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Back to square one

Archive for August, 2014

Back to square one

Friday, August 15th, 2014

The latest figures from the Office of National Statistics (ONS) show that the economy is finally breaking new ground.

Graph3The graph appears to say it all. Adjusted for inflation, the UK economy has at last outgrown the peak established in the first quarter of 2008. The Government hailed the figures as proof their policies were working, while others pointed to the six wasted years since the crash took hold. Either way, it was a very slow recovery (25 quarters) from a very deep recession (7.2% peak to trough). As the Office for National Statistics points out, even the impact of the 1979-1981 recession (5.9% peak to trough) was overtaken after 16 quarters.

Dig a little deeper into the numbers and the recovery has not taken the form hoped for by the Government and Bank of England. For all the talk of re-balancing the economy, it is the service sector which has driven the recovery. That sector is now 3% larger than in the first quarter of 2008, while the other three main sectors have all shrunk. Both the construction and production sectors are still over 10% smaller than six years ago.

The wrong type of growth is, as any politician will tell you, better than no growth. However, the weakness of the production and construction sectors – the latter fell 0.5% in the second quarter of 2014 – will weigh on the Bank of England as it moves ever nearer the point when it raises interest rates.

Good for holidays, less good for investments

Wednesday, August 13th, 2014

The strength of the pound is showing up in welcome and unwelcome ways.

If you were heading off to Europe a year ago on holiday, you would have been offered, as a tourist, an exchange rate of around €1.115 for each pound. This year the rate as at the end of July was about €1.235, an increase of nearly 11%. Eurozone annual inflation is running at just 0.5%, so you are gaining more than 10% in purchasing power. It is a similar story if your destination is the USA, where last year’s $1.48 to the pound is now around $1.655.

The robust performance of the pound is quite a recent event and needs to be set against the sharp fall which the Bank of England allowed to happen during the financial crisis, as the graph below brutally demonstrates.

US$ v UK£


The recovery of sterling may now be making holidays less costly, but it is having a less pleasant impact on investors:

  • UK companies are facing tougher competition abroad for their exports and, at home, more pricing pressure from imports.
  • The profits those companies make overseas – whether as exports or in foreign subsidiaries – are being lost in translation. Last year’s $1m was worth about £660,000, but now it is just over £590,000.
  • Dividends are being hit. Partly this is because of the profits impact, but it is also because many of the UK’s largest companies use the dollar as a base for their accounting and dividend payments rather than sterling.  For example, HSBC paid 10 cent interim in July 2013 and July 2014. For UK investors, the sterling dividend fell from 6.58p to 5.88p.

While the multinationals are suffering, smaller UK companies with a focus on consumer services are doing well, thanks to the recovering economy and much less foreign competition. Managers of UK equity income funds are therefore having to look beyond the big FTSE 100 names if they want to increase the dividend payments to their investors.


Next year’s pension reforms

Monday, August 11th, 2014

pension-clock-red-text-31707942The Government has set out further thoughts on what pensions will look like from next April.

The Chancellor’s Budget bombshell of pension reform was accompanied by a consultation document setting out his broad proposals for industry comment. The consultation period ended in early June and in mid-July the Government issued its response. There were few surprises, but some tweaks of note:

  • As expected, there will be measures to prevent the new flexibility being used to prove tax-efficient remuneration. Broadly speaking, if you draw more than the tax-free lump sum from your defined contribution pension scheme, your scope for further contributions to such schemes will fall from £40,000 per tax year to £10,000.
  •  The Government has abandoned the idea of outlawing transfers from private sector defined benefit schemes (e.g. final salary schemes) to defined contribution arrangements. However, it will require anyone wishing to undertake such a transfer to first obtain professional advice. Transfers from public sector defined benefit schemes will not be possible unless the scheme is funded – a rarity outside local Government.
  • Guidance – not independent advice – will have to be offered when benefits are drawn. The Treasury will initially design and implement this, with guidance primarily coming from two existing bodies, the Pensions Advisory Service and the Money Advice Service. Product providers will not be involved in supplying the guidance, but they will have to meet part of its cost. Concerns remain about how effective this will be given the short timescale and potential demand.
  • The minimum age for drawing benefits will generally rise to 57 in 2028, with further increases thereafter in line with state pension age thereafter, maintaining a gap of 10 years.
  •  The 55% tax charge on drawdown funds payable on death will change, but the Government coyly says “any changes have the potential for unforeseen and unintended consequences” and so deferred announcing its decision until the Autumn Statement, which probably means early December.

A still clearer outline of the changes should emerge this month as the Government has promised draft legislation for technical consultation.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change.


HMRC Take aim at the users of nearly 1,200 tax avoidance schemes

Thursday, August 7th, 2014

taxmanHMRC have published a list of tax avoidance schemes for which it wants up-front tax payments.

Two days before the Finance Bill became the Finance Act, the obviously eager HMRC issued a list of nearly 1,200 tax avoidance schemes. Frustratingly the list consisted only of the scheme reference numbers (SRNs), given under the Disclosure of Tax Avoidance Scheme (DOTAS) legislation, so there were none of the exotic names which have been making headlines in some of the national press.

Starting in August, HMRC intend to spend about 20 months using ‘accelerated payment’ powers given to them by the Finance Act 2014 to systematically ask the schemes’ users to pay the tax they thought had been avoided within 90 days. HMRC say that there are approximately 33,000 individual taxpayers and 10,000 companies involved, with over £7bn of revenue at stake. HMRC have given no indication how they will progress through their long list, although some of the schemes could date back to 2004, when DOTAS was introduced.

Shortly after publishing the DOTAS list, HMRC issued a press release claiming that their High Net Worth Unit had brought in £1bn in “compliance yield”. The Unit, established in 2009, deals with the tax affairs of “the 6,200 wealthiest customers” of HMRC, each with net worth of £20m or more. It seems likely that a fair few of those special customers (sic) will have more opportunities to chat with their HMRC ‘relationship manager’ once the DOTAS list letters roll out begins.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.