BR Report 2019

Compliance Considerations Market Update / Thought Leadership 16 17 SMCR REMINDER The new Senior Managers & Certification Regime rules will be implemented in December 2019 and will replace accountability rules for advisers under the FCA’s current Approved Persons Regime. If you haven’t started to prepare for the transition, it’s worth doing so sooner rather than later. Key points to consider for advisory firms: The rules can be found in Policy Statement 18/14 (which needs to be read with PS18/15). These are not final, but are thought to be largely as they will be at implementation. Advisory firms or IFAs who are appointed representatives will fall outside the regime and remain within the current approved persons regime. Most directly authorised advisory firms or IFAs will be classified as core firms, but you can check which category of rules applies to you at: https://www.fca.org.uk/decision-tree/firm- checker-tool. Firms need to identify which senior managers are responsible for every area/activity/function of the firm. Approved senior managers will need to complete (and file with the FCA) a new regulatory form called a Statement of Responsibilities, including a full description of the areas for which they are accountable. Senior managers will have a new statutory duty of responsibility in relation to all of their areas of accountability within the firm. The FCA is placing much more emphasis on evidencing the reasonable steps taken by each senior manager to discharge their responsibilities. So record-keeping is key. All qualified financial advisers in firms will need to be certified by the firm to confirm that they are fit and proper to provide investment advice before they start giving advice and each year thereafter. One (ideally) senior manager must be allocated the responsibility for the certification of adviser. Market Update / BR within the IHT context KID update In last year’s BR report we pointed out that KIDs are not generally required for BR products, but some providers may have produced one. Since the inception of KIDs, there have been concerns about the clarity of the regulation, which has led to inconsistencies in the way KIDs are drafted. In February 2019, a Joint European Supervisory Authorities (ESA) supervisory statement concerning the performance scenarios in the PRIIPs KID was issued. It stated that, “the performance scenarios could, based on the recent economic environment, provide an overly positive outlook for potential future returns if they are taken to be best estimate forecasts”. Consequently, the ESA recommended that providers with PRIIPs regulated products add to the KID, under the heading of “Performance scenarios” within the section “What are the risks and what could I get in return”, an additional warning that: “Market developments in the future cannot be accurately predicted. The scenarios shown are only an indication of some of the possible outcomes based on recent returns. Actual returns could be lower.” Last year’s BR report looked at two cases where HMRC contested the availability of BR. In the first case HMRC successfully defeated a claim for BR at the tax tribunal (Ross v HMRC) whilst, in the other, the taxpayer was successful (Vigne v HMRC). Since then, HMRC has appealed the Vigne decision and there has been another important BR case decided by the tax tribunal. First a recap. For a BR claim to succeed, a business must be wholly or mainly trading. In the world of property, there exists a spectrum of business types, ranging from a fully serviced hotel at one end (which would without question be trading) to long-term property lets with a passive landlord at the other (which would be treated as an investment). Cases therefore often turn on where exactly a particular business falls on that spectrum. The trend in recent years has been for HMRC and the tribunal to require a very high level of additional services over and above simple property letting in order to qualify for BR. It was against that background that the successful BR claim in Vigne last year came as a pleasant (for taxpayers at least) surprise. VIGNE V HMRC APPEAL, 2018 It was therefore not surprising when in HMRC v Vigne, HMRC appealed against the first decision that the Vigne family horse livery business was trading. HMRC argued that it was mainly an investment business. However, for technical reasons, HMRC were only able to appeal on narrow grounds and they lost the appeal. Interestingly, the appeal tribunal hinted that they were not sure that the original decision was the correct one, but it allowed the appeal nonetheless based on the limited grounds for appeal that it could consider. GRAHAM V HMRC, 2018 The second case (Graham v HMRC) saw another taxpayer successfully securing BR, but on a very different type of business. This business involved a holiday complex on the Isles of Scilly. There were four flats or cottages, together with a couple of guest bedrooms, and critically, there was a long list of additional services that went well beyond those provided in a simple property let. They included a swimming pool, sauna, BBQ, games area, a laundry, a golf buggy available for hire, a welcome pack, an exceptional garden, and extensive help and guidance from the owners to assist people through their stays. Because of the exceptionally high level of services offered, the judge concluded that the additional services predominated over the basic letting activity and, as a result, concluded that the business fell just on the right side of the line to qualify as trading for BR. Both Vigne and Graham are unusual in different ways. In Vigne, the case was argued by the deceased’s son, without professional representation in the court. As a result, it is possible that the tribunal was more sympathetic to the case than it might otherwise have been. In Graham, the level of services offered was exceptional, and therefore, unusual but the fact the case was won by the taxpayer confirms that BR for businesses of this sort remains a possibility. Tom Hewitt Partner, Burges Salmon LLP “Inheritance tax planning often forms a key component of a financial adviser’s proposition and therefore having access to attractive Business Relief qualifying opportunities should be an important part of a diversified approach.” — ANDREW ALDRIDGE, PARTNER, HEAD OF MARKETING, DEEPBRIDGE CAPITAL