Philippa Kelly
Hello and welcome to the ICAEW Insights podcast, where we analyse the latest news from the world of accountancy, business and finance. I'm your host, Philippa Kelly, Director of Financial Services at ICAEW. This episode, we're talking about the implications of the war in Ukraine and the recent Spring Statement. I'm joined by solicitor and serious crime specialist Matt Corn, and Frank Haskew, ICAEW’s Head of Taxation Strategy. First, we tend to the effects of the war in Ukraine, and in particular, the continuing implications for professionals. We have all been horrified at the events that have unfolded following the start of war in Ukraine in late February 2022. The Russian invasion has and will continue to have profound humanitarian effects. Individuals and businesses have been keen to mobilise support for the Ukrainian people, whether it be to assist in the safety of staff and their families or supporting aid efforts. However, we must ask ourselves whether professionals are, and have been, doing enough. New sanctions continue to be imposed, and some institutions and businesses have gone beyond requirements to sever relationships or links with Russia entirely. I'm very pleased to be joined by Matt to consider where we are and what comes next. Matt, welcome to ICAEW Insights.
Matt Corn
Thank you very much.
Philippa Kelly
Matt, since the start of the Ukraine war, the commentary around financial crime has increased. Can you explain what's been going on and why it's suddenly so topical?
Matt Corn
There are two issues really, for the government. Obviously, there's the political level, which is to punish Russia, and obviously the other side of it is to look at bringing forward something they already had planned in the first place, which is to look at recovering what they deemed to be laundered money effectively. Obviously, the latter aim is something that we can speak about today, obviously in a bit more detail. In particular, you'll be aware, very current, is the government's resumption to rush through what was the Economic Crime Bill, which is now an Act of Parliament. They've done that quickly, it was unopposed, I believe, and it is now an Act of Parliament – the idea being to make it easier for law enforcement agencies such as the National Crime Agency to recover assets that they feel have been effectively laundering the proceeds of overseas crime in the UK. So that's really where they are up to. I'll go on in a bit to perhaps talk a little bit more about the Economic Crime Bill itself, but that's why it's so topical, it's been sort of the springboard to get the government to really act upon something that they, I think initially, thought about earlier in the year. It was put on the back burner, somewhat, but obviously the turning point was the invasion, and they felt that aside from the political job they have to do, this is a good time for them to implement this. I think that's where we're at currently.
Philippa Kelly
So, as you said, we have new law, but also some new guidelines. So, the Financial Action Task Force announced new guidelines this month, and lawyers and activists say the Economic Crime Bill could have a significant impact in tracking down Russian assets covered by Western sanctions. What exactly does the Bill involve? And how does it differ to what is already in place?
Matt Corn
Well, what we already have in place is something really that's known as the Proceeds of Crime Act. That’s been enforced since the Blair government of 2002, which was really aimed at confiscating the ill-gotten gains, if you like, of criminals, predominantly in the UK. There was an existing framework of confiscation of assets, post-conviction or forfeiture – forfeiture of seized cash, that sort of thing – there were also specific money-laundering offences that were introduced under that Act, such as converting or transferring or possessing criminal property. They then develop matters a little bit further and you had Unexplained Wealth Orders and things like that. But I think this new Economic Bill is intended to go quite a bit further. They're looking now, you know, at insuring entities, if you like. Foreign companies and entities are now required to register properly who the beneficial owners are. I think the government feel that for many years, money has been channelled into the UK, and particularly the City of London, by what appear to be companies that are made up of layers and layers, you know, of other companies. And it's very difficult to actually work out who the beneficial owner is. And it's a classic way of laundering money, and that laundered money from criminality could come from drugs, it could have come from fraud, it could be people smuggling, it could even be terrorism. And if you put enough layers there between the individual that's responsible for it and the money itself, and channel it through the UK, the City, through business, through property, it's very easy for that money to then be sort of swallowed up. So, the idea of the Economic Crime Bill is to set up a register and to have very punitive penalties, and to make it a criminal offence effectively not to make it clear and transparent who the actual beneficial owner is. And it's also very much their intention to tighten up any perceived weaknesses in Unexplained Wealth Orders, which have been something that the National Crime Agency have been involved in now for some time, to make it a little bit easier for the law enforcement agency. And the intention is, with these provisions, is to tackle what the government has said is, I think, £100bn worth of effectively unlawful funds, which have been channelled into the UK. So, I think that's what the Bill is intended to do. So, it effectively will require all entities to declare who the owner is, and it's to go back, I think, as far as 20 years. So, it's a pretty significant change and it will be a structure that will be enforced, doubtless, by bodies like the National Crime Agency. So, it goes further than the Proceeds of Crime Act was ever able to do. It'll run in conjunction with Unexplained Wealth Orders, which had been enforced for a while – those have really been attempted and not always successful. There's one fairly high-profile successful unexplained wealth order, where I think a property developer in the North agreed in the end to hand over, I think, £10m. But the idea is to make it essentially a criminal offence not to be transparent. And I think the government feel that if it's something like that is in place, in addition to the existing legislation, it makes their task a bit easier. They can restrain people's assets, as they are already doing under restraint orders, property freezing orders, and that can lead to civil recovery orders and the like, where you don't actually need to prove, or you don't need to have a criminal conviction, but as long as there's sufficient evidence of unlawful origin of the of the funds, or if the person who's the subject of the unexplained wealth or is unable to show where the funds came from legitimately, then the structures are in place to seize that money. So, it's a very important measure and I think it's there to go further than the existing confiscation framework that has been there for a number of years.
Philippa Kelly
This is a positive development. But this is not a new problem and it is not a small problem. Home Secretary Priti Patel even said that for too long London has been the place that people have come to wash dirty money. So, as you've acknowledged, we're going to be able to go back 20 years, and this is a £100bn problem. The government has been under increasing pressure to do more to tackle the flow of Russian money into the UK. Can you tell us a little bit about how Russians are commonly hiding their money in the UK? And what's the biggest area of focus for the authorities?
Matt Corn
I think the government would say, I mean, it's not just Russia, but obviously the focus is on Russia at the moment. But I think the way the government are looking at it is it’s through property, it's through business, it's through cinema – lower level, it’s things like travel agents and the like – but mainly it's through property, it's companies purchasing properties in the City, and the origins of it, on the face of it, looked to be, you know, a company, but it might turn out that that company is nothing more than a shell company. So, it’s very difficult then to trace the origins, if you like, and to follow the money and work out who the beneficiary is. And so, I think that's how it's done. It's really through property. And the government's belief is that this money is illicit money that has come from one of those areas of criminality that I mentioned before – you know, drugs, fraud, people smuggling and terrorism ultimately. So, I think they think that this is a positive step where they can at least try and recoup some of this money, but obviously there's the political angle as well and obviously they're doing it as a, you know, as a way of punishing Russia and hitting those that have got a lot of money. So, I suppose we shouldn't necessarily conflate the two issues. I mean there's obviously some significantly legitimate money that they're looking to freeze as well and put sanctions upon, because they're doing it as a sort of a punishment, if you like. But there is also this problem that, as you refer to, that Priti Patel has mentioned, that they believe that the City of London has been used as a sort of a ground for illicit funds to be washed. And obviously the more layers that you create, it becomes less and less clear where that money has come from. And that's really what money laundering is, it’s cleansing what started off as dirty money and putting it through property, high-value property very often, and looking at the chain of who is the purchaser, well it’ll look as though it's a company. But in fact, you know, that may just be a shell, there may be several layers of companies, and you never quite know who the person behind it is. And that's why this act has been brought in, to say “Well, it's now a requirement that this be done, a failure to do so will result in certainly financial penalties, but also it's a criminal offence”. So, I think property and the real, you know, the billionaires that have that are behind it, that's really going to be the focus, I think.
Philippa Kelly
It feels like there could be a real influx of work here for chartered accountants, both in terms of advisory work and keeping up with the various sanctions themselves or working with authorities. How can they ensure they're prepared?
Matt Corn
Well, I think that's right. I think there will be an influx of work on a variety of levels, whether it be for, you know, the client company that's being the recipient of the sanctions or whether it be to assist the law enforcement agencies. I think it's important that the new legislation is considered in some detail. It's very fresh, it's very new. I had a look at the statute itself, I mean, there are a number of provisions, it's very detailed. But there's a considerable requirement of disclosure. I can imagine that the chartered accountant, for example, could be put to great use following the money, obviously, but through the various layers and through the various companies, and that could be a minefield of work. So, it's worth obviously being familiar with the new Act, as well as obviously refreshing knowledge of the Proceeds of Crime Act and Unexplained Wealth Orders. And I know that many chartered accountants, forensic accountants, have a great deal of knowledge of the Proceeds of Crime Act in its current form. But obviously it may well be now that it's another string to the bow, if you like, to get a handle on the new Economic Crime and Transparency Act. So, I think, yes, there'll be a different, a lot more work, but a different area, a different angle, and it will be a lot more about, you know, tracing disclosure, liaising with HMRC and really looking at the very technical and sometimes complex structures of companies, which will then lead to who the ultimate beneficiary is.
Philippa Kelly
Lots to be aware of and keep on top of then. Thank you very much for joining us, Matt.
Matt Corn
Thank you.
Philippa Kelly
The Chancellor delivered his Spring Statement on the 23rd of March 2022. In his time as Chancellor, Rishi Sunak has dealt with the economic effects of coronavirus, inflation and now war in Ukraine causing further inflation. A cost of living crisis has crystallised in the UK. As well as the grave heating or eating trade-off for some families at the forefront of the crisis, hard choices are increasing, including around the food we eat and how we travel, impacting us all. In advance of the statement, there was significant pressure on the Chancellor to provide help to those families who need it most. On the 17th of March, Martin Lewis, money saving expert, tweeted about energy prices in particular. He said: “So many people at crisis point regarding energy bills, including those with very high usage due to disabilities, home ventilators, oxygen concentrators, electric wheelchairs, etc. I am nearly out of tools to help. Government must intervene.” I'm joined by Frank Haskew to consider the statement that was delivered. The Chancellor has probably never had a normal, let alone a new normal, in his tenure, and it's across all of those different facets, whether it's the macro-economic changes or other more sector-specific challenges, and then the war in Ukraine and the exacerbating effect that that has had. Would you say that's what made it hard to know what to expect from this statement? And did you get what you were expecting from the statement or any surprises in there? You’ve already talked about the fuel duty and that realisation that, as you said, I think many of us had, that actually the price of fuel and its composition is much more led by tax and duty, or was, compared to where we are now.
Frank Haskew
The fact was, I don't think any of us really knew what to expect. And after we had the announcement on the 7th of September last year of the Health and Social Care Levy, which literally came out of the blue, and within a week had been passed. The next day they tabled the Bill, and within a week it was law. Quite extraordinary really that that was the approach they decided to adopt. So, having had that sort of surprise, in September, I think it's fair to say we really weren't quite sure what to expect in this budget, given all the events that have been going on. In the end, there were some headline tax changes, there wasn't a lot in terms of detail tax changes, which I think was probably actually quite welcome, given everything that we've had already. But I think, you know, just again, to paint the picture, I mean, the Institute for Fiscal Studies did a report earlier on this week, which emphasised the rising tax burden we’re facing from April, and indeed over the next two years, and that we're going to have historic highs, two years of rising taxes. We're going to see not just the NIC rises for April 2022 for a year, and then this Health and Social Care Levy clocking in for the following year, so you know, that was already pencilled in. We also, of course, have got these future rises in the corporation tax rates from April 2023 and we will also see things like the end of the capital allowance super deduction. So, we are against a picture of a steadily rising tax burden. And, you know, the Chancellor could probably have done it, I mean, there were a lot of calls before the Spring Statement that he should just cancel the Health and Social Care Levy or the 1.25% NIC for the, if you like, the opening year of it. He decided not to do that. Although in fact, looking at the OBR figures for the deficit position, in fact, it was quite considerably better than it was in the Autumn Statement to the tune of like £50bn, which could have easily given him a headroom to have done that actually, just to cancel the whole Health and Social Care Levy. But he decided not to do that, probably because he invested, you know, a lot of political capital in it. So, what we did see was a sort of partial reversal, effectively, of it by other means. And the estimate was that probably about a third of what will be coming in in the Health and Social Care Levy changes will effectively be given back by the changes, in particular, to national insurance and the rise in the primary threshold to align it with the income tax threshold. So, that effectively rose by £3,000. So, they are, I mean, they were aligned once upon a time, but in fact, the Conservative coalition government changed that. So now they're sort of back together again. But it will mean that anybody who's earning less than £12,570 pounds won't pay any income tax or national insurance. And his estimate was that 70% of people, as a result of these changes, would actually not be paying any more, would be paying less, than they would have done. A sort of interesting way of, sort of, finessing the tax rise to make it more palatable, I guess. So, I mean, that was, I think the headline from it – I mean, I would just also say, of course, because it's so late in the day, they can't get it done by 6th of April, so the NIC change will come in on the 6th of July – so we're going to have a split year NIC treatment, which I think we have had once before, to my knowledge, but it's something you try and avoid because it just creates all sorts of difficulties. So, a lot of people will be pleased that that's what's happening. But the fact that it's going to come in July, I've already had lots of people saying that's going to cause huge complications. But nevertheless, you know, it's going to be a benefit to people. And obviously, you know, there was another big announcement that the income tax rate is going to be reduced by 1%. But that won't be till 2024, and that's in his tax plan. There were obviously some other, I mean, there was some help for SMEs, there's going to be a rise in the employment allowance, which effectively allows small businesses to not have to pay employees’ national insurance, and that's going to rise by £1,000 pounds to £5,000 pounds. And we also saw various changes on business rates, we've seen the multiplier frozen, and also some new temporary business rates relief, business rates relief for retail, hospitality and leisure, worth about £1.7bn. So, they're trying to help out with businesses. We've also seen some changes to the VAT zero-rating provisions to effectively encourage the provision of energy-saving installations, solar panels, etc, which I think, given everything else that's going on, is probably going to be a direction of travel for the future.
Philippa Kelly
So, a huge amount going on there as you've taken us through, and complicated is probably an accurate way of describing what it's like for people trying to figure out the impact on them, whether it's their business or their household. And as well as figuring out where you will be following these changes, I think households in particular are also trying to figure out what the impact of inflation is going to be on them. And it's quite worrying for a lot of people and something that hasn't been experienced by many. So, one of the things that we found in the banking sector, for example, is that even though you use 30 to 40 years of economic data in your models, there's no high inflation experience within that data, and that's how far we're having to go back to start to think about this. But as well as households, there's also an impact of inflation on public finances. And you alluded to this, I think, a little bit, in what you were saying earlier, but could you talk about that a bit more?
Frank Haskew
Yes, I agree with you. I mean, I'm old enough to remember around this sort of, as a young person, the inflation in the 70s. And maybe that experience did stick with us. But for people younger, they would never have really experienced anything like this. So, you know, it is profoundly worrying, concerning, for people. And obviously, you know, the worrying concern that spills over into the public finances as well. So, you know, as I said earlier, COVID has cost us about £400bn, and effectively, the public finance net debt position was shot to pieces, I guess, is probably a good description of it. So, the Office for Budget Responsibility have said that their estimate for net borrowing in the Spring Statement, surprisingly, you might say, was actually about £50bn better than was forecast at the time of the Autumn Budget. I think that's at least one piece of good news in this. And of that, receipts were actually about – tax receipts effectively – were £37bn higher than expected, which I think just shows you the scale of this. And spending is actually £13bn lower. So, the net effect, as I say, was £50bn in improvement. But, you know, what we're seeing here already, and it's beginning to show through, is that debt interest is going to go through the roof. Debt interest, although spending was £13bn lower, debt interest was actually £13bn higher than forecast. So, debt interest is now on an upward trajectory, and if you look at the OBR forecasts, for 2022-23 they are estimating that debt interest will be £83bn. That was double the estimate in the Autumn Statement, so an extra 40 or so billion pounds on the debt interest. And that figure is four times higher than the debt interest that the UK paid in 2020-21. So, it doesn't take very much, as you can see, for rising interest rates to blow a huge hole in the amount we're paying in debt interest. And you know, I haven’t got the figures right in front of me, but you can do a lot with £80bn.
Philippa Kelly
You would hope so.
Frank Haskew
I think it covered the Home Office, the Ministry of Justice and the schools’ budget, is the sort of figure. I mean, total national, I think, receipts, are about 800 or so billion. So, it's becoming a significant figure. In fact, I mean, the debt interest according to the OBR was that they're expecting the ratio debt interest to revenue, obviously, to rise, and it's expected to hit 7.6% next year or the year just about to start. We haven't seen that level since 1997-98. And when it's, I mean, we obviously have the financial crisis, but generally it's been on a downward trajectory. And as I say, in 2020-21, it was only 2.5%. So, I think it just shows you that it doesn't take very much here to start blowing your figures completely off course. And although that was seen that the Spring Statement has showed a significantly better debt position than they were expecting, the rise of interest rates could blow us a major hole, if you like, in the government finances, following pressure on receipts. And I mean, of course, there is, I'm not an economist, but I think there is this view that actually high interest rates, it does allow governments to inflate away their debt. And so, we will see that as a proportion of GDP, the amount of debt actually falls. So, you know, I suppose that's one way of looking at it. But the hard reality is that we're going to be spending £80bn paying debt interest, whereas a year or so ago we were only paying £20bn. And we could do a lot with £60bn.
Philippa Kelly
So, immense pressure on household finances, strain on public finances, with more to come, as you've alluded to around health and social care, and then more that will inevitably be needed in other areas. There was an immense amount that this statement could have dealt with or attempted to tackle. In your view, what still needs to be dealt with, what's still going to keep you awake at night?
Frank Haskew
I suppose we're all obviously worried it could get a lot worse than what we've got in the Spring Statement. And you only have to look at the OBR forecasts to see that effectively there's very little headroom, and it wouldn't take very many events to blow a lot of the, if you like, basic assumptions that underpin the financial position completely out of the water. And I say, just going back to remembering inflation, I think once it gets into the system, we all know it's quite difficult then to sort of eke it out, and it can be at considerable cost to ordinary citizens as well. So, I think, you know, we've got that sort of macro-level concern about “Are we gonna have enough tax receipts?” and “Is the debt interest going to become so significant that effectively that will have a severe impact on public spending?” and all the other pressures we've mentioned already. So, we've got that sort of level on the one hand, and I think on the other hand, looking at the tax system, we have this tax plan, as it was called, which he produced – to be honest, I think it was fairly lightweight, it didn't really give much in the way of detail. I think we can expect, we going to have to pay, for instance, for the 1% reduction in income tax if it happens in 2024. And in the tax plan it talks about the fact that, you know, originally, we've got over 1,000 tax reliefs in the tax system, which the Office of Tax Simplification first identified. And ever since then, Public Accounts Committee, the National Audit Office, have been saying, you know, “We need to have a handle on tax reliefs, how much they cost, whether they're value for money” – and the spotlight is slowly coming around to look at tax reliefs. And that's going to be part, I think, of this conversation. And the Chancellor is on record as saying that he's in favour of low taxation, but a broad base. So, the other side of the coin of a reduction in tax rates is a broadening in the tax base, and that could include, almost any tax relief could be up for discussion, you know, pensions, charitable contributions – there's plenty there that will probably have to be looked at.
Philippa Kelly
So, there's a huge amount that you've highlighted to us, even just in the brief discussion that we've been having, but for a lot of members of ICAEW and indeed others, if they want to find out more about any of these implications in particular, from the statement, where can they go to find out a bit more information?
Frank Haskew
Well, I'd like to give a little plug for, in fact, my other colleagues in the Tax Faculty literally just finished a webinar on the Spring Statement. I haven't obviously seen it myself yet, but I'm sure it'll be excellent from the slides I saw. And that's at ICAEW.com/tax webinars. So, if you want to get under the skin of the Budget and some of those detailed changes, may I point you in the direction of that, which is free to watch. We also have put some material out and comments on the Insights pages. So, if you go to the ICAEW Insights and the latest tax news, tax news for March 2022, you'll find our comments there. And, you know, look at obviously HMRC’s website and HM Treasury’s website, Spring Statement 2022, and you'll find the information there. So, that would be my recommendation.
Philippa Kelly
And we'll put links to all of those resources that Frank's outlined in the show notes to this episode. Thank you very much, Frank. It was a pleasure speaking to you. That's all we have time for today. Thank you to my guests, Matt Corn and Frank Haskew. Thank you for listening. If you've enjoyed this episode, remember to subscribe to ICAEW Insights on Apple Podcasts, Spotify or wherever you get your podcasts.
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