trusts, trust based schemes and oeics. Exemption based on the principle VAT Directive (now art 135(1)(g) 2006/112/EC): management of special investment funds as defined by the member state JP Morgan Claverhouse (C-363/05) challenged UK position ECJ held that member states must pay regard to the wording and objectives of the directive and to the principle of fiscal neutrality

40 Special Investment Funds and VAT 40 Member states cannot include / exclude different types of scheme without paying full regard to the directive and fiscal neutrality (equality of tax treatment between like organisations) Competing forms of SIFs must be given equal VAT treatment Wheels Common Investment Fund (C-424/11) tested the boundaries of what is a SIF Wheels defined benefit employee pension scheme Members did not bear investment risk Contributions into fund paid by the employer as contractual obligation to its employees

41 Special Investment Funds and VAT 41 ATP Pension Services (C-464/12) held management of defined contribution pension schemes exempt from VAT ATP provided administration services to pension providers Defined contribution pension schemes Contributions paid (directly or indirectly) by pension beneficiaries into pooled investments Investment spread over a range of securities Pension beneficiaries bear the investment risk

42 Special Investment Funds and VAT 42 HMRC Brief 44/2014 following ATP HMRC accept that pension funds which have all of the following characteristics are special investment funds: They are solely funded (directly or indirectly) by the pension customers who receive the retirement benefits. The pension customers bear the investment risk. The fund contains the pooled contributions of several pension customers. The risk borne by the pension customers is spread over a range of securities

43 Special Investment Funds and VAT 43 HMRC Brief 44/2014 Management means management as per Abbey II and GfBk tests ( specific to and essential for, intrinsically connected etc.) Can include advisory, information functions, administration and accounting services (e.g. computing fund income, unit pricing etc.) Not necessary to alter the fund s legal and financial position Does not apply to the management of non-pension funds into which contributions are paid unless that fund is a SIF in its own right e.g. an AUT or OEIC.

44 Special Investment Funds and VAT 44 ATP for Life? VAT exemptions for life business currently include policy administration and claims handling (subject to Arthur Andersen being implemented in the UK at some stage in the future) Pension fund management is a class of insurance business if carried out by a regulated insurer Management of insurance funds by a non-insurer is subject to VAT Can ATP apply to life funds?

45 Special Investment Funds and VAT 45 Can ATP apply to life funds? Not according to HMRC s brief But ATP s principal customer was a Danish life insurer HMRC are in ongoing discussions with the ABI on the implications of ATP for the life industry Issues: With profit funds which cover different classes of business, pensions, with profits life, whole of life; SIPPs.

46 Special Investment Funds and VAT 46 Can a property fund be a Special Investment Fund Yes according to the AG in Fiscale Eenheid X (C-595/13) referred by Dutch Supreme Court (no official English translation as yet available) The fund is a recognised collective investment scheme It is not essential that investment is spread over a range of securities Investment can be in a portfolio of property or even a single property Management includes the effective exploitation of the property asset AG s opinion may not be followed by the Court but is in about 80% of cases

47 VAT Update Adecco: Temporary Staff The long-awaited case on the VAT treatment of temporary staff was heard by Judge Barbara Mosedale in the First-tier Tribunal (FTT) from 11 to 15 May. Adecco s position: Once a candidate has been introduced, Adecco has no control over temporary workers during an assignment. Adecco s supply to the client can only be of introductory (finding, vetting and introducing) and ancillary (i.e. payroll) services. Consequently there is no supply of staff and VAT is chargeable on the margin only. This is similar to the Reed case in 2011, after which HMRC released R&CB 32/11 stating that, as a judgment of the FTT, the decision is only binding on the parties to the appeal and HMRC therefore does not regard Reed as having any wider impact We expect Mosedale J to deliver her decision later this year (possibly in the early Autumn). The four year clock for claims continues to run and protective claims should be submitted by suppliers to avoid VAT periods falling out of time. 47

48 Insurance VAT issues Introducer Appointed Representatives (IARs) IARs have limited permissions in respect of introductory services and as such HMRC do not believe they will meet the conditions for VAT exemption as insurance-related services In September 2014, HMRC issued guidance on IARs - VATINS5205. This (currently) makes the point that IARs are not subject to the full FCA regime that applies to the regulated activity of an Appointed Representative. The IAR is restricted to an introductory activity which does not go beyond selling leads. Therefore, HMRC state that they can t act as intermediaries for the purposes of the VAT exemption We understand the revised guidance will draw back slightly suggesting regulatory status is only an indicator but we expect HMRC to believe that IARs activity will generally be considered VATable 48

49 VAT Update Introducer Appointed Representatives (IARs) (cont.) What next for businesses? HMRC expected to be active in this area Current VAT treatment unlikely to be consistent across the market Regulatory issues if IARs have overstepped their permitted activities to gain VAT exemption (whether contractually or in practice) Check with your businesses - Are there IARs? - What VAT treatment is currently applied? - What does the VAT clause say? VAT risk assessment and/or move to AR status? 49

50 VAT Update Investment Trust Companies (ITCs) claims for VAT outside the 4 year cap The case concerns the right to recover overpaid VAT directly against HMRC (rather than the supplier) on the basis of the English law of restitution. Background facts: Following the CJEU judgment of JP Morgan Claverhouse, some fund managers made claims against HMRC to recover overpaid VAT. HMRC only paid the net amount of VAT originally paid to HMRC (output tax of 100 less the input tax of 25). A group of closed ended investment trust companies (the ITCs) brought a High Court restitution claim against HMRC claiming the balance (i.e. the input tax offset the 25). The Court of Appeal has held that the Claimants do not have a right to recover the difference between the net ( 75) and gross ( 100) amounts from HMRC. 50

51 VAT Update Investment Trust Companies (ITCs) claims for VAT outside the 4 year cap (cont.) However, a Claimant who has overpaid VAT to a supplier can make a claim in restitution against HMRC for the net amount in periods for which the supplier is out of time to submit a claim without the claim being restricted by the time limits in the VAT Act. The Court of Appeal has potentially given Claimants the ability to recover VAT for periods that previously were thought to be out of time. The case has been appealed to the UK Supreme Court. It is not an easy process but if amounts are large enough then worth considering a claim possible interaction with ATP type claims (or temporary staff claims). 51

52 VAT Update Partial Exemption Noticeable shift in HMRC s approach to agreeing a Partial Exemption Special Methods (PESMs) with businesses. In the investment sector of a life assurance company PESM, typically VAT recovery position will be determined by the level of non-eu transactions. Direct investment in property that is opted to tax can also allow for recovery of VAT incurred on related costs and proportion of overheads PESMs can be based on a variety of metrics. In relation to funds, methods proposed are typically based on either transaction values or transaction count. Which ever is proposed, HMRC will generally seek evidence that he proposed method is not distortive and will ask the business to demonstrate the alternative method is not more appropriate. HMRC now requiring a worked example to be submitted to accompany any request for a revised PESM. ATP presents opportunities for life companies to reconsider the values included in the residual pot calculation IFRS accounting maybe more readily acceptable. 52

53 VAT Update BRE Ubezpieczenia: claims handling The central issue in this case is whether the services outsourced under a claim handling and settlement agreement qualify as VAT exempt insurance services. BRE Ubezpieczenia is not an insurance agent but was authorised to act in the name of, and for the account of, an insurer. The question referred to the CJEU is: Are services which are supplied on behalf of an insurance undertaking by a third party in the name and on behalf of the insurer which has no legal relationship with the insured person, covered by the exemption? The decision could have wide ranging implications for the insurance industry. The UK s VAT exemption for insurance services may (eventually) be narrowed in line with the Andersen s decision (debatable). The result of this case could potentially bring forward a review of the UK VAT law for insurance services involving a further restriction of the exemption. In VAT technical terms, the life industry is better placed than the general insurance industry for dealing with significant changes in this area other exemptions should be available (see ATP). 53

54 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0)

55 Tax implications of the April 2015 pension tax changes June 2015 Tim Sexton

56 Agenda Summary of the changes at April 2015 Issues for providers Do you offer the full range of flexibilities? PAYE issues What do customers say they want? Summary Tax implications of pensions reform PwC June

57 Summary of the main changes From 6 April 2015 Tax implications of pensions reform PwC June

58 Defined Contribution retirement benefits Two new retirement options (up to the lifetime allowance) Flexi-access drawdown o No minimum income requirement o Not capped by Government Actuary s Tables Uncrystallised Funds Pension Lump Sum ( UFPLS ) o Ad hoc lump sums o Each lump sum split: 25% tax-free and 75% taxed Can also still buy an annuity Capped drawdown may continue if individual was in capped drawdown as at 5 April 2015 Tax implications of pensions reform PwC June

59 Flexi-access drawdown versus UFPLS Timing of distribution Flexi-access Can keep crystallised funds in pension scheme UFPLS Immediate full distribution of amount chosen Timing of tax When draw funds Immediately Tax-free cash Reduced 10k Money Purchase Annual Allowance? Separate 25% lump sum at time of crystallising benefit: No tax-free cash when draw from drawdown fund Triggered when draw any taxable funds from drawdown fund 25% tax-free element built in to UFPLS. (No entitlement to separate 25% tax-free cash sum) Yes Tax implications of pensions reform PwC June

60 Money Purchase Annual Allowance ( 10,000) Anti-avoidance provision Applies if an individual takes any UFPLS or any taxed benefits from a flexi-access drawdown fund Normal AA of 40,000 still applies but individual also subject to a tighter 10,000 Money Purchase Annual Allowance Only affects contributions to DC arrangements Applies from trigger event date Providers must give information to the member if the individual takes any benefits that would trigger the lower limit applying Tax implications of pensions reform PwC June

61 Death Benefits Death under age 75 DC funds, whether crystallised or uncrystallised can pass to beneficiaries who may receive it without any income tax Beneficiaries may keep funds in the pension scheme, subject to the scheme s own rules Death over age 75 DC funds may pass to beneficiaries who will be taxed on the proceeds 45% tax for 2015/16 if take benefits as a lump sum Beneficiary s marginal rate of tax for 2015/16 if taken as pension From April 2016, for both pension and lump sum benefits, taxed at marginal tax rate of beneficiary Tax implications of pensions reform PwC June

62 Transfers between pension schemes Transfers from one DC scheme to another DC scheme are unaffected Transfers from funded DB schemes to DC schemes now require full regulated financial advice Exception is safeguarded benefits that are worth less than 30,000 Transfers from unfunded public sector DB schemes to DC schemes are no longer allowed Tax implications of pensions reform PwC June

63 Second hand market in annuities Consultation on whether annuity holders could sell their annuities for a cash sum Consultation closes 18 June 2015 Details not clear at this stage Tax implications of pensions reform PwC June

64 Issues for providers Do you offer the full range of flexibilities? PAYE issues Tax implications of pensions reform PwC June

65 Do you offer all the new flexibilities? It is optional whether providers offer all the new flexibilities Do you want to offer some or all of these new options? Who is your target market? Low-cost and straightforward or full service? Cost and complexity of offering different choices? Need to provide information, support and guidance to customers Obligation to signpost the government s Pension Wise service Tax implications of pensions reform PwC June

66 PAYE on death cases Need processes to determine the correct tax due based on member s age at death Future payments of death benefits to beneficiaries may occur some time after the member s death, but should be non-taxable payments if the member died under age 75 Not reported through RTI if whole payment is non-taxable Reported through RTI if partially taxable (e.g. combined with another taxable payment) The same benefits paid to beneficiaries where the member died age 75 or over would be taxable Based on member s age at death not the beneficiaries ages Tax implications of pensions reform PwC June

67 The PAYE trap for some lump sum customers: 1 Customers taking one-off taxable lump sum benefits likely to have PAYE different from the actual tax liability If the pension provider has a valid PAYE code for the individual then use that PAYE code If not, then use the emergency code 1060L on a Month 1 basis Effectively assumes regular monthly payments of this amount Over withholds in many cases Might under withhold where no personal allowance due Tax implications of pensions reform PwC June

68 The PAYE trap for some lump sum customers: 2 Customers possibly surprised and unhappy at tax withheld Communications challenge for the pension provider Some customers may reclaim from HRMC the extra tax withheld Three different forms P50Z :- taken whole pension pot and have no other income P53Z :- taken whole pension pot and have other taxable income P55 :- taken part of their funds and will not take any more this tax year Tax implications of pensions reform PwC June

69 The PAYE traps for some providers Timing problems for providers in processing ad hoc withdrawal requests around the tax year-end - In which tax year does the payment fall and who is liable if the payment falls into the subsequent tax year? If customer asks for some funds do they know the net amount receivable? - Customer needs 1,500 to pay for medical costs, how much should the customer request from the scheme? Tax implications of pensions reform PwC June

70 What do customers say they want? PwC survey of 1,200 consumers age Tax implications of pensions reform PwC June

71 What do consumers mention as important factors when deciding how to manage their pension pot? PwC survey of 1,200 consumers age Most commonly mentioned factors, in order: 1. Certainty of income 2. Tax efficiency 3. Own life expectancy Income that is certain and will last a lifetime suggests an annuity as being a suitable product? Tax implications of pensions reform PwC June

72 What do consumers say they will do with their pension pot? PwC survey of 1,200 consumers age % 32% 28% 27% 1% Would draw an income from a drawdown product Plan to invest some of their money. Of these Would purchase an annuity Plan to spend some of it money Of these 39% want to use an online platform 17% would look to invest via an IFA 74% would use it partly for general expenditure 70% would treat themselves with part of it 22% would pay off mortgage / home improvements or pay off unsecured debt Multiple responses allowed, so totals exceed 100% Only 1% of all respondents would exclusively spend all their pension pot on treating themselves. Tax implications of pensions reform PwC June

73 Summary Tax implications of pensions reform PwC June

74 Tax changes from 6 April 2015 Full flexibility around income drawdown No minimum income required (flexi-access drawdown) New Uncrystallised Funds Pension Lump Sum (UFPLS) New 10,000 money purchase annual allowance Applies when take taxed part of a flexi-access fund or UFPLS New tax rules on death benefits Broadly no tax if member dies under age 75 Tax implications of pensions reform PwC June

75 The market Market is still developing: What products would your customers want? What products should you provide? - Customer choices versus cost and complexity What are the tax and tax administration requirements for those products? - New tax rules on benefits for death under age 75 Communications to customers about tax and tax withholding rules - Need accurate clear messages for customer-facing staff Tax implications of pensions reform PwC June

76 Summary The change is more subtle than the newspaper headlines may suggest - Less about freedom not to buy annuities (this existed already) - More about the perception of the normal way to take benefits Simplification is complex - The devil is in the detail and may not be obvious - Anti-avoidance rules (e.g. the lower 10k AA) add to the complexity Will the consumers want the full freedoms (and complexity)? Will there be pressure (or legal compulsion) on providers if too few offer a sufficient range of products? Tax implications of pensions reform PwC June

77 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

78 June 2015 Pension Reform April 2015 PAYE & RTI Implications

79 Pension Reform Background Members will be considered as flexibly accessing their pension if they receive any of the following on or after 6 April 2015: A payment from a flexi-access drawdown fund An uncrystallised funds pension lump sum (UFPLS) A payment under a flexible annuity contract Pay As You Earn (PAYE) should be applied to these payments Where the fund is not extinguished with the first payment it will be treated as an ongoing PAYE source KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the United Kingdom. 79

80 Operation of PAYE & Interaction with Real Time Information (RTI) Requirement to operate PAYE on taxable pension withdrawals Real Time Information requirements must be complied with including Full Payment Submissions (FPS) to be submitted on or before the date of payment PAYE reference and Accounts Office reference needed from HMRC Payments of tax due should be made by 19th/22nd following the end of the tax month 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the United Kingdom. 80

81 Operation of PAYE & Interaction with Real Time Information (RTI) Applying the correct tax code If it is the first payment to the member, operate the Emergency Tax Code on a Month 1 basis If you hold a form P45 for the current tax year the specific code may be applied, however, this should not include any year to date figures HMRC will then issue a tax code to operate against future payments. The new tax code should correct the member s tax position if subsequent withdrawals are made within the tax year If you hold a form P45 from a previous tax year for a member, operate the Emergency Tax code on a Month 1 basis. Where a member makes two withdrawals within the same tax period, the second withdrawal should be taxed on the Emergency Tax Code on a Month 1 basis Once the funds in the scheme are depleted, you should issue a P KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the United Kingdom. 81

82 Operation of PAYE & Interaction with Real Time Information (RTI) In Year Refunds Where pension funds have extinguished: Where a members fund is extinguished, you should enter an end date on the FPS and issue a form P45. This will enable the member to claim any tax refund that might be due in-year To claim a refund, the member will need to send HMRC their P45, along with 1 of 2 new forms: a P50Z if they have no other PAYE or pension income (other than the state pension) and a P53Z if they have other employments or pensions Where member has pension remaining: Where a members fund is not depleted and: they do not intend to make another withdrawal in the tax year, and the pension provider is unable to make a refund Members can apply for a refund by completing a new P55 form and sending it to HMRC so that their tax can be calculated and any repayment made KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the United Kingdom. 82

83 Pension Reforms in Operation PAYE and Self-Assessment PAYE Operation Member has pension pot of 200,000 and want to withdraw 80,000. Initial Withdrawal Amount PAYE Due (1060L Month 1) Net to Member 200, x 25% 50,000 30, ,345 17,654 67,654 The member decided to make no other withdrawals in the tax year and had no other income. Self Assessment Total Taxable Income for 15/16 Tax Year 30,000 Personal Allowance 10,600 The tax already deducted at source needs to be compared to what is due on 30, the complete tax year Tax Due via self assessment 3,878 Tax already deducted at source 12,345 Tax refund ( 8,467) 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the United Kingdom. 83

84 2015 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

85 AFM TAX TRAINING DAY Hosted by Deloitte 16 June 2015