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How HMRC use IT systems to seek out tax evaders
There is no doubting the resolve of HMRC to track down and prosecute tax evaders.
The Government has committed to spend £917m to tackle tax evasion and raise an additional £7bn each year by 2014/15.
HMRC are using 2,500 staff to tackle avoidance, evasion and fraud, there is also a website to help those who want to declare income https://www.gov.uk/sortmytax
In the search for tax evaders, HMRC have a £45m computer system called Connect which in 2011 delivered £1.4bn in tax revenue and the system is getting bigger and better all the time. According to Accounting Web:
It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.
Last year Connect made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.
In addition HMRC have also identified 200 accountants, lawyers and professionals who advise on tax avoidance structures and its currently unclear how HMRC will be dealing with them and their clients.
It is important to remember that most people pay the correct tax, in fact HMRC calculate that 93% of tax due is paid correctly, its only a small minority who try to evade tax.
steve@bicknells.net
Associates don’t have to be taxing
The small companies rate of Corporation Tax is 20% compared to main rate of 23% (2013/14). The small company rate is applied if your profits are below £300k, however, if you have associate companies, the £300k is spread between them equally.
For the purposes of CTA10/S25 (4), formerly ICTA88/S13 (4), a company is an associated company of another at a given time if at that time:
- one of the companies has control of the other, or
- both of the companies are under the control of the same person or persons
http://www.hmrc.gov.uk/manuals/ctmanual/CTM03710.htm
But what some businesses forget is that if you have a subsidiary that has become dormant it stops being associated
an associated company which has not carried on any trade or business at any time during the accounting period is disregarded – if it is an associated company for part only of the accounting period, the rule applies to any time during that part.
http://www.hmrc.gov.uk/manuals/ctmanual/ctm03580.htm
steve@bicknells.net
Related Parties and Conflicts of Interest – Directors Responsibilities
The disclosure requirements for Related Party Transactions in published accounts are a common cause of confusion, on the face of it, its sounds easy but getting it right is often a balance between compliance and relevance. The rules are set out in the Companies Act 2006, FRS8 and for smaller companies FRSSE (April 2008). The rules apply to both Full and Abbreviated Accounts.
- FRS 8 defines a related party to include an entity’s subsidiaries, associates, joint venture interests, directors and close family members of directors.
- The standard requires an entity’s transactions with related parties, regardless of whether a price is charged, to be disclosed in that entity’s financial statements.
FRS 8 section 3 and FRSSE section 15.7 states that disclosure of the following is not required:
- Pension contributions paid to a pension fund
- Emoluments in respect of services as an employee or the reporting entity
- Transactions with parties simply because of their role as:
- Providers of Finance
- Utility Companies
- Government Departments
- Customer, Supplier, Franchiser, Distributor or Agent
The disclosure under FRS8 and FRSSE should include:
(a) the names of the transacting related parties
(b) a description of the relationship between the parties
(c) a description of the transactions
(d) the amounts involved
(e) any other elements of the transactions necessary for an understanding of the financial statements
(f) the amounts due to or from related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date
(g) amounts written off in the period in respect of debts due to or from related parties.
Dividends to directors do meet the definition of related party transactions and are disclosable as such.
Trival items don’t require disclosure and the principle of materiality should be applied.
An item of information is material to the financial statements if its misstatement or omission might reasonably be expected to
influence the economic decisions of users of those financial statements, including their assessments of management’s stewardship.
The Companies Act 2006 places a statutory duty on directors in relation to potential conflicts of interest:
A director must “avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”.
Related Party Transactions will often create a potential conflict of interest.
Authorisation may be given by the directors—
(a)where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
(b)where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
The authorisation is effective only if—
(a)any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
(b)the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
So it is vital that Directors disclose any potential conflict of interest and seek authorisation from the Board of Directors.
steve@bicknells.net
Salary Sacrifice was “clarified” in April, does your scheme comply?
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
- on how to set up a salary sacrifice arrangement, or
- on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
- If the scheme involves childcare or childcare vouchers then the conditions for exemption must be met. (See EIM21905 and EIM16057). Is the agreement to provide childcare between the employee and the childminder or nursery. If so the employer by paying the cost directly is meeting the employee’s personal liability. (See EIM00580).
- For a registered pension scheme the amount which can be contributed to the scheme is normally linked to the employee’s chargeable earnings. In consequence if the salary sacrifice results in some of the employee’s income no longer being taxable, then the amount of contribution, which can be made to the scheme, will also drop.
EIM42778 – Exemption from Tax/NIC – basically stating that exemption may require that the sacrifice may be available to all employees but that the sacrifice must not reduce the employees wages below National Minimum Wages
The following is an example of an unsuccessful Childcare Salary Sacrifice:
The pay slip for the month ended 31 July 2006 gives monthly pay as £2000 plus overtime of £100, deductions for tax of £355 and NIC. The pay slip for the following month shows monthly pay of £2000 plus overtime of £100, deductions for NIC, childcare vouchers of £200 and tax of £310. The code number operated on the salary has not changed.
The situation is not clear from the payslip. When asked, the employer explains that for August, because childcare vouchers of £55 a week are exempt, £220 of vouchers has been deducted from the gross pay of £2100 and tax charged on the net figure of £1880. Further information is needed, for example a copy of the employment contract and any variations agreed by the employer and employee to that contract.
It is established that in July the employee bought childcare vouchers. The employer was not involved. The employer accepts that as the childcare in July was not provided by him, no tax exemption is available. In August the employee asked the employer to buy the childcare vouchers to take advantage of the exemption. The employer did this and deducted the cost from the monthly salary. The contract of employment shows that the employee is entitled to a base salary of £24000 to be paid monthly. This contract has not been varied. As the employee’s entitlement has remained the same, this is not a successful sacrifice. (See EIM42766).
If you operate salary sacrifice schemes its worth checking that your schemes comply, the tax consequences of failure to comply could be substantial.
steve@bicknells.net
How does Overlap Relief work?
Overlap Relief applies to Sole Traders and Partnerships.
Where 5 April is used as the annual accounting date throughout the entire life of a business, there will be no overlaps between basis periods. In such cases the total profits assessed to income tax will automatically equal the total profits made during the life of the business.
In any other case there will be one or more years in which the basis periods for two successive tax years overlap. These overlaps may occur:
- In years 2 or 3 during the period in which the basis periods and accounting periods are brought into alignment; or
- During the period of realignment following a change of accounting date.
To ensure that the total profits assessed to income tax exactly equal the total profits made during the life of the business, “overlap relief” is given.
The amount available to be given as overlap relief is the amount of profits which arise in any overlap periods. An overlap period is a period which falls within two basis periods. Guidance on computing overlap relief is at BIM71080.
Overlap relief is given as a deduction in calculating the profits of the trade for the tax year:
- in which the trade ceases (see BIM71095), and / or
- an earlier tax year in which a change of accounting date occurs if the basis period for that tax year is longer than 12 months (see BIM71090).
Here is an example:
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first 3 tax years are:
| 2010-2011 | Year 1 | 1 October 2010 to 5 April 2011 |
| 2011-2012 | Year 2 | 12 months to 30 September 2011 |
| 2012-2013 | Year 3 | 12 months to 30 September 2012 |
The period from 1 October 2010 to 5 April 2011 (187 days) is an “overlap period”.
steve@bicknells.net
Buy to Let is Back!
House prices are rising as confirmed by the Land Registry in their report 29 April 2013, the annual change is 0.9%, rent is increasing again after a drop in 2009 according to the English Housing Survey, in 2011 it went up 3% to a mean rent after housing benefit of £132 per week. So let’s see who the tenants are (English Housing Survey 2011):
| social and private renting households receiving Housing Benefit | ||||
| all social renters |
all private renters |
all renters |
||
| percentages | ||||
| age of household reference person | ||||
| 16 to 24 | 6.3 | 11.9 | 7.8 | |
| 25 to 34 | 12.6 | 26.9 | 16.5 | |
| 35 to 44 | 18.1 | 24.0 | 19.7 | |
| 45 to 54 | 16.3 | 15.8 | 16.2 | |
| 55 to 64 | 14.1 | 9.0 | 12.7 | |
| 65 to 74 | 15.8 | 7.8 | 13.6 | |
| 75 and over | 16.7 | 4.4 | 13.4 | |
| marital status of household reference person | ||||
| married1 | 16.9 | 18.4 | 17.3 | |
| cohabiting2 | 5.5 | 9.7 | 6.7 | |
| single | 33.2 | 37.6 | 34.4 | |
| widowed3 | 17.1 | 7.5 | 14.5 | |
| divorced4 | 20.9 | 17.0 | 19.8 | |
| separated5 | 6.4 | 9.9 | 7.3 | |
| household size | ||||
| one | 50.5 | 31.7 | 45.4 | |
| two | 23.2 | 28.7 | 24.7 | |
| three | 11.5 | 18.0 | 13.3 | |
| four | 8.2 | 12.3 | 9.3 | |
| five | 3.6 | 5.8 | 4.2 | |
| six or more | 3.0 | 3.4 | 3.1 | |
| household type | ||||
| couple, no dependent child(ren) | 11.5 | 8.0 | 10.5 | |
| couple with dependent child(ren) | 10.1 | 19.2 | 12.5 | |
| lone parent with dependent child(ren) | 20.9 | 35.1 | 24.7 | |
| other multi-person household | 7.1 | 6.0 | 6.8 | |
| one person | 50.5 | 31.7 | 45.4 | |
| length of residence | ||||
| less than 1 year | 8.4 | 27.7 | 13.6 | |
| 1 year, under 3 years | 15.4 | 32.5 | 20.0 | |
| 3 years, under 5 years | 13.2 | 15.5 | 13.8 | |
| 5 years, under 10 years | 20.7 | 12.3 | 18.4 | |
| 10 years, under 20 years | 22.2 | 8.0 | 18.4 | |
| 20 years or more | 20.1 | * | 15.7 | |
| economic activity of | ||||
| household reference person | ||||
| full time work | 2.7 | 13.1 | 5.5 | |
| part time work | 9.5 | 18.1 | 11.9 | |
| retired | 36.4 | 16.0 | 30.8 | |
| unemployed | 13.8 | 17.4 | 14.8 | |
| full time education | * | * | 1.5 | |
| other | 36.4 | 32.9 | 35.5 | |
| total | 2,395 | 890 | 3,285 | |
| £ per week | ||||
| mean gross weekly income | ||||
| of household reference person | 206 | 237 | 215 | |
| (and partner) | ||||
| sample | 1,945 | 690 | 2,635 | |
Yields are looking good, its possible to achieve 8% to 10%, take a look at the examples on http://investors.assetz.co.uk/property-listing.htm
Lending rates are low with Bank of England base rate stuck at 0.5%.
So we should see Buy to Let coming back into fashion with investors, with that in mind here are my top tips to minimise your tax:
1. Claim allowable expenses
- Mortgage or Loan Interest (but not capital)
- Repairs and maintenance (but not improvements)
- Decorating
- Gardening
- Cleaning
- Travel costs to and from your properties for lettings or meetings
- Advertising costs
- Agents fees
- Buildings and contents insurance
- Ground Rent
- Accountants Fees
- Rent insurance (if you claim the income will need to be declared)
- Legal fees relating to eviction
2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
3. Claim for repair and advertising expenses incurred in getting the property ready for renting
4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property
5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.
6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest
7. Claim the Energy Saving allowance for energy saving work and save £1,500
steve@bicknells.net
Why it’s important to understand the theory of Queuing
Essentially, the problem of Queuing is concerned with:
- Average waiting times
- The average length of the queue
- The number of service points (channels) there should be
- The cost of servicing the queue compared to cost of reducing waiting times
There are two main approaches to working out the solution:
- Simulation
- Queuing theory formulae
Queuing theory formulae can be complicated but are normally used in preference to simulation especially in simple situations.
Let’s take an everyday example, production staff queuing to collect stock from the company stores
So let’s run some numbers assuming the average number of production employees to be served every hour is 12 and we take 3 alternative service rates – 24, 18, 15 per hour, what is the probability of having to queue.
At 24 its 12/24 = 0.5 and the average number of staff in the queue will be 0.5/1-0.5 = 1 employee
At 18 its 12/18 = 0.67 and the average number of staff in the queue will be 0.67/1-0.67 = 2 staff
At 15 its 12/15 = 0.8 and the average number of staff in the queue will be 0.8/1-0.8 = 4 staff
The next stage is to work out the cost of servicing the production team quicker compared to the cost of a faster stores service to reduce queuing
If the production staff cost £20 per hour, based on a 6 hour day that’s £120 per day, that means based on the above the cost will be £120, £240 or £480 for queuing.
If the cost of a faster store man or faster servicing rate is less than the queuing cost then it’s worth investing to reduce the queuing cost.
steve@bicknells.net
Why have multiple classes of shares?
Businesses tend to start off just having ordinary shares with full voting and dividend rights, however, there are lots of good reasons why you might create multiple share classes:
1. To reward the owners based on their contribution – for example say one owner worked full time and the other only part time – they may want dividends to be based on their efforts whilst still retaining their original voting rights
2. To offer non voting shares to employees
3. Convertable or Redeemable shares might be offered to an investor
4. Preference Shares might have a fixed dividend
Dividends are very tax efficient so its great way to reward the owners for the risk of running a business.
Always seek professional advice before making changes to check for capital gains, settlement and other tax and legal issues, better safe than sorry.
Then before creating additional share classes check your articles of association and change them if necessary, then you will need a resolution to create new share classes, fill the appropriate forms at Companies House and then you are ready to go.
steve@bicknells.net
What steps do you need to follow to form a company?
Years ago you would go to a formation agent and buy an off the shelf company and re-name it but now its much easy to create a company from scratch using a formation agent. There are many agents out there, but you could use http://www.company-wizard.co.uk where you can form a company from £16.99 or you can do it direct with Companies House.
You will need to know:
- The company name (that hasn’t already been used and isn’t restricted)
- The names, addresses and dates of birth for directors and shareholders
- Registered office address
- You will also need to security information for the directors and shareholders (eye colour, mothers maiden name, place of birth)
The company will often be formed within a day, once you know the company registration number you can open a bank account. To do this you will normally need to visit your bank and show them two forms of ID.
HMRC will send form CT41G to the registered company address.
The CT41G form is issued to newly registered companies. This form includes your company’s Unique Taxpayer Reference .You will need it to contact HMRC. It also tells you what you need to do if your company has become ‘active’ and suggests other tax implications your company may need to consider.
HMRC will also ask if you want to appoint an agent (accountant) and this is done with form 64-8.
To register for PAYE you will need to know:
- name, business name, partner’s name, company name (as appropriate)
- business or home address, including postcode (as appropriate)
- business or home telephone number
- a contact email address
- a contact telephone number
- a name and address to send correspondence to
- the date of your first payday or, if earlier, the first date you made payments of expenses and/or provided benefits to your employees
http://www.hmrc.gov.uk/payerti/getting-started/register.htm
Follow this link if you need to register for the Construction Industry Scheme http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=039zI-xtZZw
VAT registration is done on line http://www.hmrc.gov.uk/
steve@bicknells.net
How Legal Aid Barristers cope with Revenue Recognition (UITF 40)
BIM74150 sets out HMRC’s guidance:
Unfortunately, there is no special treatment of cases where a client is legally aided. Work in progress, and anticipated profit costs in completed cases, have to be brought into account notwithstanding that there might be substantial delay in the receipt of fees. However, the solicitor is entitled to exercise a prudent approach where he or she knows that costs are going to be taxed, as to what the realisable value of work in progress, and anticipated profit costs, might be.
But the law society guidance provides more detail:
- The Tax Point is normally payment
- Prudent judgement is required of the value of work done to date
- Payments should not be recognised if it is likely that they may have to be refunded
Other interesting points from the Law Society:
- No Win No Fee – Revenue recognised when the case is won
- Pay at End – either estimate the fees or if uncertain revenue should be recognised when a reliable estimate can be made
- Fixed Fee – use appropriate judgement
steve@bicknells.net
Business Accountant 