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5 ways to reduce the risk of a tax investigation
THE TAX YIELD derived from HM Revenue & Customs investigations into the affairs of small- and medium-sized companies rose by 31% over the last 12 months, according to UHY Hacker Young.
Compliance investigations into SMEs generated £565m for HMRC in 2012/13, up from £434m in 2011/12, with the year ending March 31. Accountancy Age
Some investigations are random and some as a result of HMRC task forces, but many are triggered by risk profiling.
What can you do to reduce your chances of being selected:
1. File your tax returns on time and pay what you owe – If you file late or at the last minute HMRC will think you are disorganised and as such there are more likely to be errors in the return
2. Declare all your income – HMRC get details of bank interest and other sources of income, sometimes they test them and match them to returns
3. Use an accountant – Unrepresented taxpayers are more likely to be looked at, mainly because many of them don’t know what they are doing
4. Trends – if your business doesn’t match the profile of similar business in the same sector or your results suddenly fluctuate it could raise concerns at HMRC, for example, if you suddenly request a VAT refund
5. Tax Avoidance Schemes – if you are using a tax avoidance scheme I am sure HMRC will be looking closely, if they can find a way to challenge the scheme then at some point they will
steve@bicknells.net
10 tax allowances we fail to claim
In 2012 Unbiased.co.uk reported that £12.6 billion was unclaimed by UK tax payers, here is a list with some ideas:
- Income Related Tax Credits – Check and find out what you are entitled to – UK Benefits https://www.gov.uk/benefits-adviser
- Tax Relief on Pension Contributions – There are estimated to be over 4 million people not paying into a pension, auto enrolment should help to change that, this blogs explains the tax advantages http://stevejbicknell.com/2012/05/02/why-invest-in-a-pension-because-of-tax-relief/
- Tax Relief on Charity Donations – Are you using Gift Aid? are you a higher rate tax payer entitled to additional relief?
- Saving on Inheritance Tax – Many people don’t have a Will let alone any IHT planning!
- Making Use of ISA’s – Why get taxed on the interest on your savings if you could have an ISA? Its easy to get an ISA and you can still have access to your ISA savings if you need it, the current ISA allowance is £11,520 or £5,760 for cash ISA’s
- Child Benefit – Use the benefits adviser to check if you can claim – UK Benefits https://www.gov.uk/benefits-adviser
- Avoiding tax penalties and late filing – This just requires you to be organised, make sure you know the filing dates http://www.hmrc.gov.uk/sa/deadlines-penalties.htm and get the information needed in plenty of time
- Savings on Capital Gains – The current allowance for 2013/14 is £10,900 (previously £10,600) for an individual many people seem to forget they have this allowance
- Making Use of Employee Share Schemes – The government love employees to have shares and this year introduced a new share ownership option http://stevejbicknell.com/2013/08/03/employee-shareholders-will-your-employees-want-shares/
- Income Tax and Personal Allowances – Consider who should own assets (and get income from those investments) – you or your spouse – so that you can minimise your tax liability
Steve@bicknells.net
Do I need to do a tax return?
If any of the following apply then, YES, you need to do a tax return:
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You’re self-employed
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You’re a company director, minister, Lloyd’s name or member
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Your annual income is £100,000 or more
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You have income from savings, investment or property (unless collected via PAYE)
- £10,000 or more from taxed savings and investments
- £2,500 or more from untaxed savings and investments
- £10,000 or more from property (before deducting allowable expenses)
- £2,500 or more from property (after deducting allowable expenses)
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You need to claim expenses or reliefs
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You or your partner receive Child Benefit and your income is over £50,000
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You’re 65 and receive a reduced age-related allowance
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You get income from overseas
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You have income from trusts, settlements and estates
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You have Capital Gains Tax to pay
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You’ve lived or worked abroad or aren’t domiciled in the UK
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You’re a trustee
For full details of who needs to do a tax return follow this link http://www.hmrc.gov.uk/sa/need-tax-return.htm
For details of how to register go to http://www.hmrc.gov.uk/sa/register.htm
I know that sometimes people simply don’t realise that they need to do a return, for example a newly appointed Director or someone receiving Dividends. HMRC often don’t know if you should be doing a return (if they think you should be they will contact you), so it is up to you to make sure you file a return and disclose your income to HMRC if any of the above apply.
If you think you have an excuse, think again!
http://stevejbicknell.com/2012/10/15/reasons-excuses-for-filing-your-self-assessment-return-late/
As you will see your chances of HMRC accepting your excuse are slim.
Employment Expenses – Use Form P87
As an employee you can claim tax relief for expenses incurred in doing your job (if not fully reimbursed by your employer), for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 without the need to do self assessment.
http://stevejbicknell.com/2011/12/20/how-to-claim-tax-relief-for-employment-expenses/
So having workout you need to do a return. and having registered online, and filed your first return with HMRC, what if you later find you have make a mistake, what can you do?
If you make a mistake on your tax return you’ve normally got 12 months from 31 January after the end of the tax year to correct it. This is called an ‘amendment’. For example, for the 2011-12 return you have until 31 January 2014 to make an amendment.
http://www.hmrc.gov.uk/sa/correct-repay.htm
What if you don’t file in time?
The penalties for late Self Assessment returns are:
- an initial £100 fixed penalty, which applies even if there is no tax to pay, or if the tax due is paid on time;
- after three months, additional daily penalties of £10 per day, up to a maximum of £900;
- after six months, a further penalty of 5 per cent of the tax due or £300, whichever is greater; and
- after 12 months, another 5 per cent or £300 charge, whichever is greater.
There are also additional penalties for paying late of 5 per cent of the tax unpaid at: 30 days; six months; and 12 months.
What if you don’t have all the answers, can you put in provisional figures?
There are occasions on which some information cannot be finalised within the formal self assessment time limits despite the taxpayer’s best efforts to do so. In such cases the taxpayer should include a ‘best estimate’ of the information in the tax return and, if appropriate, a corresponding provisional figure of the tax due. The provisional figures should be clearly identified as such in the tax return. A tax return containing a provisional figure should only be submitted once it is clear that a more accurate figure will not be available before the filing date.
http://www.hmrc.gov.uk/manuals/salfmanual/salf206.htm
steve@bicknells.net
How long to keep your records
As a general rule, you should keep your records for a minimum of six years. However,
if you are:
• an employer, you need to keep Pay As You Earn (PAYE) records for 3 years
(in addition to your current year)
• a contractor in the Construction Industry Scheme (CIS), you need to keep your CIS
records for 3 years (in addition to your current year)
• keeping records to complete a personal (non business) tax return, you only need to
keep them for 22 months from the end of the tax year to which they relate.
If you need to keep records for other reasons, for example the Companies’ Act
requires limited companies to keep specific records and you also use those records
for tax purposes, you need to be aware that there may be different time limits for
retaining them. Be careful not to destroy any records you also use for tax purposes
too soon.
niall@odfinancialservice.co.uk
Life after submitting a tax return
You’ve completed your tax returns, you think you can now breathe a sigh of relief, but can you?
HMRC can inspect any taxpayer’s records under Schedule 36 by FA08, FA09 and FA10. They can check the tax records for:-
Pay as You Earn (PAYE)
Value Added Tax (VAT)
Income Tax (IT)
Capital Gains Tax (CGT)
Corporation Tax (CT)
Insurance Premium Tax (IPT)
Inheritance Tax (IHT)
Stamp Duty Land Tax (SDLT)
Stamp Duty Reserve Tax (SDRT)
Petroleum Revenue Tax (PRT)
Aggregates Levy (AGL)
Climate Change Levy (CCL)
Landfill Tax (LFT) and
Bank Payroll Tax (BPT)
The technical term for the inspection is a Compliance Check. They will check that the tax payer has:-
- Complied with their obligations
- Paid the correct amount of tax and at the right time
- Claimed the correct reliefs and allowances
The inspection
This can be completed by anything from a short telephone call to confirm a single fact, to a detailed investigation of a person’s entire financial affairs over a period of years.
HMRC may undertake checks by either asking for information or documents or by arranging a meeting or visit.
They may:
- Require taxpayers by notice in writing to provide information and produce documents (a “taxpayer notice”)
- Require third parties by notice in writing (for example a supplier or bank) to provide information and produce documents (a “third party notice”)
The caveat being that these requirements are reasonable for the purpose of checking a tax position. The generic term for these types of notice is information notice.
The recipient has the protection of a right of appeal to, or prior approval by, an independent tribunal. There is no right of appeal however where the notice only refers to information or documents that form part of a taxpayer’s statutory records, or any person’s records that relate to:
- The supply of goods and services
- The acquisition of goods from another member state, or
- The importation of goods from outside the European Union (EU) by a business
If the taxpayer is not forthcoming with the information, HMRC may invoke their statutory powers to obtain them.
They may also request assistance with aspects of a tax check from other government departments.
This could include a situation where there is reason to believe that a taxpayer:
- did not notify chargeability to tax
- did not register for VAT if required, or
- is operating in the informal economy
Restrictions on Information Powers
The taxman is not all-powerful; some safeguards have been installed, set out in the law and with guidance so that in carrying out compliance checks
- HMRC’s powers are used reasonably and proportionately
- Taxpayers are clear about when a compliance check begins and ends
- Officers have no right to enter any parts of premises that are used solely as a dwelling, whether to carry out an inspection or to examine documents produced under an information notice. They can, however, enter if invited
- FA09 adds to Sch 36 FA08 a power to inspect all property for the purpose of valuation (for direct taxes purposes). This requires either the taxpayer’s agreement or Tribunal approval
- Unannounced visits will only be made where agreement has been given by an authorised officer
Other safeguards include the fact that officers can’t require certain things to be provided:
- Information relating to the conduct of appeals against HMRC decisions
- Legally privileged information
- Auditors or tax advisers advice to a client about their tax affairs
- Information about a person’s medical or spiritual welfare
- Journalistic material
Time constraints
- Information over six years old can only be included in a notice issued by or with the approval of an authorised officer
- HMRC cannot give a notice in respect of the tax position of a dead person more than four years after the person’s death
The Power to Visit Business Premises and Check Assets and Records
Inspection powers allow an officer of HMRC to enter business premises and inspect the premises, business assets and statutory records.
If an information notice has been issued earlier, the documents required in that notice could be inspected at the same time.
FA09 incorporates into Schedule 36 inspection powers in respect of the:
- business premises of Involved third parties
- valuation of premises for Income Tax or Corporation Tax
These inspections:
- must only be undertaken where it is reasonably required to establish the tax position and
- will normally be by prior arrangement, the date and time being convenient to the taxpayer
The Power to Visit Business Premises and Check Assets and Records
Inspection powers also allow any officer to enter any premises when they believe the premises are to be used in connection with taxable supplies of goods or taxable acquisition of goods from Member States, and such goods or documents relating to such goods are on the premises.
There is no right of appeal against an inspection but the occupier can refuse entry and prevent the inspection from being completed.
The occupier can be penalised for such obstruction, where the inspection has been approved by a Tribunal.
There may be occasions when a pre-arranged visit will be inappropriate, for example where there is a strong risk that the taxpayer would move the business or remove stock or other assets. In such cases, an unannounced visit may be undertaken subject to prior agreement by an authorised officer.
If a formal statutory approach is needed, and it has not been possible to agree the time of inspection and give written confirmation, the inspection must be approved by a Tribunal and 7 days written notice of the time of the inspection given. The application for approval must be made by, or with the approval of, an authorised officer.
When a Penalty can be charged where a person:
- Fails to comply with an information notice
- Conceals, destroys or otherwise disposes of documents required by an information notice
- Conceals, destroys or otherwise disposes of documents that they have been notified are, or are likely to be, required by an information notice
- Deliberately obstructs an inspection that has been approved by the Tribunal.
- In complying with an information notice provides inaccurate information or produces a document that contains an inaccuracy,
- Fails to comply with a notice requiring contact details of a tax/duty debtor to HMRC.
These rights are covered in sections 38 FA 08 and 09
Types of Penalties
There are four types and amounts of penalty:
- An initial penalty of £300
- A daily penalty of up to £60 for every day that the failure or obstruction continues after the date the initial penalty is assessed
- A tax-related penalty
- A penalty not exceeding £3000 for providing inaccurate information or documents in response to an information notice
A tax-related penalty is in addition to the initial penalty and any daily penalties. The amount of the penalty is decided by the Upper Tribunal having regard to the amount of tax which either has not, or is unlikely to be, paid by that person.
A person is not liable to a penalty if they have a reasonable excuse for:
- Failing to comply with an information notice, or
- Providing inaccurate details or documents, or
- Deliberately obstructing a tribunal approved inspection
If they correct their failure as soon as the excuse ends, the excuse will then be treated as continuing until the correction is made.
Normally, daily penalties will not be assessed after the failure has been remedied.
Record Keeping
Schedule 37 of FA08 amended existing record keeping legislation in respect of PAYE, VAT, IT, CGT and CT, whilst Schedule 50 to FA2009 extends this approach to IPT, SDLT, AGL, CCL, and LFT with BPT being included from 8 April 2010. Following consultation it was accepted that SDRT and PRT did not require separate statutory provisions, whilst IHT will be addressed through guidance.
These provisions are aimed at alignment and clarification.
This approach is designed to be flexible across a range of business and non-business taxpayers.
There are penalties for failure to keep adequate records.
The basic requirements in relation to record keeping have not changed but rules have been aligned on how long records are kept.
niall@odfinancialservice.co.uk
What can you include in a PAYE Settlement Agreement (PSA P626)?
PAYE Settlement Agreements (PSA’s) are requested by Employers and subject to agreement with HMRC. Under this agreement the employer will be responsible for accounting for any tax and national insurance liabilities arising. Any items covered by a PSA will not need to be shown on forms P35 and P11D at the end of the tax year.
Applications for PSA’s should be made before 6th July 2013 if you want to use them for the tax year ended 5th April 2013, once approved by HMRC payment of the Tax and NI is due by the 19th October (payments by cheque) or 22nd October (payments online).
The tax due is grossed-up at the employee’s marginal rate. For example, £5,000 of benefits provided to higher rate taxpayers (40 per cent) would be grossed-up as follows:
Benefits of £5,000 x 40 per cent = £2,000 tax
Grossed-up tax = £2,000 x 100/100-40 = £3,333.33
Benefits plus grossed-up tax = £8,333.33 x 13.8 per cent Class 1B = £1,149.99
Total due to be paid £3,333.33 tax plus £1,149.99 Class 1B = £4,483.32
Minor Benefits
- incentive awards
- reimbursement of late night taxi fares outside s248 ITEPA 2003
- personal incidental expenses in excess of the statutory daily limit
- present for an employee in hospital
- staff entertainment, for example a ticket for Wimbledon
- use of a pool car where the conditions for tax exemption are not satisfied
- subscriptions to gyms, sports clubs etc
- telephone bills
- gift vouchers and small gifts
Irregular Expenses
HMRC (PSA 1070) examples (not exhaustive) of what may constitute an irregular item.
- relocation expenses where the amounts concerned exceed the £8000 tax exempt threshold (Section 287 ITEPA 2003)
- occasional attendance at an overseas conference where not all the expenses qualify for relief
- expenses of a spouse occasionally accompanying an employee abroad
- occasional use of a company holiday flat
- one off gifts which are not minor.
Impracticable Items
HMRC (PSA 1080) examples (not exhaustive) of what may constitute an impracticable item
- free chiropody care
- hairdressing services
- Christmas parties and similar entertainment provided by the employer which do not already qualify for relief
- cost of shared taxis home which do not satisfy s248 ITEPA 2003
- shared cars.
Gov.uk has guidance on How to get a PSA
steve@bicknells.net
12 really quick and easy tax tips for PAYE workers
- Child care vouchers – if you have children attending a nursery or looked after by a professional childminder, your employer can join a Childcare voucher scheme. This allows for £55 of the weekly cost to be deducted free of tax and NI if you are a basic tax rate payer, or £28 if you are a higher rate tax payer.
- Pensions – if you pay into a work pension scheme, 20% tax is automatically deducted. For high rate tax payers, you can claim additional relief either by declaring it on your Self-Assessment or calling the taxman.
- Company cars – are a pain and the tax is huge BUT if you have a company van, the benefit in kind is capped at £3,000 so for a basic rate tax payer the cost of driving is only £600 or £1,200 for a higher rate payer.
- Professional membership fees – your membership to a recognised trade or professional body it is a deductible expense, but not for your hobbies.
- Share incentive schemes – there are loads of schemes that allow either NI or Capital Gains Tax to be saved, you don’t have work for a listed company either.
- Giving your work colleagues a lift to work – if your employer encourages car pooling you can claim 5p a mile for the passenger without incurring any additional tax charge.
- Cycle to work – get your employer to provides a bike both for travel to work and play, it’s not considered as a benefit in kind.
- Then after a time you can buy it off them at market value.
- Season ticket loans – your company can advance the cost of an annual season ticket up to £5,000, much cheaper than buying a ticket weekly.
- From April 2014 this increases to £10,000 (not really sure if that’s a blessing?)
- Electric Cars – from April 2015 there’s no benefit in kind.
- Working from home – it is becoming increasingly more common for staff to work from home. You can claim £4 a week allowance without having to produce receipts.
Any questions contact the author at niall@odfinancialservices.co.uk
Will I be taxed on Christmas gifts recieved at work?
It’s Christmas and even though times are tough, you could still get a gift from your employer or client or supplier, will it come with a tax bill attached?
The answer depends on the value.
HMRC Helpsheet 207 – Non-taxable payments or benefits for employees
The Helpsheet says, certain gifts from third parties are non-taxable if all these conditions are satisfied:
• the gift consists of goods or a voucher or token only capable of being used to obtain goods, and
• the person making the gift is not your employer or a person connected with your employer, and
• the gift is not made either in recognition of the performance of particular services in the course of your employment or in anticipation of particular services which are to be performed, and
• the gift has not been directly or indirectly procured by your employer or by a person connected with your employer, and
• the gift cost the donor £250 or less, and
• the total cost of all gifts made by the same donor to you, or to members of your family or household, during the tax year is £250 or less.
http://www.hmrc.gov.uk/helpsheets/hs207.pdf
An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts can be treated as trivial benefits. . For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned. If a benefit is trivial it should not be included in a PSA (EIM21861).
http://www.hmrc.gov.uk/manuals/eimanual/EIM21863.htm
Will the employer or supplier or client have to account for VAT?
You do not have to account for VAT on business gifts made to the same person so long as the total cost of all the gifts does not exceed £50, excluding VAT, in any 12-month period. To check this it is acceptable for you to adopt any 12-month period that includes the day on which the gift is made.
But where the following apply:
- the total cost of business gifts given to the same person in any 12-month period exceeds £50
- you were entitled to claim the VAT on the purchase as input tax
you must normally account for output tax on the total cost value of all the gifts. How to work out the cost is explained in Notice 700, ‘The VAT Guide’.
steve@bicknells.net
Will the Christmas Party be tax free?
The answer is probably! maybe?
HMRC have an Exemption (not an allowance) of £150.
If the employer provides two or more annual parties or functions, no charge arises in respect of the party, or parties, for which cost(s) per head do not exceed £150 in aggregate. Where there is more than one annual function potentially within the exemption, we do not expect employers to keep a cumulative record, employee by employee, of functions attended. But for each function the cost per head should be calculated. The cost per head of subsequent functions should be added. If the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt, the others taxable (see examples at EIM21691).
The figure of £150 is not an allowance. For functions that are outside the scope of the exemption (see example at EIM21691) directors and employees, except those in an excluded employment, are chargeable on the full cost per head, not just the excess over £150, in respect of:
- themselves and
- any members of their family and household who attend as guests.
The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend. Divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head.
http://www.hmrc.gov.uk/manuals/eimanual/eim21690.htm
Things to watch out for:
1. The function must be open to all staff, if its just directors, its taxable
2. The cost must not exceed £150 per head, otherwise it will all be taxable http://www.companychristmas.co.uk/news/tax_free_christmas_parties
3. If you have several events during the year you may have to choose which ones qualify if the total exceeds £150
steve@bicknells.net
EU VAT B2C – e services to be vatable where they are consumed
At the moment all businesses supplying telecommunications, broadcasting and e-services such as downloaded ‘apps’, music, gaming, e-books and similar services to private consumers located in other EU Member States (referred to as ‘B2C’ supplies) are taxed where the business supplier is established, which is simple to understand and implement.
In the Finance Bill 2014 this will be changed and from 1st January 2015 VAT will be charged in the country where the customer has ‘use and enjoyment’ of the services.
So lets say you are an American (normally zero rated) on holiday in France, even though you pay with an American credit card and buy from a UK supplier because you are reading your ebook in France, French VAT will apply. Sounds like a nightmare, doesn’t it.
To help with this HMRC are introducing the VAT MOSS (Mini One Stop Shop) and businesses can register from October 2014.
Unless businesses opt to register for MOSS, businesses that make intra EU B2C supplies of telecommunications, broadcasting and e-services will be required to register and account for VAT in every Member State in which they have customers. MOSS will give these businesses the option of registering in just the UK and accounting for VAT on supplies to their customers in other Member States using a single online MOSS VAT return submitted to HMRC. This will significantly reduce their administrative burdens.
- Examples of telecommunications services include: fixed and mobile telephone services; videophone services; paging services; facsimile, telegraph and telex services; access to the internet and worldwide web.
- Examples of broadcasting services include: radio and television programmes transmitted over a radio or television network, and live broadcasts over the internet.
- Examples of e-services include: video on demand, downloaded applications (or “apps”), music downloads, gaming, e-books, anti-virus software and online auctions.
HMRC VAT Place of Supply Link
If you supply e services its worth considering the accounting and pricing changes that you will need to implement and how you will incorporate the ‘use and enjoyment’ rules.
steve@bicknells.net
Business Accountant 