Carrot and Stick – What the Spring Statement Means for HNW Taxpayers

There was a time when the start of Spring was heralded by the Chancellor’s Budget, a major political and economic event.  

These days the Chancellor offers two Budget statements – one in Autumn and the other in Spring, with the former containing all the major policy announcements and tax changes. The March event has been consequently downgraded, with even the Chancellor (Philip Hammond) feeling the need to stress that it is not a ‘Budget’ in the old sense.  

And this year the media coverage was relatively muted. If you relied on the main news bulletins for information, the big takeaway was the Chancellor’s view that the economy has turned a corner and that this year’s growth figures are expected to come in a little stronger than expected.

But as always, the devil is in the detail and the Chancellor signal more about the Government’s direction of travel, particularly in areas such as measures to encourage investment and tax policy.

Dividend Tax Exemption

The Government’s commitment to the Enterprise Investment Scheme is not in doubt, but there is concern among policy makers that too little capital if finding its way to potentially fast-growth technology companies that require investment support over the longer term.

Following on from the Government’s Patient Capital Review, the Chancellor outlined plans to offer tax relief on dividends to investors who ‘stay loyal’ to knowledge intensive companies.

As outlined in the Spring Statement, the dividend tax exemption will (assuming the plan is implemented) be applied in respect of investments made through a knowledge intensive fund. The exemption could last between five to seven years.

The aim is, of course, to incentivise investment, and it may prove attractive to those who are seeking not only capital gains (ultimately) but also income. It may, however, have little impact the investment plans of those who prioritise capital gains.

Tax Crackdown

If the prospective EIS changes represent a tax carrot, then a further crackdown on tax avoidance underlines that the Government – under pressure from many sides – is also prepared to carry and use a big stick.

For instance, the Spring Statement announced plans for a consultation on a possible extension to the time limits that currently apply to HMRC investigations into allegations or suspicions of tax law non-compliance via offshore trusts.  At present, the tax authorities are able to look back over the tax affairs of individuals to a maximum of six years. The consultation will look at extending that to twelve. That assumes there was no deliberate tax avoidance on the part of the individual. However, in cases where deliberate non-compliance is suspected, the time limit is already twenty years.   

As the statement made clear, these changes will put pressure on individuals to regularly review their tax affairs to ensure they remain compliant. Failure to do so risks a tax investigation that could stretch back many years, with all the associated  personal disruption. Meanwhile, designers of offshore schemes will have to notify HMRC.

Elsewhere in the statement, the Chancellor announced plans to encourage more use of digital payments as a means to prevent money laundering and there was also a promise to streamline and improve the VAT collection system.

Planning  and Review a Priority

Taken in the context of broader tax policy direction, the measures proposed or announced in Spring Statement underline the importance to individuals of ensuring that their tax affairs comply with both the letter and the spirit of the law. And to do that. it is necessary, not only to be up to speed with any regulatory and legal changes but also be attuned to HMRC’s thinking in terms of what it considers to be overly aggressive tax planning.   

Investors have a separate and arguably much more benign challenge as regards EIS. The Enterprise Investment Scheme has driven a huge amount of investor activity in the UK. So much so that it has been criticised in some quarters for skewing the market. Investors, it is sometimes said, are choosing a particular opportunity because it attracts EIS relief rather than because of its potential. The Government is committed to maintaining EIS but the rules are being tweaked. This will in turn mean that investors will have to look at their down decision making.  

In matters of both tax and investment strategy, The Route – City wealth club offers Members expert advice and regular reviews of their affairs. As policy changes, The Route is on hand to help members navigate the implications. The Route will help its Members maximise the return from investments according to their stated goals while also ensuring that they pay the right amount of tax, but no more.  

To find out more call: 020 3141 9040