As part of an ongoing consultation process, HMRC have recently announced further changes to the partial exemption rules. These changes will come into effect for VAT periods commencing on or after 1 April 2010 and should result in a reduction in the administrative burden currently faced by many smaller businesses. The changes are optional and do not require approval from HMRC.

There are two new simplified tests to see whether a business is ‘de minimis’.  If the business passes either of these optional tests (or the existing one which remains in place) it can provisionally recover all of its input tax including that attributable to its exempt supplies.

A further change allows the de minimis tests to be carried out annually rather than quarterly as is currently the case.

Where a business is de minimis (either under the new tests or under the current de minimis tests), it can provisionally treat itself as being de minimis throughout the following VAT year. If the business then fails the test at the year end, the VAT overclaimed must then be repaid to HMRC under the annual adjustment.

HMRC have issued an Information Sheet which sets out the new rules in detail.

This is very welcome news indeed, particularly for those smaller businesses which neither have the time nor the resource to deal with the current partial exemption rules.

Jane Stacey is a VAT adviser and a senior manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Jane you can call her on 01727 869141.

 

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The Treasury has recently issued a 'Tax framework for business' document. 

I am wholly in agreement with the principles outlined – competitive rates, fairness, simplicity, stability and certainty. Where I have a problem is on delivery – our tax code is the longest in Europe; HMRC has just introduced legislation backdated to 2007, and the Courts have ruled that HMRC guidance cannot be relied on – and that’s without taking time to think.

The document requests comments – I would urge you to do so before our tax system becomes so complex and uncertain it becomes unworkable.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

 

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HMRC has just announced yet another phishing attempt using its name to try and obtain personal details. The list of such attempts is now quite long but I would urge you just to have a quick look to make sure you are forewarned. Details of the current and past scams can be found here.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.

 

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HMRC has now published a factsheet setting out to whom the new late payment penalties, starting 6 April 2010, will apply, how much they will be and when they will be issued.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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Under the 'thin cap' provisions HMRC seeks to disallow loan interest on the basis that no third party lender would make loans that exceeded the amount of equity in a company. However, in a recent case, judges broadly ruled in favour of the business.

The judges said UK law should be disapplied where the lending (within the EU only) was for overriding commercial reasons and that it should be for HMRC to demonstrate that the lending was not commercial.

HMRC are unlikely to be happy with this result.

Just a word of warning though - loans from non-EU companies remain a potential issue.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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Virtually all employers are required to file their Employer Annual Return (P35 and P14s) online from the 2009-10 tax year onwards. The 2009-10 Return is due by 19 May 2010.

HMRC has published online guidance including details of employers who are exempt from the online filing requirement.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. If you would like to discuss the contents of this post with Cathy you can call her on 01908 605552. 
 

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The Government recently announced action to counter tax planning that relies on using loss relief.

The new rules will prevent loss relief and capital gains relief from being given for a loss from a trade, profession or vocation where the loss arises from tax avoidance arrangements. The legislation will be included in the Finance Bill 2010 but will be effective from 21 October 2009.

This measure seeks to target those who enter into arrangement for the purpose of obtaining a reduction in tax liability by means of loss relief but should not impact on those who make losses but have not entered into avoidance arrangements.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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Press reports indicated HMRC has rejected more than 6,000 time-to-pay appeals over the last 12 months.

This is a small proportion of the 220,000 arrangements put in place but does represent a real problem for a lot of businesses.

HMRC has, however, warned action would be taken against businesses that default on payment plans. Such businesses 'should expect HMRC to take firm action to recover the debt.'

I think that counts as 'you have been warned'!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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The BBC news website recently reported that 10,000 reports about phishing emails were made to HMRC on a single day in October, and a record 83,000 were reported in September.

HMRC has again issued a reminder that taxpayers should not disclose any personal or payment information and confirmed that HMRC does not send emails requesting personal information.
As well as the “repayment” email a new variance regarding unreported income links to a fake HMRC website entitled 'Fraud Application'.

Earlier last month HMRC warned that an email entitled 'National Insurance Contributions' was circulating, stating that payment was outstanding. The email contains a link to a fraudulent website that requests the disclosure of payment/personal details, and is not from HMRC.

If in doubt contact HMRC or your accountant but do not give bank account details.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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HMRC is, perhaps understandably, not in favour of UK companies seeking to minimise tax bills by locating abroad. It appears that HMRC are planning to keep a watchful eye for years to come to be sure that senior management decisions have genuinely relocated.

Whilst it is crucial that board meetings are held outside Britain among non-resident directors, the problem is that a company could be deemed UK-resident if evidence – potentially including travel schedules, emails, diary entries and notes of phone calls – suggested key decisions were taken in the UK.

Emigrating companies will need to keep meticulous evidence to support their assertion that their 'central management and control' has moved outside the UK. Even if their records are exemplary, any investigation into whether a company has genuinely moved its residence could lead to exhaustive and time consuming scrutiny.

In reality there was always an expectation that HMRC would take a tough approach, but now this has been confirmed.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.
 

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It's a common concern that individuals, often the younger generation, put off arranging their financial future and Nightingale Associates are encouraging not only individuals to plan for their pensions now, but businesses as well.

In October 2012 'personal accounts' will be introduced as part of the Government's reform of pension provision in the UK, with the onus transferred to employers to encourage their employees to save via their pensions. The Government's drive to encourage individuals to save for their future will result in increased costs for employers. This is due to all employees earning at least £5,035* (including temporary and contract workers) aged between 22 years of age and the state pension age being enrolled automatically into the personal accounts system at the time of introduction.

It is highly probable that business owners will incur significant additional pension costs from 2012. For those who do not currently offer a scheme or those who do not currently contribute to a pension scheme, the costs are likely to be significantly higher.

Under the personal accounts scheme compulsory contributions will be 3% for the employer and 5% for the employee from October 2016 onwards. The contributions levels will be phased in over four years. Employees will be able to opt out of the system, but will be required to do so every three years.

Employers who already offer a pension scheme may be able to avoid setting up a personal account, if an existing scheme qualifies as an alternative and this is very likely to involve a significant uplift in members and increased costs. Even so, this is worth considering as a preferable option, as these schemes will most probably provide more investment choice and allow for higher contributions. Of late, many businesses have been offering group SIPP arrangements to senior staff, which offer a range of investment flexibility.  Business owners  should consider how running their own scheme could offer a more attractive recruitment, benefit and retention tool for staff.

Personal accounts are designed to be low cost (requiring an annual management charge of only 0.35%) and they will have a limited investment choice. It is anticipated that contributions will be collected alongside PAYE administration. Personal accounts do not provide allowances for advice and it should be noted that some of the most successful group pension schemes hold work place education sessions and face-to-face enrolment.

Employers should plan for their pension future now, as although legislation is yet to be passed, principal elements are unlikely to change. Failing to comply with personal account requirements could result in fines of up to £50,000 and ongoing, daily fines for continuing non compliance.

* In 2006/07 earnings terms

Michael Lockyer is managing partner of Mercer & Hole LLP, trading as Nightingale Associates financial advisers. You can contact Michael at mlockyer@ngale.co.uk or call 0845 828 1000.

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Two recent announcements will mean that Charities could benefit from VAT savings in the future.

The CFDG (Charities Finance Directors’ Group) recently attended a meeting with HMRC. The purpose of the meeting was to discuss current tax issues affecting the sector. Following the meeting HMRC agreed to consider the direct and indirect tax implications of sponsorship activities and also the VAT issues which affect joint venture and similar arrangements. The meeting is seen to be a very positive move by HMRC.

HMRC have also recently conceded on an issue, following a VAT test case taken by the Nuffield Foundation. The case considered whether VAT paid on investment management charges could be reclaimed by Charities. This move by HMRC means that Charities will now be able to reclaim some of the VAT paid on such charges, with the possibility of retrospective claims.

An HMRC Brief is expected shortly with more details. 

Jane Stacey is a VAT adviser and a senior manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Jane you can call her on 01727 869141.

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Unfortunately pay in lieu of notice is frequently a problem area for tax. HMRC often claims it as taxable while businesses and employees believe it to be tax free.

There are two areas to consider in this:

• contractual pay in lieu of notice is treated as normal earnings and subject to PAYE and NI. Make sure, therefore, that employment contracts do not state you can pay an employee instead of giving them notice
• custom – in HMRC’s view even if pay in lieu of notice is not formally contracted for, if you habitually pay it then it is taxable. Make sure you do not fall into the trap of always giving pay in lieu as an 'easy' option.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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The start of 2010 is set to be a busy time for VAT registered businesses, particularly those involved in cross border supplies of goods and services.

The current temporary VAT rate of 15% will revert back to 17.5% for supplies of goods and services made on or after 1 January 2010. As always, this is not necessarily as simple as it sounds, as there are special rules for supplies which span the date of the change and deposits/prepayments etc.

That said, there is a cashflow opportunity for businesses if they can encourage customers to pay in full before 1 January for goods and services to be provided after the increase. (However, please note that this is subject to anti-forestalling legislation which will affect certain transactions).

With effect from 1 January 2010, there will also be a number of important changes for businesses supplying goods to other EU countries and also for those supplying or receiving cross border services, These changes involve three aspects; the place and time of supply of certain services, and changes to the EC Sales Lists rules (currently only required for cross border supplies of goods but will be extended to include services). If you are involved in cross border transactions, now is the time to consider if and how the changes will affect your business and what needs to be done in order to comply.

Businesses which submit VAT refund claims for VAT incurred in other countries, will have to do so using a new EU electronic system being introduced on 1 January 2010. The new system has revised time limits and procedures for submission and repayment of the claims. In order to use the service, UK businesses will need to register online via the UK portal and this service is expected to be available from late November. HMRC will announce further details in due course. Whilst the UK is prepared for the new system, it is possible that certain EU countries may not be fully ready.

We have already reported in previous blogs that online filing of VAT returns and electronic payment will become compulsory from 1 April 2010, for all new VAT registrations and businesses with an annual turnover above £100,000. Businesses with a turnover below £100,000 can continue to use paper returns until these are phased out in 2012.

Further details and guidance on all of these changes can be found at HMRC’s website. HMRC will also be writing to businesses to inform them of the changes.

HMRC have said that they understand that this will be a difficult time for businesses and so they intend to adopt a 'light approach' to any errors made immediately after the implementation of these changes. Whether this happens in practice remains to be seen.

Jane Stacey is a VAT adviser and a senior manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Jane you can call her on 01727 869141.

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HMRC has issued an update on the new rules that will apply to late PAYE payments with effect form May of next year. Essentially if more than one payment a year is late a penalty will be charged at graduated rates depending on how late the payment is and how many other late payments have been made in the same year. It will be important to manage payments and contact HMRC in advance if any cash-flow issues arise.

For full details see - http://www.hmrc.gov.uk/employers-bulletin/bulletin33/paye-ontime.htm

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HMRC originally launched the Tax Evasion Hotline back in 2005 to provide an easy method for the public to report their suspicions about individuals or businesses which may be evading their tax obligations. As well as the phone, freepost and fax, the methods of reporting now include email.

The email form may be accessed at http://www.hmrc.gov.uk/tax-evasion/hotline.htm

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For many years, HMRC have been unhappy that certain yacht owners have been able to reclaim VAT on the purchase of a yacht and associated running costs, by setting up a yacht chartering business. HMRC’s view has been that in some cases, (principally where there is a significant level of private use by the owner and/or their family), this situation has given rise to a tax advantage.

HMRC recently issued a business brief outlining their new approach to yacht chartering/leasing businesses. This approach appears to be much tougher than the position taken until now and adopts the principles of a recent 'abuse' case (Halifax and Part Service Srl).

The new rules focus on the economic substance of the business and if a tax advantage is the aim of the arrangement, then HMRC will take appropriate action.

It appears that this new approach will apply to both existing businesses and to new applications for VAT registration. 

Jane Stacey is a VATadviser and a Senior Manager at Mercer & Hole. The views given in this blog are personal to the author.

 

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The Finance Act introduced detailed requirements for financial officers of certain companies and HMRC has now issued detailed guidance on this which may be found here.

Just to reassure you, the new provisions only apply to UK incorporated companies that in its preceding financial year, either alone or in aggregate with other UK companies in its group, has turnover of more than £200 million, or balance sheet totals of more than £2 billion. This is unlikely to affect many businesses but where it does apply the requirements are stringent.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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We reported in our blog of 18 May 2009 that taxpayers may be entitled to payment of compound interest on VAT refunds made by HMRC. At that time, certain lead cases were in the pipeline.

A recent Upper Tax Tribunal decision has further considered this issue (John Wilkins (Motor Engineers) Ltd and Others).

The Court has ruled in favour of HMRC and decided that UK legislation does not oblige HMRC to pay compound interest. The Tribunal accepted that taxpayers had a right in principle to compound interest under EU law but that UK law should not be interpreted to do likewise. It ruled that instead taxpayers should seek compound interest from HMRC by a separate civil law claim for restitution.

Appeals to the Higher Courts are expected to be made. 

Jane Stacey is a VATadviser and a Senior Manager at Mercer & Hole. The views given in this blog are personal to the author.

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Sadly the use of losses to reduce corporation tax is becoming more common in the current climate.

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HMRC has made a deal to exchange information on UK taxpayers with Liechtenstein bank accounts.

British investors with accounts in Liechtenstein will have these accounts closed and HMRC will be advised if they seek to open new accounts, unless they choose to disclose now.
However, HMRC is offering generous terms to these investors, more so than for the general amnesty. Specifically, tax has to be paid on only the last ten years (normally 20) and penalties will be capped at 10%.

This is good news if you had an account in Liechtenstein, but presumably irritating if your account was in Jersey instead!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Clearly linked in with the announced tax amnesty HMRC has succeeded in obtaining authority to force over 300 banks to provide information about customers with offshore accounts.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Recent reports in the press indicate that the fact that a business has deferred payment of tax with HMRC's Business Support Unit because of cash-flow problems will not appear on any credit checks. This is almost certainly good news if you are such a business. The flip side though is that you have no way of knowing if your customers are having such cash-flow issues.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has introduced a new minimum interest rate on tax repayments of 0.5%. This means that interest will be payable even when the Bank of England base rate falls below 1.5%.

Earlier this year the Government said that it would introduce legislation to harmonise interest rates on interest charged and paid by HMRC. From now on, subject to the above, interest charged on tax paid will be based on and move with the Bank of England rate. Interest on tax paid late will be that base rate plus 2.5% and for interest on tax overpaid the rate will be the base rate minus 1%.

I am not sure that a differential of 3.5% is quite what I understood by harmonisation but at least the position is now clear.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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Recent press reports indicate that HMRC have over-collected millions of pounds as around 4.5 million taxpayers have incorrect tax codes.

Apparently there were 20 million queries on tax codes in March 2009, up from around 16 million last year.

I have to say this does not inspire confidence in the system, and if you consider new complexities, eg withdrawal of higher rate relief on pensions, it looks as if things will only get worse!

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

 

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Apparently the Government has put forward proposed new rules that would force accountants to reveal the names and addresses of clients who take up 'schemes' to avoid paying the 50% rate of income tax that comes into effect from April next year.

HMRC is seeking a 'new specialist information power' that would allow it to require accountants to release the details of all such individuals.

The current disclosure rules require accountants to tell HMRC about schemes and, where a scheme is registered, the scheme number has to be put on the return. Apparently this does not go far enough.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Government’s new temporary scheme introduced on 18 May 2009, to boost the flagging new car market has brought with it a number of potential VAT issues for manufacturers, dealers and customers alike.

As the amount is funded in two ways, half from the manufacturer and half from the Government, there is scope for VAT accounting errors to occur, particularly as many car dealers are using this scheme in conjunction with other promotional schemes.

HMRC’s Business Brief 31/09 sets out the correct VAT treatment of the £2,000 subsidy.

If you buy a new car or van under this scheme and are entitled to reclaim the VAT on the purchase, you will need to adjust the VAT reclaimed to reflect the manufacturers’ discount.

Further information regarding this scheme can be found on HMRC’s website. 

Jane Stacey is a VATadviser and a Senior Manager at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC formally provided details of its second tax amnesty on Tuesday of this week. After all of the leaks there are few surprises, the key points are:

• Notification of intent to disclose has to be made within the window 1 September to 30 November 2009
• Full disclosure then has to be made by 31 January 2010 for paper (very bad timing bearing in mind the tax return deadline) or 12 March 2010 for on-line disclosure
• The penalty rate is generally 10% unless you were written to in 2007 and could have taken advantage of the then amnesty in which case the penalty will rise to 20%
• Late disclosure will attract a much higher penalty between 30% and 100%
• HMRC is offering no guarantees on prosecution but has stated that so far no-one who came forward in 2007 has been prosecuted but that those who could declare by 12 March next year and do not do so face a risk of prosecution.

Full details can be found by logging on to www.hmrc.gov.uk and following the link from the home page.

I would stress that the deadlines are tight particularly when combined with the personal tax pressures in December and January. If you think you may have anything to disclose and need some help please contact us as soon as possible for a free, no-obligation and confidential phone call - 01908 605552. It seems unlikely that HMRC will provide further disclosure opportunities, so this may represent your last chance to take advantage of the lower penalties.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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If you have a view on this, now is your opportunity to say so. HMRC has invited people to complete an on-line questionnaire (by 31 July) so the department can continue its review of the merits of collecting tax and NICs on benefits through the payroll rather than through the current Form P11D procedure. The questionnaires are available at www.hmrc.gov.uk/employers-bulletin/payrolling.htm.

If this is an issue that may affect you, I would urge you to take a few minutes to complete the questionnaire. If enough people respond, HMRC may take notice; if everyone ignores it I suspect they will do whatever is easiest for them, as opposed to you.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In a recent High Court case (HMRC Commissioners v. Banerjee) the Court held that training costs incurred by a consultant dermatologist were an allowable cost for tax purposes. In order for this to be the case, the dermatologist needed to show that she had incurred the costs wholly, exclusively and necessarily in the performance of the duties of her employment. 

In this instance it was held that the training was an intrinsic part of the job that she was paid to perform and was, in fact, required under the terms of her contract of employment in that she would not have been allowed to continue in employment had she failed to attend the external training sessions, and her compliance at these was monitored. 

I have to say that this did not stop HMRC contending that expenditure incurred in performing the duties of a training contract could not be expenditure incurred in performance of the duties of employment!

The good news, however, is that they lost. On this basis it may be worth having another look at costs incurred.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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In these difficult economic times, it is easy to forget that good housekeeping can improve VAT cash flow. If debtors are increasing and cash flow is an issue, it is easy to overlook the bad debt relief which is available.

If you have debtors of more than six months old, you can adjust the VAT already paid to HMRC, subject to certain conditions.

The main conditions are:

• The VAT has been paid to HMRC
• The debt has been written off in the accounts (eg refund for VAT bad debts account which can be outside of the main accounts)
• The debt is more than six months old (later of time of supply and due date for payment).

Claims are made by including the VAT on the outstanding amount in the VAT return for the period when entitlement arises. The VAT is adjusted by including it in Box 4 of the return.

In the event that the debt is subsequently paid by the customer, the VAT claimed under these rules, will have to be repaid to HMRC.

Claims must be made within four years (from 1 April 2009) and six months from the later of:

• Date of the supply; and
• The date the amount became due and payable.

But you should not forget that if you have unpaid supplier invoices which are more than six months old (excluding any time allowed for payment), you are required to repay the VAT claimed on your VAT return. You adjust for this by entering a negative figure in Box 4 of the VAT return in the period in which the six month period has passed.

Another way to mitigate VAT debts is to consider whether you can use the Cash Accounting Scheme. Businesses with an annual turnover of less than £1.35 million and with a good VAT compliance history can use the scheme. Under the scheme, VAT is accounted for on a cash receipts basis rather than on an invoice basis. This provides automatic bad debt relief.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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One of the less well publicised items in the Budget was on error or mistake claims. Currently, if you discover a mistake on your tax return and have overpaid tax as a result, individuals have five years and ten months (and companies six years) in which to make a claim to have the tax repaid. This time limit reduces to four years with effect from April 2010.

Now would be a good time to have a look at the past.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC has now confirmed the dates for the second tax amnesty and is launching a national advertising campaign to persuade people, particularly those with offshore bank accounts, to come forward and declare any previously undisclosed income.

The amnesty will begin on 1 September for paper disclosures and 1 October for online disclosures. The deadline is still set at 31 March 2010 for paper disclosures but only 31 January for online.

The penalty is set at a flat rate 20% plus interest on unpaid tax.

HMRC say that this is a real last chance and certainly the penalty is lower than could otherwise be expected, although higher than the 10% offered on the first amnesty.

If you do have anything you need to declare, now is probably the time to start talking to an adviser so you have time to sort everything out sensibly rather than pushing deadlines.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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HMRC may be prepared to help. It has recently issued guidance on the implementation of managed payment plans (plans). These plans allow tax liabilities to be paid by equal monthly instalments over a period of up to 12 months spaced equally, either side of the normal due date(s).

The plans will provide protection from interest and penalties. They are available for income tax, capital gains tax payable and corporation tax. However, large companies are not eligible.

Plans are voluntary. You have to send a proposal to pay to HMRC who will accept it provided certain conditions are met. These currently include:

• you must have filed your return for the year
• you must have paid all previous tax due or have set up a separate arrangement to pay
• payments must be made, by Direct Debit or Standing Order, by equal monthly instalments on the fifteenth day of each month, spread equally either side of the due date.

This may not be a perfect system and it certainly needs planning in advance which makes it of little use for this July. But if cash is tight this may help come next January, provided you take action now.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole.  

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HMRC have provided further information regarding this year's 'New Disclosure Opportunity (NDO).’

Whilst most people using the NDO to disclose details of income and profits derived from foreign assets are likely to face a penalty of 10%, customers of the high street banks who received letters under the 2007 Offshore Disclosure Facility, but chose not to contact HMRC, will face a 20% penalty if they now use the NDO to make a disclosure.

The advice in our previous blog holds good; if you think this may affect you, take professional advice as soon as possible. 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Tax partner at Mercer & Hole.

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HMRC has now issued some guidance notes on the taxation on company cars and vans, including calculators to provide an indication of benefits.

Company cars - the link to HMRC’s website is http://www.hmrc.gov.uk/cars/company-cars-factsheet.pdf. 

Company vans - the link on HMRC’s website is http://www.hmrc.gov.uk/vans/vans-info.pdf.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole. 

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If you were concerned about the recent article in the press that effectively said manufacturing companies no longer qualify for Research & Development (R&D) this is a note to reassure you.

We have confirmed with HMRC that for the majority of owner-managed business there is not an issue. For those exceptional cases that may be affected, in any case, earlier years will remain untouched.

Going forward, it appears that the only area for debate will be on consumables ie the cost of the parts used in the manufacture of test products. The costs for salaries, light, heat etc should still qualify for R&D relief as before.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole.

 

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The Chancellor announced a further deferral of the proposed ‘income shifting’ legislation in the Budget. However, the ‘settlements’ anti-avoidance provisions are still very much in force and the Revenue is applying them.

In a recent case (Buck v Revenue and Customs Commissioners [2008] SpC 716) Mr Buck owned 9,999 shares and Mrs Buck 1 share in a company. Mr Buck waived the dividends on his shares, which enabled enhanced dividends to be paid on his wife’s share. HMRC argued and won that the dividend waivers constituted a ‘settlement’, and assessed Mr Buck on the enhanced dividends.
The main problem was that there were insufficient reserves to cover the dividend if the waiver had not been made.

In another case (Mr and Mrs Bird v Revenue and Customs Commissioners [2008]), Mr and Mrs Bird were the initial shareholders of a company, owning one share each. The company issued a further 98 shares at par, 19 shares each to Mr and Mrs Bird, and 20 shares to each of their three daughters. Dividends were paid to all shareholders. HMRC argued, and again won, that the dividends paid to the daughters (until they reached age 18) constituted income arising under a ‘settlement’, which should be treated as Mr and Mrs Bird’s income.

Any tax planning of this nature will need to be considered carefully if it is to be effective.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Tax partner at Mercer & Hole.  
 

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In 2007, HM Revenue & Customs announced the introduction of an Offshore Disclosure Facility (ODF) under which taxpayers with undisclosed overseas income and accounts had a limited period within which they could disclose details of this income and these accounts - and be subject to a much lower penalty (10%) than would normally be applied.

For months, we have been promised a further opportunity to make similar disclosures - but the period during which it will apply and the penalties that will be imposed have not been announced, until now.

We still do not know when the new facility will apply but HMRC announced this week that the penalty for disclosures under its New Disclosure Opportunity (NDO) will be set at 10%. This is much lower than most commentators expected and is clearly at a level which HMRC expects will encourage taxpayers to come forward.

It is unlikely that accounts at HSBC, HBOS, LloydsTSB, RBS, NatWest and Barclays will be covered by the NDO. Accountholders with these banks were given the chance to make a disclosure under the ODF and it seems likely that the chance of a 10% penalty has gone for these people.

If the NDO runs along similar lines to the ODF, the reduced penalty will be available to all disclosures - not just those relating to offshore accounts. Taxpayers who have a disclosure to make are likely to face penalties much lower than those which they would otherwise face; under the current penalty regime, taxpayers who have deliberately concealed business takings or income (either through the use of offshore accounts or other methods) can expect a penalty of at least 50% (and perhaps as much as 100%).

If you think the NDO may be relevant to you, or you know someone who may benefit from the lower penalty on offer, our advice would be to contact your tax adviser as soon as possible.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Tax Partner at Mercer & Hole.

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HMRC has now announced a pilot on the outsourcing of some of their debts. I attach a link to their website on this - http://www.hmrc.gov.uk/agents/dm-pilot.htm. I think the key thing to remember is if you get a call - contact your advisers.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole.

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HMRC has now issued its 2009/10 Business Plan setting out its vision and strategic objectives. These include:

• improving customers experience of HMRC
• improving professionalism

It is an interesting read but I will be watching the delivery.

For further information see http://www.hmrc.gov.uk/about/business-plan.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

 

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If you have submitted VAT refund claims in the past, you may be due additional interest payments following a recent High Court decision.

HMRC have always paid simple interest on VAT refunds. This position came under threat following the Direct Tax case “Sempra Metals” which ruled that taxpayers should receive interest on a compounded basis.

A number of car dealers who had received refunds on demonstrator cars, went to the High Court (Group Litigation Order) to request that compound interest be paid.

The Court recently ruled that compound interest should be paid. However, the car dealers’ claims were out of time under statutory time limits.

There is also a separate VAT tribunal case to be taken by British Telecom on the same issue. This case is due to be heard in June.

Businesses which have had claims paid with interest in the last three years should now consider whether to submit further claims to HMRC for compound interest.  Compound interest can amount to three or four times the original claim.

Businesses which have been paid claims going back more than 3 years (under the Fleming case ) may also be entitled to compound interest. Professional advice should be sought as this is a complex issue.

 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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Having seen the Chancellor announce the introduction of new 50% (and, in some cases, 60%) tax rates, the Treasury have admitted that legitimate tax avoidance is expected to reduce their impact by nearly 70%.

This would reduce the additional tax collected by something like £2.5billion, annually.

The reduction in tax relief for pension contributions made by those earning £150,000 or more will cut this tax leakage from 2011 on but it seems likely that people taking steps to lessen the impact of the new rates will keep the extra money available to the Treasury to a minimum.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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HM Revenue & Customs (HMRC) have announced that 25% of their £4billion budget will be devoted to attacking tax avoidance and evasion, this year.

This represents a significant shift in emphasis and follows a lengthy 'litigation and settlement review', which has led to HMRC promising to prosecute far more often than it has done in the past. If the HMRC stay true to their word, the days of taxpayers cutting a deal over the amount of tax due in contentious cases could well be over - instead, the matter will be decided in court, with the decision setting a precedent for similar cases.

The expected return for this investment is £2.4billion, far less than HMRC might normally expect to receive for such an outlay.

It is unclear exactly what will be challenged at the moment; what does seem certain is that we can expect HMRC to undertake more frequent investigations and enquiries, especially where they feel reliance has been placed on the letter (as opposed to the spirit) of the law.

As their new Chief Executive, Lesley Strathie put it, “In the current difficult economic climate, it is more important than ever that HMRC helps and supports customers fulfil these obligations while relentlessly pursuing those who bend or break the rules.”

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The good news is that the law changed this month so that you may now be able to purchase an additional six years of state pension contributions by paying Class 3 contributions.  Unfortunately, as a result of this new right, the rate of Class 3 contributions increased from £8.10 per week to £12.05 also from April 2009. The Pension Service website states that this is necessary to ensure that the change is cost neutral.

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A recent case (Wilson v Revenue & Customs Commissioners SpC 724) caught my eye purely because it triggered an instinctive response of “but that’s not fair!”

The taxpayer submitted his 2004/05 self assessment tax return including a claim for a capital loss of £2m. HMRC entered the figures manually on the computer and then lost the return. The taxpayer failed to produce a copy of the return when HMRC asked for this and HMRC issued a notice requiring him to deliver a copy, followed by a summons for a penalty for failure to comply with the notice, and requested the maximum penalty of £300.

The Special Commissioner determined the penalty on the basis that the return contained information relevant to the taxpayer’s tax liability and the default had continued for a year. The maximum penalty was very small compared with the amount of the loss. The fact that HMRC received the original return did not prevent it from requiring a copy!

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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HMRC has now published details of the tax effects of the part nationalisation of the society to assist people with their returns for this year.  The details can be found at http://www.hmrc.gov.uk/briefs/cgt/brief1609.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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HMRC has now introduced an advisory system of 'benchmark' scale rates which employers can use to make subsistence payments to employees free of tax and NICs. The new advisory system was implemented from 6 April 2009.

The system only covers scale rates for day subsistence payments. There are detailed requirements on notifications and conditions but once set up the following tax payments can be paid, tax free and with no P11D reporting obligations:

Breakfast rate for irregular early starters up to £5.00 per day

One meal (5 hour) rate - up to £5.00 may be paid

Two meal (10 hour) rate – up to £10.00 may be paid

For further details see www.hmrc.gov.uk/briefs/income-tax/brief2409.htm.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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The new penalty regime introduced by HM Revenue & Customs took effect from 1 April 2009. Essentially the regime attempts to reward good and punish bad behaviour and applies a measure of reasonable care. If reasonable care has not been taken the imposition of a penalty is almost inevitable. HMRC has published a leaflet entitled “Take Care to Avoid A Penalty” which provides some guidance on their views. 

This can be found at http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf.

You can comment on the new penalty regime in the space provided below, or visit my profile for details of how to contact me. 

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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With effect from 6 April 2009 employers with 50 or more employees must send their employee starter and leaver information – P45s, P46s and P46(Pen) for pensions – online. Failure to do so could result in a penalty. Forms are filed online using HMRC’s PAYE Online for Employers service, with which employers must first register at www.hmrc.gov.uk. 

Comment on PAYE penalties in the space provided below, or visit my profile for details of how to contact me.

Cathy Corns is a Corporate Tax partner at Mercer & Hole. 

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In theory, greater cooperation should be a good idea. My only reservation is over how it will work in practice.

Two proposals have been adopted by the EC with the aim of improving assistance between the tax authorities of Member States. In addition to providing clearer and common rules on procedures, forms, etc it will grant tax officials equal powers of inspection in administration enquiries carried out in another State.

Another element of the proposals is aimed at tackling the question of bank secrecy. A Member State will not be able to refuse to supply information concerning a taxpayer solely because this information is held by a bank or other financial institution.

With a second HM Revenue & Customs amnesty on offshore accounts soon to be announced, these proposals certainly add to their arsenal of weapons for tackling tax avoidance.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

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A while ago now HMRC moved responsibility for deciding which taxpayers would have their tax returns subjected to an enquiry away from local inspectors to Risk Intelligence Assessment Teams (RIATs).

RIATs have information and statistics available on a country-wide basis. This allows RIATs to spot trends, compare income, expenses, profit ratios, etc. with similar businesses on a nationwide basis. 

RIATs do not, for obvious reasons, publicise all of the possible triggers, but here are some of them:

• Recurring late submission of accounts/tax returns overdue in recent years
• Significant fluctuation in income or expenses
• Significant errors including no adjustments for private use element
• Low income compared with outgoings.

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HMRC has issued taxpayers warnings on being targeted by fraudsters.

A growing number of telephone and email scams involve fraudsters posing as tax officials arranging repayments, attempting to obtain personal information after 31 January, when many people will be expecting refunds.

The emails tell the recipient they are due a tax refund and ask for bank or credit card details. Recipients are advised not to click on web links contained in suspicious emails and not to open attachments.

HMRC advised that any email that appeared to originate from HMRC and offered a tax refund should be forwarded unopened to phishing@hmrc.gsi.gov.uk. HMRC does not undertake to reply to every email sent, but said the information would be used to help reduce online fraud.

For further details visit the following link on the HMRC website. 
 

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Less than 50 employees? If so - if you file your employer's returns on line this year you will receive a £75 bonus from the Revenue - see link for further details. 

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HMRC is proposing to outsource some of its debt collection service to private-sector suppliers. It plans to run pilot schemes, including outsourcing debt collection, to low-value debt specialists and selling debts deemed irrecoverable as part of an assessment on how debt could be managed more effectively.

The Federation of Small Businesses has expressed concerns that the sympathetic stance taken by HMRC on the plight of small businesses during the economic downturn could stop with outsourced collection.

HMRC reject this view, stating that the collectors will have to work to HMRC’s standards. People will be expected to behave well and treat debt respectfully.

Time will tell …

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It was in his Pre-budget report last November that the Chancellor, Alistair Darling, announced the creation of the Business Payment Support Service (BPSS). This is a telephone helpline (0845 302 1435) that companies and business owners can ring to negotiate extra time to pay tax.

As the January deadline for paying self-assessment income tax approached, several of our clients made use of this service and were able to agree 3, 6 or sometimes more than 12 months in which to settle their tax bills. The whole process took only a few minutes.

It would appear, however, that this initial burst of enthusiasm at HM Revenue & Customs has worn off and it is now much harder to agree more than a 3 month delay on the telephone. Anything longer than that is likely to be passed to a local manager for review and may also require more detailed information such as cash-flow forecasts and management accounts.
 

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HM Revenue & Customs (HMRC) has announced the latest interest rates charged on late payments of and paid on overpayments of tax.

The reduced rates that cover quarterly instalment payments of Corporation Tax take effect from 16 March 2009. The rates for all other direct and indirect taxes, including National Insurance contributions paid, take effect from 24 March 2009. The rate of interest:

• On late payments of Income Tax, National Insurance contributions, Capital Gains Tax, Stamp Duty, etc. changes from 3.5% to 2.5%, while on overpayments of these taxes interest remains at 0%.
• On late payments or repayments of Inheritance Tax changes from 1% to 0%.
• On underpaid instalment payments of Corporation Tax changes from 2% to 1.5 % while on overpaid instalment payments of Corporation Tax, and on Corporation Tax paid early (but not due by instalments) the rate changes from 0.75% to 0.25%.
• On unpaid Corporation Tax changes from 3.5% to 2.5% and on overpaid corporation tax remains at 0%.
• On under-declared or over-repayments of VAT, Air Passenger Duty, Insurance Premium Tax, Landfill Tax, Climate Change Levy, Aggregates Levy changes from 3.5%to 2.5%.

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In certain circumstances a PAYE liability can arise on the exercise of share options in a company. The initial liability falls on the employing company, but there is a fixed period from the date on which the payment is deemed to have been made, within which the employee can make good the tax due. If this is not done then the tax is effectively treated as a benefit in kind and assessed to income tax.

A recent case of the Special Commissioners (Chilcott and Others v. Revenue & Customs Commissioners SPC727) related to a case where, rather than reimbursing the company, the individuals declared the options on their returns and paid the tax. HMRC then sought to repay that tax and assess them instead on the benefit in kind of the company payment. 

The Special Commissioner did find for the Revenue but expressed concern about the legislation in that, in his opinion:

1.      The liability could be an additional imposition on an employee who reimbursed the employer after the 30 day period had expired. In those circumstances the overall tax burden could be as high as 56%. That appeared to put employees who chose not to reimburse their employer in a better overall position, which made no sense.

2.      The legislation takes no account of the length of time between the expiry of the 30 day period and the date on which reimbursement occurred. The tax charges are exactly the same if an employee is a day late as opposed to a year late.

Despite the sympathy and concern, one has to say the taxpayer still lost. The facts of this case pre-dated a change in the legislation and the period for making good was extended to 90 days. It was clearly recognised that 30 days was too short, but too late to help Mr Chilcott and colleagues.  

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Do you provide free business lunches to clients/business contacts? Have you restricted the VAT incurred on such lunches? If so, you may be interested in a recent European Court decision.

The Danfoss A/S, AstraZeneca A/S case(C-371/07) involved the provision of free meals in the staff canteen to health professionals attending business meetings at the appellant’s premises. The ECJ judgement has confirmed that such lunches may have a business purpose where the meal is provided to improve the efficiency of the meetings and if there is a business purpose, then the VAT is deductible.

This decision has cast some doubt over the UK’s treatment of VAT on business entertainment, and in particular, for working lunches.

UK VAT law restricts the recovery of VAT on business entertainment including in house lunches provided free of charge to clients during business meetings and to staff hosting such meetings.

This decision may mean that UK law may be too widely drawn. It remains to be seen whether further litigation on this issue will be pursued in the UK Courts. In the meantime, businesses may wish to consider submitting protective VAT claims, pending the final outcome of this matter.

Claims submitted for VAT incurred prior to 1 May 1997 (under the terms of the Conde Nast/Fleming cases) will have to be submitted by 31 March 2009.

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HMRC has announced a cut in their interest rates, both those charged on late payments and those paid on tax overpaid.

The reduced rates for accounting periods ending on or after 1 July 1999, take effect from 19 January 2009:

• The rate of interest charged on underpaid instalment payments of corporation tax changes from 3% to 2.5%.
• The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments) changes from 1.75% to 1.25%.
• The rate of interest on overpaid corporation tax reduces to 0%!
• The rate of interest on unpaid corporation tax changes from 4.5% to 3.5%.

The reduced rates that cover all other direct and indirect taxes, including national insurance contributions, take effect from 27 January 2009.

• The rate of interest charged on late payments of income tax, national insurance contributions, capital gains tax, stamp duty, stamp duty land tax and stamp duty reserve tax reduces from 4.5% to 3.5%.
• The rate of interest on overpaid income tax, national insurance contributions, capital gains tax, stamp duty, stamp duty land tax and stamp duty reserve tax reduces from 0.75% to 0%!
• The rate of interest for late payments or repayments of inheritance tax, capital transfer tax and estate duty changes from 2% to 1%.

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HM Revenue & Customs has been providing business owners with its view of the availability of inheritance tax business property relief, where there was a significant commercial issue or transaction of the business itself, for a 6 month trial period from 1 May 2008.

HMRC recently announced that the inheritance tax business property relief clearance service for business owners will continue, and will also include an extension to the scope of the service.

Under the extension, HMRC will also provide its view of the tax consequences of a transfer of value that involves a change of ownership of a business where this transfer, leaving aside the application of business property relief, would result in an immediate inheritance tax charge, and provided that the other existing conditions are met. Clearances in these change of ownership cases will remain valid for a limited period of 6 months.

Individuals who had previously had their application rejected because it fell outside the scope of the trial service, but would be included under the extended service, may request a review of the original application.
 

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Do you have a view on how the Revenue should behave and how it should treat you? Then this is your chance. The Revenue has issued an update on its taxpayers' charter that is currently open for consultation. You can find the full details online at: http://charterconsultation.hmrc.gov.uk  
 

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HMRC has announced revised guidance on Land Remediation Relief (Brief 62/2008 - http://www.hmrc.gov.uk/briefs/company-tax/brief6208.htm).

The new guidance states:

             “A substance means any natural or artificial substance, whether in solid or liquid form or in the form of a gas or vapour. Previously, we have taken the view that the term “substance” could not include a life-form. We now accept that a plant can be a substance for the purposes of Land Remediation Relief.”

A specific section will be included on Japanese Knotweed.

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John Morton was Lord Chancellor for Henry VII.

As Chancellor, charged with raising revenue, Morton visited nobles to ‘assess’ their ability to pay tax. If the entertainment afforded to him was lavish, he deduced that the owner had plenty of money and could obviously afford to pay a higher revenue. On the other hand, if the entertainment was frugal, this meant that the noble was saving all of his money and could therefore afford ...
 

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HMRC has established its new Business Payment Support Service, for businesses with cashflow problems, to arrange instalment payments on ‘all business taxes’ that are overdue.

This unit promises to give most businesses a response in ‘about 10 minutes’ if they ring its helpline. The help-line – 0845 302 1435 – is open 8am to 8pm Monday to Friday, and 8am to 4pm at weekends. We understand that no ‘additional penalties or surcharges on the tax’ will be imposed on businesses that are granted an instalment plan by HMRC.
 

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With effect from 9 December 2008 taxpayers can settle their self-assessment tax bills by credit card (for an extra fee of 1.25%).

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HM Revenue & Customs have announced that more than £2 billion is lost every year as a result of tax evasion – and accepted that they have little chance of catching the fraudsters.

Up to two million people are believed to be involved, of whom only a very small minority are ever caught and punished.

The Revenue’s new penalty regime includes provisions to increase the amounts payable by people who deliberately evade tax – and most people would not object to this. It is a shame, though, that in order to punish the more serious cases more severely, other (innocent) mistakes will also be hit.
 

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HM Revenue & Customs have released details of the amounts that employers may reimburse to employees provided with ‘company’ cars, for business travel. For journeys on or after 1 January 2009, the amounts payable per mile are as follows:

Engine size (cc)	Petrol	Diesel	LPG
1400 or less	10p	11p	7p
1401 to 2000	12p	11p	9p
Over 2000	17p	14p	12p

Any amounts paid up to the appropriate figures above will not be taxed.

These are only advisory rates; where employers can show that the costs exceed these amounts, it should be possible to pay the higher amount. Employers doing so can, however, expect to be asked to demonstrate why the costs are higher than the Revenue’s.

In the case of both petrol and diesel engines, the rates are lower than the previous amounts and reflect the lower costs of those fuels since the last review, in June 2008.

These figures will next be reviewed in June 2009.

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Apparently MPs are considering offering buy-to-let landlords the chance to make up for evading taxes by paying in full during an amnesty rather than facing financial penalties or legal action from the Revenue. If this were to happen, the amnesty would coincide with an information campaign, explaining to by-to-let landlords why paying taxes is crucial and outlining the consequences they face if they fail to submit a complete return.

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Whilst it seems a little unusual to think of depositing money with HMRC rather than with a bank, if you do have spare cash this may be something worth considering.

Just to put matters in perspective, for companies that overpay “ordinary” tax, interest is paid thereon at 2% and for tax paid early or for over-paid quarterly instalments the Revenue are paying at 2.75%, both of these are taxable.

For individuals who have overpaid tax the Revenue are paying 1.5% interest on a tax-free basis. 

Interest is not accrued if you choose to pay your income or capital gains tax early.

However, for individuals, there is the possibility of using Certificates of Tax Deposit. These were very popular some years ago but fell out of favour in times of rising interest rates. Regrettably they cannot be used for corporate tax, PAYE or VAT. Essentially deposits are purchased and the rate of interest, which is taxable, varies as to whether the certificate is cashed or applied against tax payments. The current rates are as follows:-

Deposit of under	Applied for tax	Cashed
£100,000 or less	1.75%	0.75%
£100,000 or over:
Months held
(a) under 1	1.75%	0.75%
(b) 1 but less than 3	4.50%	2.25%
(c) 3 but less than 6	4.25%	2.00%
(d) 6 but less than 9	4.25%	2.00%
(e) 9 to 12 months	4.00%	2.00%

If these rates are better than you would get from putting your money elsewhere, this may be something that is worth considering.

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According to the Daily Telegraph more than 2,200 small businesses have asked HMRC for more time to pay their tax bills, and some have been given several months to pay off their bills.

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The Special Commissioners have found that a dividend waiver by a husband, which resulted in his wife receiving all of the distribution from the company was a "bounteous settlement" the net effect of which was to treat the income as his. It is not clear at the moment precisely which factor was conclusive in this case but the following points may have been relevant:

1. The husband held 9,999 of the 10,000 shares issued.
2. The waiver took place two years in succession.
3. The dividends paid to the wife were very similar to the company's distributable reserves - so the same amount per share could not have been paid on each share.

The Special Commissioner made a number of interesting observations, including saying that there was no commercial purpose for either of the waivers and that neither would have taken place on an arm's length basis.

So it seems that dividend waivers can still be used - but it is probably safe to assume that the Revenue will want to challenge situations similar to those in this case.

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In a recent case, the Special Commissioners decided that a couple who allowed their three young daughters to acquire shares in the parents’ company at less than market value, should be taxable on dividends paid on the daughters’ shares.

The circumstances of the case were not straightforward, as the parents claimed (but failed to prove) that the share purchase was in some way linked to a loan made to the company but the facts appear to be:-

1. The parents set up a new company in which each subscribed £1 for one ordinary share.
2. Some months later, when the company was trading profitably, a further 98 ordinary shares were issued for £98 to both parents (19 shares each) and the three daughters (20 shares each).
3.  Each year until the company ceased trading, dividends were paid on the 100 issued shares.

Where children under 18 have income of more than £100 that stems from gifts from their parents, the income is treated for tax purposes as belonging to the parents.

In this case, the Special Commissioners decided that the parents had effectively gifted the right to dividends to their daughters (and would not have done the same for a third party) and that the income therefore belonged to the former.

Had the parents been able to show a commercial link between the loan and the issue of the shares, it is quite possible that the outcome would have been different. Yet further proof that documenting what you are doing – and why – is of paramount importance when dealing with the Revenue.

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Just a quick reminder that there is one area where employers can increase the amount included in a dispensation without needing to go back to HMRC. Under the heading “Annual increase in amounts included in a dispensation” HMRC’s manual states:

“Where expense payments included within a dispensation are set at a particular amount (e.g. scale rate payments…), the amount may be uprated annually by the employer without the need to seek HMRC’s agreement, as long as the annual increase is equal to or less than the annual increase in the Retail Prices Index (RPI) for the same period).

It would probably be sensible to keep a permanent record of this but it could still save some time.

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From 10 November 2008 the Revenue will send penalty notices where their records show that 2007-08 form P11D(b) Class 1A National Insurance contributions Annual returns have not been received.

These returns were due by 6 July 2008. The penalty will be £100 per 50 employees for each month the return is outstanding, from 7 July 2008 to 6 November 2008, i.e. four months.

If you have not sent your return I would recommend that you do so as soon as possible.
If you need any help please let us know.
 

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It has been generally accepted for some time that individuals were able to pass on interests in furnished holiday let properties and caravan sites, free from inheritance tax, provided that:

•  the lettings were short-term; and
•  the owner played a significant role in managing or overseeing the lettings.

HM Revenue & Customs have just announced that this is potentially not their view going forward and that some cases which qualified in the past might not do so in future.

Little further guidance is supplied; when it is, we will provide details and our thoughts on the Revenue’s change of view.

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HM Revenue & Customs have announced that they will offer another “amnesty” to UK taxpayers who failed to disclose offshore bank accounts under last year’s facility.

The 2007 “amnesty” was a limited success; although it has raised around £400 million to date, the original expectation was for a much higher figure. The Revenue have decided, therefore, to offer taxpayers a further chance to disclose details and suffer a far lower penalty than they might otherwise pay.

Details are sparse at the moment; we will provide further information when it becomes available but would be happy to discuss this matter if you feel it may be relevant to you.

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We reported in February this year on the new place of supply rules for cross border services, due to come into effect on 1 January 2010.

One additional reporting obligation will also be introduced on that date. Those businesses providing services to businesses in other EU countries, will have to complete Electronic Sales Listing Reports (“EC Services Listings”). Currently such statistical reports are only required for cross border supplies of goods.

The new reports for services will report sales, who the customer is and where they belong. The purpose of these reports is to enable cross border “matching” of sales and purchases, to ensure the correct VAT amount is accounted for by the customer.

Businesses which are affected by the new changes should take early action to review systems and controls to identify how the new rules will affect them. The capture of this data may require system changes and even a new report to be generated. Finance staff involved in VAT return completion will have to understand the new rules to be able to apply them correctly.

It is worth noting that the new rules for penalties will already be in place (April 2009), when these new rules are introduced. The new penalty regime is based on “behaviours”. A penalty of 10- 30% for “failure to take reasonable care” will be payable. HMRC’s guidance on the new penalty system indicates that if a business unintentionally omits to do something that a reasonable person would be expected to do, then a penalty will be applied.

We expect there will be a considerable number of penalties imposed under the “careless error” category and it remains to be seen how HMRC will apply the rules in practice. HMRC have issued Business Brief 53/08 which outlines the requirements.

 

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Private landlords need to make sure they keep their information up-to-date, as the Revenue is looking to enforce a tax clampdown on the sector.

Apparently, the Revenue plans to ‘data match’ information from local authorities, the Stamp Office and letting agents on rental income and property sale revenues with its own tax filing records.
 

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In the current climate, many businesses will be experiencing cash flow difficulties and may be looking to restructure or refinance in order to raise much needed cash. At such a time, VAT is often overlooked but there can be a painful sting in the tail!

The first thing to remember is that if you have debtors of more than 6 months old, you can adjust for the VAT already paid to HMRC, subject to certain conditions. On the other hand, if you have unpaid supplier invoices which are more than 6 months old, you are required to adjust for the VAT you have already claimed on your VAT returns.

If you pay your VAT by electronic means, (e.g. BACS/CHAPS), you will have an extra 7 days to pay the VAT due.

If you are struggling to pay your VAT bills on time, you should contact HMRC before a due date is missed. Late submission of VAT returns/payment of the due amount will lead to default surcharges. Lack of funds is not a reasonable excuse for submitting late returns.

When you contact the local VAT office, you should request a “time to pay” arrangement. This normally means you will be allowed to pay in instalments. However, HMRC will be more likely to agree to this if your business has a good VAT compliance history. Therefore it is important to submit all VAT returns and payments by the due date for as long as this is possible. Also be aware that even if you have entered into a payment arrangement, you may still be liable to a penalty for not paying the full amount by the due date.

If you restructure your business and as a result, dispose of assets/shares, there may be VAT consequences. Professional advice should be sought as there may be simple ways to structure the transactions in a VAT efficient way. This is particularly relevant when disposing of property as the VAT amounts involved will usually be significant. There are many ways to minimise adverse cash flow, by completing the transactions in a certain way.

As a recent Business Brief issued to house builders showed HMRC appear to be sticking to the letter of the law, even in these difficult times!
 

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We reported in our blog of 16 April 2008 that the Budget (BN74) had introduced new rules for the extension of VAT exemption for fund management services with effect from 1 October 2008.

HMRC have now issued Business Brief 48/2008 which sets out details of the type of services which will be exempt from 1 October 2008. In summary, VAT exemption will now apply to management charges for collective investment schemes which are:

• All UK-established AUTS and OEICs ; or
• Recognised overseas schemes (as defined)
• Certain closed-ended investment funds such as Investment Trust Companies.

Businesses which are affected by these changes should consider their VAT position and take advice where appropriate.
 

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HMRC has acknowledged that the tax code changes for the new 2008-09 personal allowance due to be processed in September may cause some cash-flow problems.

HMRC has stated that initially employers should net any refunds against other PAYE deductions in September but, where these are insufficient to cover the refunds, employers may apply to HMRC for funding to cover the balance.

Full details of how to make a claim are given on http://www.hmrc.gov.uk/employers/payefunding.htm.
 

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Most shareholders in private trading companies know that these shares will be exempt from inheritance tax (“IHT”) when they die.

Many of them are also parties to what are known as shareholders’ agreements – in simple terms, private but legally enforceable agreements between shareholders on such matters as dividends policy, share transfers and what happens when an employee shareholder leaves the company.

In our experience, many shareholders’ agreements include a provision that, if a shareholder dies, his (or her) personal representatives must sell the shares – and the other shareholders must buy them.

The Revenue’s view (which they hold very strongly and will take as far as they need to) is that this provision represents a legally binding contract at the point of death – so the exemption is not available and, as a result, IHT is due.

We have been told of a number of cases where the Revenue have enquired whether shareholders’ agreements existed – and then tried to charge 40% IHT when they reviewed the agreement.

This is a problem which is straightforward to put right, but costly to ignore. If you would like to discuss this in more detail, please contact Cathy Corns or me.
 

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HM Revenue & Customs (“HMRC”) have published guidance on the impact of salary sacrifices on statutory payments.

A salary sacrifice arrangement allows employees to give up taxable earnings in return for benefits or payments that are not taxed or subject to national insurance. In the right circumstances, it can yield large savings for employees (and sometimes employers).

The guidance, issued in the form of a number of questions and answers, covers a range of issues including:

• what is needed to make a salary sacrifice successful;
• when changes can be made to agreed arrangements; and
• the effect on SMP, SSP and pension contributions and the interaction with minimum wage legislation.

The guidance is available at http://www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm; if you would like to discuss how salary sacrifice might work for you, please contact Cathy Corns or me.
 

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I suspect that no-one apart from tax professionals has actually bothered to look at HMRC's new consultation on a charter for “HMRC and its customers”. Since the publication starts by suggesting what roles the charter would play and in any case it will not have any legal force, the cynic would say there seems little point.

However, there are some interesting points about seeking a broad range of views in respect of the way HMRC interacts with its “customers” and it would appear that the charter will, as a minimum, fulfil the following:

• provide users with “headlines” about their rights and responsibilities;
• set out a statement of some of the broader values of HMRC with regard to its relationship with customers; and
• establish the standards of service that customers can expect from the organisation.

Apparently it will cover broad principles such as treating customers courteously, dealing with issues promptly, being fair and professional, etc.

I have to say I still find the term “customers” a tad irritating when actually one has no choice about whether or not to interact with HMRC. My personal view aside, however, if you do have strong views about HMRC’s current stance with regard to the way it acts, the way it deals with you, etc., this is your opportunity for your voice to be heard.

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HMRC is updating its rights and powers.

Some of the reforms make perfect sense (though in my opinion not all). My concern, which is growing, is that taxpayers’ rights are not being correspondingly updated.

Currently HRMC’s “customers” have: 

• No automatic right of appeal against every new power;
• No right to the independent scrutiny of a tribunal; and 
• No automatic right to compensation if it all goes wrong.

HMRC’s solution to this is the Charter which has no statutory rights.

This is not satisfactory at all. Now might be a good time to start lobbying your MP.

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Using private cars for business travel is hurting drivers by potentially hundreds of pounds a year due to HMRC's refusal to increase mileage rates.

The tax free mileage rate that private car drivers can claim has not moved at all over the last five years despite the increasing cost of petrol.

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HMRC have recently published a consultation document on interest, titled “Interest – Working Towards a Harmonised Regime”

The document explains the rationale for charging and paying interest, sets out the principles underpinning the regime, looks at the anomalies of the current system, and outlines and invites comments on the new proposals.

The document is quite long. Having read through it, there are some significant points:

•  “the purpose of interest is to reinforce the fact that particular taxes are due for payment on particular dates, and to bring a degree of fairness into the system where those payment dates are not met by some taxpayers but are by others.”
  

This should be contrasted to the statement in the next paragraph:

• “interest is not intended to be a penalty for late payment”
  

and very shortly after

• “interest is not designed to influence behaviour in the way that penalties are, and there is no consideration of the reason for late or overpayment. It is simply recompense for not having use of the money, measured by reference to the amount and time. It is for this reason that an appeal right against an interest charge is not appropriate.”

The document supports the view that if HMRC has financially disadvantaged someone by charging interest because of HMRC’s own mistake or unreasonable delay, it should cancel the charge.
One other key point is the discussion on whether or not interest charged and paid should be on a compound rather than a simple basis – this could be very significant.

Again, if you have a comment, this is your chance to make it.

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A report by a working group for the conservatives is recommending that the next conservative government should make radical changes to the way new tax legislation is drawn up and scrutinised - with a view to simplifying the UK’s tax code.

It proposes setting up an Office of Tax Simplification (OTS) to examine the existing law and practise and make proposals for simplification. As well as being staffed by HMRC and academics, it should also include individuals from the tax professions to provide both expertise and a fresh perspective.
The group also proposed setting up a new Select Committee on Taxation with membership drawn from both Houses. This committee should improve the scrutiny of government initiatives and proposals, and review proposals presented to it by the OTS.

Finally, the conservatives would look to re-establish the Pre-Budget Report as the time to propose technical changes in advance of the full Budget and Finance Bill. The thought is that this would have avoided many of the recent problems of badly thought through proposals, produced with little consultation and last minute legislation rushed through Parliament without sufficient scrutiny.

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Following the merger of the Revenue and Customs a review of all existing powers needed to be undertaken; the merged Department had different rules for direct and indirect taxes and some of the powers were out of date.

The problem is we are not entirely happy with the results. The principle of matching a power with an appropriate safeguard is not being consistently followed. Some of the powers in the Finance Bill 2008 are likely to give rise to problems for a lot of people if they become law as they stand. New powers are being introduced without any right of appeal included in the law. Safeguards have no statutory force and can be changed without any independent scrutiny. This cannot be right. As an example, HMRC have the power to see statutory records but there is no right of appeal if you believe the request is unreasonable or irrelevant.

This is just a brief indication of the position. I think you will agree we are right to be wary.

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One easily missed proposed change in HMRC’s powers is that allowing HMRC to set-off sums payable to a taxpayer against sums owed to HMRC by the same taxpayer. This could cause financial problems, particularly as set-off is to be entirely within HMRC’s power and exercisable at its discretion.

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HMRC has now published its Freedom of Information guidance setting out what you can (and cannot) ask them for. Interesting!

The details are available at http://www.hmrc.gov.uk/freedom/foi-index.htm

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The Law Commission is considering duty of care provisions to protect taxpayers, as it believes the current position is unsatisfactory. Specifically it is considering the need for more redress against public sector bodies such as the Revenue when they act wrongfully.

The commission’s paper, which asks: ‘what mechanisms should be available for citizens to receive redress against public sector bodies?’ (not a catchy phrase I admit) is currently out for comment.

The full report can be found at http://www.lawcom.gov.uk/docs/cp187_web.pdf  

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HMRC have recently issued a factsheet to help you decide whether you are employed or self-employed for tax and National Insurance purposes. The leaflet covers issues such as:

• Is your employment status right?
• The special rules that apply to certain occupations and jobs 
• Working through a Company or partnership 
• Checking your employment status 
• Employment Status Indicator (ESI) tool 
• Your position if you have more than one job
• Why employment status is important 
• Your entitlement to benefits and employment rights
  

It gives links to other relevant information and provides helpline numbers.

The sheet can be found at http://www.hmrc.gov.uk/leaflets/es-fs1.pdf.  

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For periods commencing on or after 1 July 2008 HMRC have increased the threshold under which a business can make good errors or mistakes it has previously made when preparing its VAT returns.

Prior to this period any “errors” totalling over £2,000 had to be reported to the VAT man under the “voluntary disclosure" rules. Going forward this has been raised to a minimum of £10,000 with even higher thresholds for businesses with turnover of £1,000,000 who can correct themselves “errors” of up to 1% of turnover up to a limit of £50,000.

I see this as a welcome relaxation of the rules which will help to cut red tape for many businesses.

But beware, as there is no longer “disclosure” when an adjustment is made, then the adjustment will not meet the definition of a “disclosure” for the new penalty regime and hence penalties could still become due.

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Just so you know, HMRC is planning to unveil the “biggest change to the way we process PAYE records in 25 years” in October of this year.

Under the scheme, the PAYE Service will bring together a dozen different databases covering information about individuals and, in theory, will be able to see at a glance what each person’s tax position is. At the moment, records are held with reference to employers so if, for example, someone has two jobs, their tax position is immediately complicated. HMRC says: “As a result of the change we will have a more comprehensive view of the individual’s PAYE and you will benefit from having fewer queries from both HMRC and your employees”.

The new system (called National Insurance Recording System 2) aims to make administration simpler – watch this space.

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The Employment Appeals Tribunal recently ruled in HM Revenue & Customs’ favour by supporting current National Minimum Wage legislation relating to tips.

This means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charge unless the tips are paid directly through the employer’s payroll.

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The Revenue have recently issued a number of documents regarding their procedures and rights on PAYE inspections, together with some details on their obligations, what you can do, etc. You can find full details at www.hmrc.gov.uk/leaflets/c6.htm.

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Further to my colleague Roger’s comments in his blog of 30 April 2007, the High Court has recently overturned the Tribunal’s decision in part. The decision of the High Court was that the “enrolment fee” paid by members at the first meeting could be apportioned to reflect the printed matter element (zero rated leaflet/books etc). However, the fees paid for the subsequent weekly meetings were consideration for a single supply of “weight loss management services” which is standard rated.

The taxpayer appealed the decision in relation to subsequent meetings and HMRC cross appealed in relation to the first meetings. The Court of Appeal has recently issued its judgement which confirms that all fees paid by members are standard rated as a single supply.

This case demonstrates that it is becoming increasingly difficult to apportion income in cases of “apparent” mixed supplies.

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A proposed change in tax law in this year’s Finance Bill could leave many taxpayers disadvantaged.
Currently when HM Revenue & Customs (HMRC) makes an error or mistake in an individual’s tax affairs he can claim back taxes (with interest added) for the last 6 years. HMRC now wants to cut the time limit so it is only liable for repayments for the previous 4 years. This cannot be good news - not when HMRC can go back to collect tax for up to 20 years.

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Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).

Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.

There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.

Remember also to Class 1A NIC liability which will arise on the benefit of the loan.

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Many employers reimburse subsistence expenses by way of scale rate payments.

HMRC has now agreed that employers may use the benchmark rates published by the Foreign and Commonwealth Office when paying accommodation and subsistence expenses to employees who travel abroad on business without the need for the employees to produce expenses receipts. The rates can be found at http://www.hmrc.gov.uk/employers/wwsr-april08-revisions.pdf.

Accommodation and subsistence payments at or below the published rates will not be liable for Income Tax or National Insurance contributions and employers need not include them on forms P11D. However, if an employer decides to pay less than the published rates its employees are not automatically entitled to tax relief for the shortfall. They can only claim expenses supported by receipts, less any amounts paid by their employer.

These tax/NIC free amounts are in addition to the incidental overnight expenses that employers may reimburse tax/NIC free (http://www.hmrc.gov.uk/manuals/eimanual/EIM02710.htm).  

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It is a fairly common misconception that charities are relieved from paying VAT. In reality, charities are subject to the same VAT rules as any commercial organisation, although there are a number of specific reliefs for certain supplies made to and by charities. For many years, charities and associated groups have made representations to the government to allow charities to reclaim the irrecoverable VAT which they incur. This has so far been unsuccessful. Therefore, if a charity’s taxable business income breaches the VAT registration threshold, it has to register and account for VAT in the normal way.

Charities will normally have a complex VAT position as they will be receiving a mixture of business income (taxable and exempt) and non business income. They may also set up a trading subsidiary to carry out any significant trading activity. This can lead to a complicated VAT recovery position, as VAT incurred on costs has to be attributed to the relevant income stream and will either be fully recoverable, irrecoverable or partly recoverable. There are a number of different ways of undertaking the VAT recovery calculations, with scope for improving VAT recovery rates by adopting the most advantageous method. However, the benefit of implementing a “special method” has to be weighed against the cost of implementing and undertaking the calculations for such a method. The use of a special method also has to be agreed in advance with HMRC. Methods have to produce a fair result and be easily checked.

Charities do benefit from certain VAT reliefs, including advertising, donated goods, aids for the disabled/handicapped and certain types of buildings. The charity will have to certify that zero rating applies. Again the conditions/rules are very precise and advice should be always be sought in cases of doubt.

Charities are increasingly finding new ways to raise funds and as a result, it is more likely that they will enter into activities/transactions which may have VAT consequences. For example, two charities working together in “partnership” may inadvertently create a VAT cost when recharging each other for services. Advice should always be taken when entering into new contracts or amending existing contracts. Unfortunately HMRC do not take a lenient approach to charities which make errors in their VAT returns and penalties/interest may be imposed.

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When commercial property is acquired, capital allowances may be claimed on the part of the purchase price attributable to plant and machinery, whether fixtures or moveable chattels.
Historically the way of ascertaining the amount to be allocated to plant, a “just and reasonable apportionment”, involved a specialist valuation of the various components of a purchase (land, building and plant) relating the results to the actual price paid.

The amount claimable on this basis is generally higher than buyers expectation.
However, in 1997 an alternative procedure was introduced under which the buyer and seller could jointly elect to set a figure to be treated by both parties as the disposal sale proceeds and purchase price for the fixtures. This figure is binding on HMRC and any subsequent purchaser of the property.

The main problem with the election is that it tends to benefit one party over the other.

It is generally better for the seller to put a low value in the contract – the historical allowances over this figure are then retained by him. This means that the buyer then has minimal allowances. Conversely, the buyer wants as high a figure as possible while this may have tax implications for the seller. The only answer is to negotiate – and probably compromise.

The key thing though is to understand what you are being asked to sign and to know what previous owners have signed too.

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It is probably fair to say that one of the best known parts of our tax legislation allows employees being made redundant to receive up to £30,000 compensation, free of both tax and national insurance.

It is equally fair to say that the Revenue are far from keen on this and will find any legitimate reason they can to charge income tax on the payment. One of their main weapons in this is the so-called pay in lieu of notice (“PILON”) clause in an employment contract; if an employee is entitled to receive pay in lieu of notice, this payment is contractual (and hence taxable) rather than compensation (which would be exempt from tax up to £30,000).

Unlike the rest of us, MPs have been entitled to receive termination payments free of tax, even if the payments are made in accordance with a PILON clause in their contract, for some years.

This year’s Budget has extended this exemption to the Mayor of London and members of the Greater London Assembly.

So, when Ken Livingstone handed over the keys to City Hall to Boris Johnson at least he had the consolation of knowing that his pay off would not suffer tax.

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We reported in our blog of 16 April that there was likely to be further litigation in relation to whether pension funds should benefit from VAT exemption in relation to investment management services.

It has now been announced that the National Association of Pension Funds (“NAPF”) and Wheels Common Investment Fund (Ford/Jaguar/Land Rover group pension fund) will bring a joint challenge against HMRC at the tribunal. If this challenge succeeds, pension funds could submit VAT refund claims for the past 3 years and also for the period 1990 to 1996 in the light of the recent House of Lords Judgement in the Fleming and Conde Nast cases. The main beneficiaries will be private sector defined benefit pension schemes with segregated investments.

As previously advised, these pension funds should be discussing this issue with their fund managers and submitting protective claims as appropriate. Any rejected claims should be re-submitted to stand behind this appeal.

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The European Court decision in Securenta has again cast doubt on the recovery of VAT on share issues and focused attention on the VAT position of holding companies.

Securenta was a German investment company dealing in land, acquiring financial holdings in other businesses and managing various other investments. It raised the necessary capital partly by means of an issue of shares. The ECJ ruled that VAT on the costs connected with the issue of shares was allowed only to the extent that the expenditure was attributable to economic activities. Non-economic activities where there was no right to deduct presumably included much of the investment activity undertaken such as acquiring, holding and selling shares and bonds.

Guidance on how HMRC will apply this decision is still awaited. Holding companies often incur significant legal and accountancy costs when issuing new shares and this case may make it more difficult to recover all of the VAT involved. Wherever possible holding companies should be part of a VAT group with their trading subsidiaries as this hopefully should minimise the impact of the decision.

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Apparently, such arrangements do not meet the new requirements that are being introduced from 6 April 2008.

HMRC is aware that over the years some employers have reached agreements with their local tax office, for example with regard to:

• Using substitute forms P46. 
• Not following the P46 procedures where forms P45 not received. 
• Not using tax code BR (Basic Rate) as the form P46 default tax code. 
• Sending data on CD-ROMs.

These local agreements are now being ended and may lead to the rejection of the information submitted.

HMRC is reviewing all local arrangements with a view to terminating them and any affected business should urgently conduct a similar review to avoid having your data rejected.

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HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.

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HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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HMRC has stated that businesses that can demonstrate good management and accounting systems will be viewed as low risk, giving them more time to spend on higher risk businesses.

Family businesses are often regarded by HMRC as a higher risk because of the overlap between business and family.

So what can you do to reduce the risk of an investigation?

1. Loans to family members constitute a taxable benefit (and can create a charge on the company) and should be declared. 
2. Expenses that are not wholly and exclusively for the purposes of the business need to be clearly identified and the tax treatment clarified. 
3. Entertaining expenditure (other than staff) is not allowable. 
4. Salaries paid to family must be wholly and exclusively for business purposes. 
5. Benefits provided for family members must be declared. 
6. Tax planning is high on HMRC’s agenda and aggressive planning is likely to cause an enquiry. Careful implementation and documentation is crucial. 
7. Acquisition and sale of business assets should be properly recorded. 
8. Ownership of assets such as yachts and aircraft often cause problems when these are used by family members. 
9. Overseas companies which are part of the group, with UK-based decision makers, are likely to face a company residence challenge from HMRC.

HMRC is carrying out a full review of tax systems and processes for companies which it considers to be high risk; especially where there is a history of mis-declaration. Some time spent now to tidy things up could save a lot of problems later.

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The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.

The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.

Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.

Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.

Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.

It is worth taking time to get this right but done correctly both employer and employees can be winners.

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The ECJ has recently ruled that M & S should get its long awaited £3.5 million VAT refund. For those of you not familiar with this case, M & S have been litigating for many years to obtain a full refund of VAT charged in error on chocolate teacakes between 1973 and 1994. The UK tax authorities had refused to repay this VAT on the grounds that M & S would be “unjustly enriched” as it had passed 90% of the VAT overpaid on to its customers.

M & S was in a VAT payment position (that is, it owed HMRC money after deducting the VAT it paid from the VAT it charged). Prior to 2005, the UK tax authorities treated “payment” and “repayment” businesses differently in relation to unjust enrichment. This was found to be discriminatory and contrary to the EU principles of fiscal neutrality and equal treatment.

The European Court has referred the case back to the House of Lords in the UK for a final judgement.

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The way the new rules work it is likely that a number of businesses may be moved from gross to net under CIS. There is a reason to be worried.

One of the key aims of the new CIS scheme was to improve compliance in the construction industry.

Under the new scheme, HMRC may raise a determination transferring a subcontractor from gross to net payment status at any time if HMRC believes that were the subcontractor to apply for registration for gross payment at that time this would be refused.

From last year HMRC has a programme for businesses to review their tax compliance over the previous 12 months. If there are unacceptable breaches the businesses receive a determination moving them to net status and notice of right of appeal. This is a rolling programme to ensure every business is checked once a year.

To pass the compliance test, the trader and any business partners (or the company and each of its directors) must, during the 12 months up to the date of the application, have done all of the following subject to some small margins for error.

• Completed and returned all tax returns sent. 
• Supplied any information to do with the tax that may have been requested. 
• Paid by the due dates 
  • all tax due personally or by the business
  • all National Insurance contributions (NICs)
  • any PAYE tax and NICs due as an employer
  • any deductions due as a contractor in the construction industry.

This is likely to be a real problem for businesses.

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Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.

From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.

There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).

If this principle based approach is successful in this area, we have to ask – what will be the next step?

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For most self-employed people there is usually some use of their home for business purposes. You are then entitled to a tax deduction for the proportion of household expenditure relevant to the business use.

The Revenue has recently issued guidance to “clarify” the calculation of deductions. This suggests that the costs should be apportioned on the bases of:

• area of the total property used in the business;
• usage;
• time the area is used for business use as opposed to any other use.
  

However, where this will not work the Revenue should accept claims made on any reasonable basis.

So how do you apportion home costs?

The Revenue gives several examples of the approach it recommends.

Mortgage interest: The interest may be split where there is a substantial use of part of the property for business purposes.

Insurance: An apportionment of the total premium calculated for usage and area, etc.
Repairs and maintenance: General household repairs are allowable in line with the proportion of business use.

Telecoms/internet broadband, etc: The Revenue’s previous view was that line rental was not allowable. This has now changed, and a proportion of rental and calls is allowed on a reasonable basis; this should be supported by itemised bills.

The guidance includes a number of specific examples, which can be found by clicking here.

One thing to remember is that an individual’s main residence is exempt from capital gains tax on disposal provided it has been used as the main residence throughout ownership. Provided that no room is used exclusively for business purposes, there should be no restriction on the availability of the main residence exemption from CGT.

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HM Revenue & Customs’ campaign of compliance checks into property income, announced last month, appears to have begun in earnest. We have been told of a number of people who have received letters from the Revenue.

At first glance the letters look innocuous; a straight forward enquiry, asking whether tax returns might have omitted rental income in error.

It would be wrong to underestimate the gravity of these letters on a number of grounds, including:

• in our experience, the Revenue will have done their homework. Though they may have made mistakes in compiling their lists, shaking them from their belief that their information is perfect will not be easy; and 
• though their letter may not look threatening, they will undoubtedly be treating this as a serious issue. In addition to collecting the tax due (and interest where it has been paid late), the Revenue will look to apply penalties, which could theoretically double the tax payable.
  

Finding information relating to rental income, interest payments and other expenditure from a number of years ago will be a difficult task; without it – and the goodwill of the Revenue – the amounts payable could escalate.

If this is an issue potentially of concern to you, please contact Cathy Corns or me. We have helped a large number of clients in dealing with Revenue enquiries and might be able to provide practical and timely advice and assistance.

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An employer is obliged to deduct tax and insurance from any payments made to their employees. But what happens if they get this wrong – perhaps because they mistakenly thought the “employee” was self-employed?

This was the point decided in a 2005 tax case, Demibourne Limited v Revenue & Customs Commissioners. The individual (an odd-job man called Mr Bone) had paid tax on the basis that he was self-employed. However, having concluded that Mr Bone was in fact an employee of the company, the Special Commissioner required the company to “gross up” all the payments they had made to Mr Bone and to pay PAYE and national insurance on this gross amount, without any allowance for the income tax he had already paid. In effect tax was being paid twice on the same income.

This will seem to many to be an most unfair outcome, but one that, in our experience, the Revenue have applied consistently following the Demibourne case. Fortunately, in recent months the Revenue have tried to find a way to avoid double taxation in this type of situation and draft proposals were issued on 28 February 2008.

If these proposals become law, it will become possible – in specified circumstances – for some of the PAYE liability to be transferred to the employee. The liability transferred will not exceed the tax assessed on, or paid by, the employee, leaving him no worse (or better) off.

The new rules would effectively take us back to where we thought we were, before the Demibourne case.

What they do demonstrate, though, is that the Revenue can – and will – work to remove iniquities, even where doing so might leave them worse off.

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In order for an employee or director of a company to benefit from the new Entrepreneurs’ Relief after 5 April 2008, he or she must have held more than 5% of the company’s ordinary shares for at least twelve months. But it will not be necessary to have held all of the shares being sold throughout the period, as one of the Revenue’s FAQs makes clear:

Q - I already hold over 10% of the shares in the company. If I acquire another 4% of the shares and sell the whole 14% 6 months later, can I get entrepreneur’s relief on the whole 14%, or only on the 10% I held for the whole of the one year qualifying period?
A - Relief will be available in respect of the whole 14% holding if the qualifying conditions are met. The requirement is that a 5% stake is held throughout the qualifying period. The particular shares or securities disposed of do not have to be held throughout that period.

www.hmrc.gov.uk/cgt/entre-faqs.htm

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My colleague Cathy Corns recently outlined the new penalty regime for both direct and indirect taxes to be introduced next year. This new regime will potentially mean that businesses will face higher penalties for errors in VAT return periods with a due date after 1 April 2009.

Under the current VAT rules, if a business discovers an error before HMRC has begun to make enquiries, it can either make a voluntary disclosure or where the VAT is less than £2,000, it can adjust the amount on the VAT return. By doing so, the 15% misdeclaration penalty (triggered when an error breaches certain thresholds) will automatically be waived. Also, a penalty will not apply where a business can convince HMRC that it has a “reasonable excuse” for the error. Under the new regime, the concept of “reasonable excuse” will no longer be grounds for waiving a penalty.

Instead, HMRC will determine the quantum of a penalty by reference to the amount of VAT at stake, the nature and behaviour of the offence that lead to an understatement of VAT and the extent of the disclosure by the business.

There has been no confirmation so far that VAT errors below £2,000 cannot continue to be adjusted on the VAT return, under the new regime. However, it may prove necessary to write to HMRC to disclose any error, regardless of the size and reason, even when the error can be put on the VAT return. This would avoid the potential for a 30% penalty for making “careless” errors.

Hopefully HMRC will confirm this point nearer the time. Watch this space….

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There has been a great deal of concern, since Alistair Darling’s announcement that taper relief would be abolished from 6 April 2008, that people holding loan notes after selling their business would face an 18% tax rate, rather than the 10% they had expected at the time they sold the business.

The Revenue have just released draft legislation on the proposed Entrepreneurs’ Relief, together with answers to a number of frequently asked questions. Within the latter, they have confirmed that, if the original disposal would have met the conditions for Entrepreneurs’ Relief (e.g. 5% ordinary shareholding, carrying 5% of the votes, owned by a director or employee, or a business interest held for at least one year prior to the sale), the encashment of the loan notes will do, too.

This applies only if the loan notes are “Qualifying Corporate Bonds” (which most are) but will be a welcome relief to many former business owners.

If you would like to discuss whether you might be affected, please contact Cathy Corns or me.

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Anyone who has exchanged shares for non-qualifying corporate bonds (or non-QCBs, for short) needs to review their position carefully – before 5 April 2008.

Unless, in addition to the non-QCBs, they meet the criteria for the new Entrepreneurs’ Relief (e.g. they have been employed by the company that issued the loan notes and have owned at least 5% of the company’s ordinary shares throughout the twelve months prior to encashing the loan notes) they will face an 18% capital gains tax bill, rather than the 10% they might have expected when exchanging their shares.

It may be possible to benefit from the lower rate – but only by acting well in advance of the change.
If you think you might be affected by this and would like to discuss what you can do to keep your tax bill down, please contact Cathy Corns or me.

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Someone “selling” their company by taking shares in the acquiring company may be in for a nasty surprise after 5 April 2008.

The new Entrepreneurs’ Relief, which comes into effect on 6 April, will reduce the capital gains tax due on selling shares from 18% to 10% only if the vendor:

• worked for the company; and 
• owned at least 5% of the ordinary shares in that company, carrying at least 5% of the votes, throughout the twelve months leading up to the sale.

Our experience is that these two criteria are often not met, either because the vendor does not work for the new company or because he holds less than 5% of its ordinary shares.

If you are likely to be affected by the new rules (including situations where the exchange has already happened) and would like to discuss what might be done to improve your position, please contact Cathy Corns or me.

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The Revenue have confirmed that the £1 million “lifetime limit” for capital gains qualifying for the new Entrepreneurs’ Relief will apply only to gains made after 5 April 2008.

Official confirmation to anyone born in April 1968 that life really does begin at forty.

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The new Entrepreneurs’ Relief, which comes into play from 6 April 2008, will (subject to certain criteria) reduce the capital gains tax due when shares in trading companies – or business interests – are sold.

It will not, however, be available where business assets are sold in isolation, rather than as part of the disposal of a business. This would include, for example, the sale of land owned and used by a farmer, unless the sale could be argued to be of a distinct business.

This is likely to be an area of debate with the Revenue and, in many cases, might only be settled by the Courts.

If you would like to discuss how this might affect you – and whether there is anything you can do to avoid this hike in the tax likely to be due – please contact Cathy Corns or me.

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In his quieter and more introspective moments, Alistair Darling must wonder if he has the Midas touch in reverse; and if he doesn’t, many others are probably doing it for him.

Fresh from the Revenue’s “clarification” of his proposals for non-doms, which effectively reversed much of what he and they had said previously, the Chancellor now faces criticism from business leaders that his new plans favour non-doms over British-born entrepreneurs.

Under the new proposals, non-doms will be able to elect for a “deemed sale” of their British and overseas assets at 6 April 2008, meaning that they will pay UK capital gains tax only on the growth in value from that date.

In contrast, UK-born entrepreneurs have no such option and will not only lose the benefit of indexation allowance for assets held between 1982 and 1998, but also see the standard rate of capital gains tax on some assets rise by 80%.

We are aware of one example where the post-5 April 2008 tax bill will be nearly four times the liability before, and are sure this will be repeated many times over, sometimes with even more extreme results.

The Chancellor and Revenue are, we understand, adamant that their current proposals will not alter, and in many cases there is, frankly, little that can be done to improve matters.

That does not mean you should not try.

Please contact Cathy Corns or me if you would like to discuss this in more detail.

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Companies tend to take out life policies for one of three main reasons:-

• Key man cover;
• Security on loan repayment (endowment); or
• Investment, e.g. into a single premium bond.

On key man policies the rules are generally quite straight forward; the company can obtain relief on the premiums paid and, if it does so, will be taxed on the proceeds. An alterative, possible treatment is to disallow the premiums and seek to agree with the Revenue that on this basis the proceeds will not taxed.

On the other policies, the key question with regard to deductibility of premiums is whether or not the policies are “trading”. For policies taken out to provide security for loans to buy business premises, historically there has been a special treatment in that premiums were allowed for tax purposes but, where the proceeds were used wholly to repay the loan, those proceeds were not taxable. In practice the Revenue tended to tax only the excess over the debt repayment.

For other policies the final payment on the “investment” tended to be treated as a chargeable gain.

However, the pre-budget report changed this. Under the new rules the key changes will be:- 

• The proceeds of the policy will no longer be treated as a chargeable event;
• The policies will be brought within the loan relationship rules with effect from 1 April 2008.
• There will then be a deemed surrender and taxation as a chargeable gain at that date and thereafter any gain accruing under the policy will be taxed under the loan relationship rules.

If you do have such a policy it is important to contact someone for detailed advice on the implications for you.

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... is expected to take effect for periods starting after 31 March 2008 where the return is filed after 31 March 2009.

The new system distinguishes between different types of tax “offence” for example, heavy penalties for evasion, but an acknowledgement that genuine errors happen.

HMRC appears to want to encourage compliance and sees penalties as an essential element in enforcement.

The result is that the new penalties will apply to returns for income tax, corporation tax, pay as you earn, national insurance contributions and VAT.

The new regime seeks to grade the penalty to match the ‘offence’. There are effectively four categories:

• Innocent mistake; 
• Careless conduct; 
• Deliberate action, but not concealed; and 
• Deliberate action with concealment.
  

Innocent mistakes will no longer attract a penalty. The penalties for the other three conducts are laid down with prescribed reductions for disclosure (differentiating between prompted and unprompted). The proposed penalties range from 15% to 30%, for a prompted disclosure for ‘failure to take reasonable care’, to 100% of the tax due for a ‘deliberate understatement with concealment’.

It will be “interesting” to see how HMRC will distinguish between innocent mistakes and a ‘failure to take reasonable care’. This is likely to be an area for debate, dispute and potential litigation.
You should be aware that unprompted disclosures will reduce penalties to nil for potentially minor offences.

Additionally, in cases of ‘failure to take reasonable care’, HMRC has the discretion to apply a suspended penalty. If the correct procedure is implemented and adhered to, the penalty could be cancelled.

One thing that is clear is that a lot of businesses and individuals will be affected.

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HMRC has the power to arrest, and as of this month is now also able to intercept phone calls, emails and letters, and “bug” residential premises and private vehicles.

The powers were granted to HMRC in the Serious Crime Act, which gained Royal Assent in October, but did not come into force until the relevant statutory instrument was issued earlier this month.

Basically Customs officers had these powers because of their criminal investigations into drugs and smuggling, but now they have been granted across the board for HMRC.
The question is – what will happen in practice?

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The Times online had a somewhat worrying story ; it appears that HMRC have allegedly paid a substantial sum of money to an ex-employee for stolen information on UK residents with foreign bank accounts. I do feel this raises some interesting ethical questions about ways of obtaining information but also sets a bench mark for potential informants in terms of price for value! It may well be of course that a number of the individuals with the bank accounts have nothing to hide and have made proper returns. What is certain though is that they are now going to have to prove it. This will almost certainly be a case of guilty until proven innocent. It does raise another question for people on how much information to share; disgruntled employees or ex-partners can (anonymously if they so wish) lodge allegations with HMRC that are likely to be investigated. Even if there turns out to be no real issue you will still have had to spend your and your advisers' time in replying to HMRC queries and demonstrating the correctness of returns to their satisfaction; this can be a lengthy and time-consuming process. Deciding on what information can and should be shared could take on a whole new meaning. So nowadays -who can you trust?

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HMRC have now issued Business Brief 07/2008 inviting businesses to submit claims for both input tax accrued before 1 May 1997 and also output tax claims for accounting periods prior to 4 December 1996.

There is no time limit for submission of these claims but if you have a claim, prompt action should be taken.

Further announcements are expected.

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The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.

This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.

The AIA will apply to expenditure incurred on or after 1 April 2008 for corporation tax (6 April 2008 for income tax). The same dates see the abolition of first year allowances. Where an accounting period overlaps the implementation dates the maximum AIA will be restricted according to the proportion of the period falling after the relevant date. This will give some strange results in the coming months.

As an example:

A business with a 30 April year end plans to buy plant costing £50,000. If it buys in March it will qualify for a first year allowance (FYA) of 50% = £25,000. The same acquisition in May (the first month of the next accounting period) will attract the full AIA = £50,000. The real problem is if the same acquisition were to be made in April when it would attract no FYA, the AIA will be restricted to one twelfth of the annual amount (£4,167) and the excess will attract a reduced writing down allowance of 24.58%, giving a total deduction of only £15,433.

Identical transactions will be taxed differently according to the date expenditure is incurred and the accounting date chosen!

Careful planning is very important.

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A recent decision in the case of Livewire Telecom LON/06/1365 has demonstrated the complexity of VAT fraud cases involving carousel fraud.

The appellant was a wholesale broker (exporter) of mainly new mobile phones. In the course of selling such phones, the company made the relevant checks on both suppliers and customers and the unique phone reference numbers “IMEI”. However, in 2006, HMRC refused to make a significant repayment of input tax on the basis that it suspected that the business was knowingly involved in “contra trading” in respect of 14 transactions. “Contra Trading” involves two separate supply chains, one “clean”, the other “dirty”. The dirty chain will include a “missing trader”. In this case, the appellant was part of the clean chain but HMRC claimed that it was knowingly involved in a carousel fraud.

The tribunal decided, on the evidence available, that the due diligence process of the business appeared to be flawed. However, the appellant could not have (nor ought to have) known of the fraud at the time the transactions took place. Interestingly the tribunal was also critical of the way HMRC presented its evidence and made suggestions as to how this could be improved for future cases.

Other businesses which have had input tax claims refused may now seek millions of pounds of VAT refunds.

HMRC are considering whether to appeal the decision.

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Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.

It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.

In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.

You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.

If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.

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HMRC has recently confirmed one very important point on assets that have been owned for a number of years. Such assets will have accrued a substantial amount of indexation relief (over 100% to date on assets held on 31 March 1982). Where an individual owns such assets on 5 April 2008 the indexation relief is irretrievably lost.

However HMRC have now confirmed (http://www.hmrc.gov.uk/cgt/faqs-cgt-reform.htm) that where an asset is transferred to a spouse or civil partner on a no-gain no-loss transfer the indexation relief is captured as part of the new owner’s base cost for tax purposes. This is an important planning possibility.

Regrettably though life in tax is never 100% straightforward – if the original owner would qualify for the new entrepreneurs relief and the new owner would not then the value of the historic indexation has to be compared with the value of the new relief before any transfer is made.

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The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.

Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.

Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.

It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.

If you would like to discuss what might be possible, please contact Cathy Corns or me.

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As we reported last week, Alistair Darling has released details of what he and HM Revenue & Customs are calling “Entrepreneurs’ Relief” (which probably sounds better than the U-turn that many consider it to be).

Under this new relief, which is set to become law from 6 April 2008, the self-employed, employees and directors will qualify for a 10% tax rate on selling their interest in the trading business or company for which they work.

 

Not surprisingly, a detailed review of the Chancellor’s proposals shows the relief to be more complicated and less attractive than it might initially appear:

1. The relief applies only on the first £1million of lifetime gains, which is markedly less generous than the taper relief regime it replaces and is unlikely to be of great benefit to the serial entrepreneur. 
2. At the other end of the scale, the requirement for an employee to hold at least 5% of the company’s shares means that many lower paid staff at companies such as Tesco (so often referred to as an example of the small investor benefitting from taper relief) will be excluded from the Chancellor’s new scheme. 
3. The shares, or interest in the business, must have been owned for at least one year, which does little to encourage long term investment. 
4. There is still no allowance made for inflation on those assets owned before April 1998, the impact of which it is easy to underestimate. A husband and wife farming partnership, whose farm was worth £1,000,000 in 1982, could face a tax bill of £38,000 if they sold their farm for £2.5million before 6 April 2008. Waiting – or being forced to wait – until after the end of this tax year would increase the tax liability to £148,000. The fact that it would have been nearly £270,000 but for the new relief is unlikely to be of great comfort to a couple who have seen their payment to HM Revenue & Customs increase by nearly 300%.

In many cases, the changes will have removed the urgency of business owners to try and sell before 6 April 2008, which will in turn potentially prevent a false market. But for others – especially those who have owned their business for many years - it may still be worthwhile looking at ways to benefit from the more generous regime in force until then.

If you think you may fall into the latter category and would like to discuss how the new rules might affect you, please contact Cathy Corns or me.

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Have you had input tax (or output tax) claims capped by HMRC at 3 years? If so, a recent House of Lords Judgement will be of interest to you.

The judgements in two similar cases Conde Nast and Fleming have ruled that the introduction of the 3 year cap with effect from 1 May 1997 was in breach of the principles of Community law as it did not allow the taxpayer a reasonable transitional period in which to submit refund claims. As such it must be disapplied. This opens up the period for submission of old and new claims.

The Lords ruled that a prospective transitional period should now be allowed in order for taxpayers to make claims. Futhermore, as the three year cap has been ruled to be defective, this means that even taxpayers who have not yet submitted claims for input tax incurred before 1 May 1997 will have the opportunity to do so. It is not known how long the transitional period will be, but it could be as short as six months.

Therefore if you have had input tax claims capped in the past, you should now revisit these claims as a matter of priority. When the details of the transitional period are announced, such claims should be re-submitted.

This judgement also calls into question the position following the Marks & Spencer case (relating to overpaid output tax). It may also be possible that the transitional period for output tax claims could be "reopened". Therefore, any output tax claims (overdeclared VAT in the periods prior to 4 December 1996 ) which have been capped by HMRC should also be revisited.

Watch this space for further details...

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Is a key issue for most business particularly where tax is concerned. But did you know that HMRC run a committee just to look at the issue. (The question of another layer of administration reducing administration can be left for now I think). The last minutes were interesting reading – in particular –

“Some members expressed disquiet at the way that the PBR CGT changes had been badged as simplification measures. They saw the changes as damaging for business and for the credibility of the simplification and admin burdens agenda ….. this was not simplification from a business perspective … the changes did simplify the tax; but that this was a wider policy change and more than a simplification. “

So now we know – simplifying tax must make it simpler for business.

One other area where the committee seemed to share my concerns is on income shifting: -

“There was still a degree of confusion for smaller businesses around IR35 and a question mark over whether this legislation had achieved what was intended. The planned legislation on income shifting was likely to increase the difficulty.

Any legislation needed to be properly proportionate to the risk at which it was targeted – what is the legislation designed to protect and is it capturing the right people in the right way?”

Sadly the issue was flagged but not resolved.


The future areas where simplification is a target appear to be taxation of benefits in kind and the associated company rules.


This appears to be one to watch – if you want to read more click here.

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In response to the comments made on the consultation on Taxpayers’ Safeguards, HMRC has announced that it will start working on the development of a Taxpayers’ Charter, which will set out both taxpayer rights and responsibilities in one single accessible document.
Dave Hartnett, HMRC Acting Chairman, said:

“Making sure that taxpayers’ rights are properly protected, whilst providing HMRC with the powers needed to ensure that today’s tax system is properly administered, are key HMRC commitments. This is what the Review of Powers consultation, together with the Taxpayers’ Charter, are about and I urge all interested parties to help us get that balance right by participating fully in the consultation.”

If you would like to read further, click here.

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HMRC has recently published three further consultations on its Powers, Deterrents and the accompanying Safeguards.

• Penalties Reform – proposals to extend the new framework for penalties on incorrect returns and the introduction of a new penalty for failure to notify HMRC of taxable activities.
• A New Approach to Compliance Checks – proposals on a framework for HMRC to check that taxpayers are paying the correct amount of tax.
• Payments, Repayments and Debt – changes in the way that HMRC collects tax debt.
  

These documents herald some potentially significant changes. If you would like further information all the documents are available on the HMRC website at www.hmrc.gov.uk/consultations/index.htm.

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Below is a piece written by my colleague Barry Hallam on our sister blog Tax Plus.

Although January is traditionally the busiest time of year for tax professionals we are eagerly awaiting further details on the proposed changes in the rules for Residence, Domicile and Capital Gains which are rumoured to be available next week.

While we wait, HM Revenue and Customs have found the time to publish three consultative documents concerning proposed changes to HMRC powers and have indicated the intention to draw up a Taxpayers' Charter.

The three documents run to over 150 pages and can be found on the Revenue website. The three documents are:

• "Modernising Powers, Deterrents and Safeguards: Payments, Repayments and Debt: Responses to Consultation and Proposals.”
• "Modernising Powers, Deterrents and Safeguards: A New Approach to Compliance Checks: Responses to Consultation and Proposals.”
• "Modernising Powers, Deterrents and Safeguards: Penalties Reform: The Next Phase."
  
  

The first document on payment, repayment and debt proposes changes to the statutory framework that allows HMRC to collect tax debts and ensure that taxpayers pay what they owe; the second document contains proposals on compliance checks and puts forward proposals for a new framework for HMRC to check that taxpayers are paying the right amount of tax and claiming the right amount of repayments; and finally, the civil penalties document puts forward proposals for extending the new statutory framework in Finance Act 2007 for charging civil penalties to all other taxes, levies and duties that HMRC is responsible for, except for Tax Credits.

There is no mention in the documents of the Taxpayers Charter but the accompanying Press Release quotes Financial Secretary to the Treasury, Jane Kennedy, as saying:

"The Government is committed to ensuring that the tax system is useable and accessible and a Taxpayers' Charter will provide a good reference point for taxpayers.”

Those with long memories will remember that both the Inland Revenue and HM Customs and Excise introduced Taxpayers Charters in the 1990s but these disappeared after a few years when it became apparent that neither organisation could keep to them!

Watch this space for the more pressing details on Residence, Domicile and Capital gains.

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In his Spring 2007 Budget, the Chancellor (who at that point was still Gordon Brown) announced changes to the capital allowances regime, without giving more than the most rudimentary detail.

A lengthy consultation period followed and it is only now that HM Revenue & Customs have published draft legislation. The document runs to 91 pages(!) with the most important changes being:

Rates of allowance

The regime of first year allowances for small and medium sized business is to go and be replaced by a series of other allowances:

• annual investment allowance – £50,000 of expenditure written off immediately; 
•  “integral features” – annual allowances at 10%; a new concept that gives relief not only to certain items not previously allowed (eg energy saving awnings) but also includes items such as air conditioning and heating, that previously qualified as plant (on which allowances were available at 25%); 
• long life assets (broadly those with an expected life of more than 20 years) - rate of allowances increases from 6% to 10%; 
•  other plant and machinery – annual allowances fall from 25% to 20%; 
• industrial and agricultural buildings allowances – being phased out by 2011; and 
• enterprise zones – the present 100% allowance ceases in 2011.
  

Some of these are considered in more detail below.

Annual investment allowance

The 100% relief on £50,000 of expenditure will be available to all businesses, from April 2008. The allowance will be split between group companies or businesses under the control of the same person/people. It can be used against most items of allowable capital expenditure (the exceptions to this include cars) in whatever order or proportion the taxpayer decides.

Businesses with relatively small capital expenditure programmes may decide that it is better to wait until after the changes come into effect before spending money on plant and machinery; for larger, or more capital intensive, businesses, this change alone is unlikely to be significant.

Integral features

One of the most commonly missed tax reliefs has been the opportunity for businesses to claim relief for expenditure on tax allowable fixtures that form part of the ‘fabric’ of a building (for example air conditioning). From this Spring, the savings available to businesses will change significantly, as the items on which relief is due have been extended but the rate of relief falls from 25% to 10%. HMRC have also published a list of items that qualify for this relief – this includes electrical, water, heating and cooling systems.

Anyone who thinks that they may have incurred costs that might qualify for these allowances should review the position as soon as they can, as the reduction in the allowance could have a significant impact on both tax liabilities and cash flow.

Planning opportunities

With the abolition of first year allowances on expenditure above £50,000 and the reduction in capital allowance rates, businesses should look carefully at whether bringing forward capital expenditure might accelerate the rate at which they can claim allowances. Whilst the same amount of allowances will normally be claimed over time, the timing differences can be significant.

It is important to look at costs already incurred and see if they should be reallocated – for example, away from building fabric (no allowances after 2011) to plant (allowances available at 20%) and to consider the life of assets; short life asset claims may well be an important way to bring forward relief in the year in which assets are scrapped or sold.

You will appreciate that the above is only a general, basic, summary and detailed advice should be sought before any planning is undertaken. As with most things coming out of HMRC the devil is in the detail and further work will invariably be needed to confirm the best course of action in any given situation.

That said, if you think you might be affected by the new rules and would like to discuss what you can (or perhaps should) do before April please contact Cathy Corns or me.

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A leading business consultancy has warned that a lot of law firms could have trouble with HMRC over the next few months. Advisers are predicting an increase in tax investigations into returns for legal firms (and other professional practices). Personal expenses and associated records appear to be “hot” topics for HMRC to check up on, as well as calculation of work in progress and accrued income, bad debt and dilapidation provisions, and general expenses.

We are only too well aware that the nature of HMRC’s queries has been far more detailed than historically. We have seen HMRC query the deduction for less than £100 of telephone adaptors stating that these should be capitalised! This level of detail is irritating but also time consuming and so costly both in terms of in-house and of adviser’s time.

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Further to my post earlier today the Chancellor of the Exchequer, Alistair Darling, has now made his statement to MPs about a “major operational problem” at HM Revenue & Customs.

In his statement he confirms the loss of personal details relating to 25 million individuals not 15 million as reported earlier.

A full report of the Chancellor’s statement can be found here.

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The BBC are reporting that the Chancellor of the Exchequer, Alistair Darling, is to make a Statement to MPs about a “major operational problem” at HM Revenue & Customs later today. This was preceded by the resignation of Paul Grey as Chairman of HMRC following reports of about the loss of taxpayers' confidential details. First a laptop with personal details of a few hundred taxpayers was stolen. Then it some computer discs disappeared on route to Standard Life which held details for thousands of people and the latest loss involves discs containing bank details of 15million child benefit recipients.

Watch this space.

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There are some important changes to the Construction Industry Scheme (CIS) starting this month:-

• monthly returns must reach HMRC by 19th of each month.
• an automatic penalty of £100 will be charged for late returns, including ‘nil’ returns and returns due for earlier months.
• for every 50 subcontractors beyond the first 50 included on the return there will be an additional £100 penalty.
• for returns due on or after 19th October, penalties will be charged for each month that a return is late.
• at least once each year HMRC will be checking that subcontractors have met all their obligations including any contractor and/or employer obligations, within certain published limits - if not they will lose their gross payment status.

www.hmrc.gov.uk/new-cis

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Do you use or provide a computer for home working? If so, you may not be aware of a change in HMRC policy.

Following the removal of the tax exemption for the loan of computer equipment by employers to employees (Home Computer Initiative (“HCI”)), HMRC have issued Business Brief 55/2007 which sets out the revised VAT policy in relation to computers provided by employers to employees who work from home.

Previously HMRC had been happy to accept that any private use of such computers could be ignored and that full VAT recovery was allowed. However, with effect from 15/8/07, HMRC will look for evidence that it is “necessary” for the employer to provide the computer in the first place. If this evidence is not available, then an apportionment of input tax will be required to reflect any private use element. It may be possible to agree a fixed percentage with HMRC.

Businesses providing computers under an existing HCI agreement can continue to reclaim full VAT until the agreement has expired (normally 3 years).

In practice, would a business provide a computer to employees unless it was necessary for them to carry out their duties? And how do you monitor the level of private use? Therefore, it seems that the best approach would be to argue that any private use is insignificant and should continue to be ignored.

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Following the original article on the BBC website and covered  by my colleague Lisa Spearman on  Tax Plus Blog.

A bigger picture is being uncovered with many more articles appearing on the Internet and you can read a selection of other professional opinions by clicking on the links below.

 

http://www.accountancyage.com/accountancyage/news/2199454/hmrc-considers-plan-access

 

http://ifaonline.co.uk/public/showPage.html?page=ifa2006_articleimport&tempPageName=469687

 

http://www.ft.com/cms/s/0/f2cb6c44-6bc9-11dc-863b-0000779fd2ac.html

 

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A further ramification of the well publicised ‘carousel fraud’ has led to many SME clients facing long delays in routine VAT registrations.

A director of HMRC has recently warned that there was little sign of immediate improvement in the back log. Us accountants have been asked not to chase sent less than six weeks old, meaning that many start up businesses are facing potential cash flow problems.

The possibility of compensation from HMRC has been suggested, but somehow I can not see this being financial !!

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I was asked recently for advice by a client, a 40% taxpayer. He wanted to make a substantial donation to charity, funded by the sale of an investment property. The property had a market value of £100,000 and the cost was £20,000.

Basically he had two choices : gift cash, or gift the property.

If he sold the property and gifted the funds to charity the position would be:

• Tax on the disposal £32,000, i.e. 40% x (£100,000 - £20,000). This assumes no taper relief is available
• Net £68,000 available to donate
• A qualifying donation of £87,179 (£68,000 x 100/78)
• Higher rate tax relief £15,692, i.e. £87,179 x 18% (40% - 22%) provided he has sufficient taxable income
• The charity would reclaim the basic rate tax of £19,168 (£87,129 x 22%) from HMRC

 If he gave the property instead the position would be: 

• Income tax relief of £40,000, i.e. £100,000 x 40%
• Charity receives a property worth £100,000, which it could then sell.
• No CGT charge on the charity
• No CGT charge on my client.
  

By giving the property itself rather than selling and giving the cash my client was £24,308 better off and the charity £12,871 better off (£100,000 - £87,179).

If taper relief at full rates had been available (and my client had enough income the result would reverse and a sale and cash gift would be better.

This is not easy – but it is always worth checking.

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