A tax on a tax

VAT

Yesterday I wrote about the various Government interventions that employers in the UK have had to cope with. My point was that the employer is increasingly being used as the unpaid agent of the welfare state.

Auto-enrolment is one case in point. Employers are expected to comply with detailed rules and threatened with fines for non-compliance. The purpose of the rules is to require employers to pay money on their behalf and on behalf of their staff , into workplace pensions. There is no direct benefit of these pensions to employers, on the face of it , this is an employer tax – an extension of NI.

In his Quinquennial Review of the National Insurance Fund, the Government Actuary made a direct link between the success of auto-enrolment and the strain on Government Finances. He tells us that by 2020, the success of auto-enrolment should allow Government to reduce the benefit of state pensions. So auto-enrolment is a means of reducing public expenditure, a means of taxing people and companies to pay their own pension rather than being dependent on general taxation.

While there is an obvious reason to comply with the auto-enrolment legislation. IT IS THE LAW (as the Pension Regulator is keen to remind us), there is little incentive for an employer to choose the right pension. Unless the business owner is a beneficiary of the auto-enrolment workplace pension , any money spent on ensuring good outcomes from the workplace pension chosen, is altruistic.

Despite this, many employers do choose to spend time and money on getting the right workplace pension for their staff. They should be regarded as heroes by a Government for whom the long-term success of this policy lies not in compliance with auto-enrolment regulations but in the success of the pension schemes in improving living standards.

Put simply, if these workplace pensions don’t work, then national insurance rates will go up.


It would make sense to reward small employers who spend money researching and documenting their research into the workplace pension generations of staff will rely on.

But this voluntary act of due diligence by an employer is not rewarded – it is taxed!

Incredible as it might seem, in the context of the strain being placed on employers, employers are being required to pay VAT on advice and guidance they receive in selecting their workplace pension.

This is despite the purchase of insurance products being zero-rated.

The problem is that whereas advice on pure insurance products (such as fully insured GPPs ) is zero rated, advice on non-insured products including the NEST Master trust, is not exempted.

So any kind of whole of market advice carries a VAT charge of 20%.


For medium sized companies, even for most SMEs, this should not be a problem- they are registered for VAT and can reclaim the VAT they pay. But there are many employers who are recognised as charities who are not able to claim back VAT and many micro and Nano employers whose turnover is below the VAT exempt rate (£68,000) who will have to set up a workplace pension but who will have to pay un reclaimable VAT do it properly.

I have been warning about this problem for some time . The problem is likely to increase as the number of employers being born soars. According to ONS , the number of new businesses borne has exceed those dying each year since 2011, even the ONS cannot get accurate data on how many of the 2.5m business enterprises active last year are VAT registered (they currently have an information request out on this).


 

This is something that should be addressed by each political party’s election manifesto. We cannot tax small business 20% on an activity which is generating them no money and is effectively subsidising another department of Government (HMRC +DWP).

Each party should consider its position on this and should take steps to ease the business burden of Auto-Enrolment on small and vulnerable employers. This does not mean dumbing AE down (let alone scrapping it for micros as has been mooted in far right circles). It does mean finding a way to let smaller firms buy advice and guidance on their workplace pensions without paying VAT.

I believe that this advice and guidance should be regulated by the Pension Regulator (not at this stage by the FCA) and that the regulation should be proportionate to the needs of this market. That does not mean that SMEs and micros should be regarded as retail consumers, but they should certainly be accepted as a new class of customer which needs a different kind of assistance than the larger employer (for who there is a well established advisory market).


I would be very happy to pick up the phone to any politician or researcher wanting to get help on this. I suspect that if this matter is not looked at now, it will be looked at too late. The rush of employers staging in 2016, need to do their homework in 2015 and we need help on this matter in either the 2015 budget of 2015 autumn statement.

The alternative will be rushed and fudged legislation on the hoof as the problems outlined in this blog hit home.

 

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to A tax on a tax

  1. Con Keating says:

    Henry There is a simple generic problem here. A complete absence of incentives or reasons beyond the law for employers to offer pensions as part of employee compensation. What we see also takes no account of the varying forms that the labour input to a company may take.

  2. David says:

    To keep feeding the pension skim schemes and through that process, the ponzi financial system, is the only reason we have auto-enrolment.
    When the extra savings are made available for any use for the benefits of employees, from compound cash ISA savings for retirement, or accelerated mortgage repayments, or anything in between, then we could say otherwise.

    It’s nice to see pension being deregulated at one end, but the input of funds for long-term saving for later life are still very limited for peoples life time needs of savings flexibility and spending.

    If the government truly wants people to be increasingly responsible for their futures, through ring-fenced employer subsidies, then they should be heavily deregulated at both ends, not just one.

  3. henry tapper says:

    I agree that there is too much carrot and not enough stick. The Government has done nothing to address the problem of employers being poor purchasers, except tighten up the qualifying criteria for workplace pensions from 2015, this will reduce the number of bad workplace pensions going forward and should take spruce up some of the toxic pensions out there today, but it will not make employers smart purchasers.

    If we consider the employer the new fiduciary, then they need to engage, get educated and to be empowered.

    I suspect that David’s “skim schemes” are the workplace pensions in question. I can’t see any way of doing funded pensions without skimming- the alternative is an unfunded system (which I know Con would prefer!).
    I have to deal with what we’ve got and make the skim schemes “low-fat”!

    • Con Keating says:

      I think that two distinct elements are being confounded here – one is the question of low-fat and that is clearly relevant and one of the principal reasons behind the calls for fund manager transparency. But separately there is the question for the employer – given a choice of paying cash wages or the equivalent into a pension scheme, then absent any incentive, the employer should be expected to expend the minimum of time and effort as this is costly to them.

  4. David says:

    I agree it’s somewhat disingenuous to call low-fat skim schemes a root of the problems. People need to be paid to do work.

    But I think pension providers could and should do a lot more on behalf of those saving through them to account for their AMC or other charges.

    Choice and flexibility is arriving slowly. The last decade has seen huge sea changes.

    8 years ago I had to write a letter to my pension provider to alter my investments, now I can do it on-line. However they still charge a 1% AMC and a 5% fund swap charge.

    It’s still a long way from being anywhere near as flexible as a stock/shares ISA.

    Or even just finding a nice cash ISA with a lock-in high return could out-perform many pension funds, and have near zero fees, elevating the overall performance higher still.

    While pensions lose out on flexibility and costs, and possibly performance, vs a simple cash/stock ISA, it suggests we still have a long way to go for the consumer.

  5. mark coomber says:

    David, the lower level of flexibility (by which I assume you mean in the main access being restricted to age 55+) in a pension plans/schemes is the ‘price paid’ by the member for (a) the up-front the income tax relief received on the contributions, (b) IHT-exemption of the accrued value. These being the two main differences when compared to ISA’s.

    This and the fact that pension plans/schemes are supposed to be a longer-term savings vehicle for retirement…..and not an open ‘pot’ to dip into when you spent too much at Xmas, or want a holiday/new car/TV etc

    BTW, your own old pension plan’s terms (ie 1% AMC & 5% fund switch charge) are as set out in the contract terms you agreed with them many years ago when modern-day IT wasn’t available to either them or you. But now it is. But the terms of the old contract still stand (there was nothing in them that stated they would reduce them if IT in 20 years time would reduce their operating costs).

    If you don’t like the costs then do something about it such as switching it to a modern pension plan with corresponding lower AMC’s etc.

    The same goes for anything else you currently pay for such as your mortgages, car insurance, gas, electricity etc….which I bet you do review and take action with. If so, then why not your pension?

    It beggars belief why some people don’t take responsibility for what is arguably one of their biggest assets in their existing pension plans.

    Of course, pension providers are not going to voluntarily vary downwards the charges associated with old-style plans since they are commercial businesses, not charities. They may even be companies that your own pension fund invests in(!)

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