HMRC investigation? Let us help protect your interests
Tax Investigation Management
Tax investigations by HMRC often come as an unpleasant shock for many and can be very stressful.
From the outset communication from HMRC can be quite intimidating as they tend to take an aggressive position and “throw the book”. The enquiry will often embrace many aspects of the business and will typically take the form of a standard template letter padded out in parts by reference to the particular client.
In other cases HMRC will issue a letter which on the face of it looks benign but has far reaching implications if not handled correctly.
At Shipleys we are non-judgmental, vigorous in defending our clients and aim to resolve the investigation in the most efficient manner possible without compromising the quality of our work.
We have the experience and know-how to handle local district cases to large tax fraud cases both in direct and indirect tax (VAT).
And with Shipleys Tax Fee Protection Partner our clients have peace of mind that in the event of an enquiry all professional fees up to the First Tier Tribunal are covered.
- First steps
- How we can help
- How do HMRC investigate a business?
- What are the trigger points to look out for?
Some of the areas in which we regularly assist clients are:
- Code of Practice 9
- Code of Practice 8
- Voluntary Disclosures to HMRC (Onshore)
- Compliance Checks
- Negotiated Settlements with HMRC
- You need to know what your rights are under enquiry
- Identify and prioritise of areas of primary concern
- Assemble and analyse relevant information and evidence in order to quantify the correct tax liability
- You need advice on what HMRC can ask you to produce – whether you have to provide copies of documents and soft copies of electronic files for example
- You need an assessment of your accounting systems to know if it is robust enough to withstand scrutiny
- You want to reduce the risk of an investigation going forward and improve compliance procedures.
How we can help
- Our team consists of highly experienced ex-HMRC Inspectors
- We can influence and control the pace of investigation
- Our specialist knowledge will be utilised to challenge any incorrect assumptions made by HMRC
- Comprehensive Fee Protection insurance for clients
Remember early intervention by a tax investigation specialist could resolve the dispute relatively quickly; what not do to is to attempt to correspond with the tax man yourself as you could unknowingly put the proverbial “foot in it”.
Are under enquiry? Do you think you are at risk of an investigation? Contact us now for independent advice on your options.
HOW DO HMRC INVESTIGATE A BUSINESS?
Some tax investigations are random but increasingly the majority are as a result of HMRC’s risk analyses/assessments.
This “risk assessment” process typically compares the results of the business to other similar businesses; it statistically analyse areas such as gross profit margin, mark-up rate and comparisons to earlier years. Where a case is “risk assessed” HMRC cannot decline the invitation to investigate.
Even where HMRC know that there was “nothing in it for them”, officers have openly admitted that they have no choice but to open an enquiry because the risk assessment process had identified the case as warranting an enquiry.
What are the trigger points to look out for?
The short answer is patterns and, to a certain extent, timing.
Most accountants are unaware that whilst HMRC can launch an investigation into a business at any time within the statutory timeframe, enquiry notices are usually timedto be issued at specific times of the year in order to control work flow. Favoured times for issuing enquiry notice are the end of January (accountants busy with heavy workloads) and Fridays (clients receive a shock when opening post on a weekend!).
Nowadays, HMRC typically impose a non-statutory time limit on the taxpayer for producing information requested in the opening letter. Often it will not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case. This is important in both establishing a relationship with the officer dealing with the enquiry and also gaining maximum penalty mitigation for cooperation in the event there is culpability.
HMRC expect to see consistency across a business, both within the business itself and also across similar sectors. It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit decreases HMRC will query if proprietors’ drawings/directors remuneration increases. This crude analysis tool is often misleading and belies the actual reasons for fluctuations leading to businesses that have nothing to hide being flagged up for enquiry.
For example, if turnover increases substantially HMRC may conclude that maybe not all of the turnover in the previous year was declared. Or if it drops significantly then maybe some has been taken by the owner and not declared? The reality maybe that turnover has increased due to having a exceptionally good year and decreased because of a loss of a large customer or order.
Suspicion is also aroused if the claim in respect of administration expenses increases well beyond what would be expected comparing it with the previous year. HMRC will wonder whether hours have increased (hence the increase in admin expenses) and therefore the officer will wonder why turnover has gone down.
Proprietors’ drawings – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to query whether any cash takings have not been declared. Similarly, if the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business even though the reality is most proprietors in business start ups do not take any drawings in the formative years.
Gross profit margins (GPR) – typically the GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than a few percent will arouse suspicion. HMRC has access to a vast database of information indicating what the GPR of a particular type of business should be.
Invoices – An officer will scrutinise invoices carefully to check whether part of the invoices are being paid in cash to disguise the true GPR.
Sectors – HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector. For example, Medical practices, dentists and vets are targeted because they engage locums as self- employed workers whereas in reality it is difficult to show that a locum is self- employed in many typical practices.
Professional footballers and their clubs have been under scrutiny for a few years now mainly because in some cases a player will receive a payment for the exploitation of his “image rights” and HMRC does not approve of this because it reduces or in some cases completely avoids liability to UK tax by devising a structure which holds the image rights offshore.
Umbrella companies and IT agencies using “one-man band” IT companies have been under the microscope for a long time (see IR35), mainly because it is considered that many of them are purportedly engaged as self- employed workers but the reality is that they can be deemed to be employees.
Standard of living – does an individual have the means to finance his/her standard of living? Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc. Although there will often be perfectly reasonable explanations as to how such assets may have been acquired it may not stop HMRC delving further.
People often think they can outwit HMRC and stay one step ahead. However, they should be well aware of that most of the tricks which the unscrupulous businessman may try has been seen and dealt with by HMRC many times over and they underestimate HMRC at their peril.
If you require help with tax or VAT investigations then speak to our experts on 0114 272 4984 or email firstname.lastname@example.org.
Latest news & blogs…
WITH THE THREAT of a second UK lockdown looming, the Chancellor has today sprung into action to unveil his “Winter Economy Plan”.
Measures in Mr Sunak’s Plan include a new Jobs Support Scheme, an extension to the VAT cut for some sectors and support for businesses and workers.
At Shipleys Tax we have gathered the most relevant parts of the plan and summarised them below.
What is the New Jobs Support Scheme?
- The new Scheme, which is available to all small and medium-sized businesses, will see the Government top up the wages of workers forced to cut their hours due to the pandemic. It is intended to replace the somewhat successful employer furlough scheme.
- Employees will get paid for work as normal, with the state and employers then increasing those wages to cover up to two-thirds of the pay they have lost by working reduced hours.
- This means that employees must work a minimum of 33% of their normal hours. For the remaining hours not worked, the government and employer will pay one third of the wages each, meaning that employees working 33% of their hours will receive at least 77% of their pay.
- The idea behind the scheme is that it will enable employers to retain workers on reduced hours, so that employees are not made redundant.
- The Job Support scheme will start from November 2020 and last for six months, taking over from the current furlough scheme, which is due to end on the 31 October 2020.
- It will run alongside the Job Retention Bonus, as well as other initiatives aimed to help get people back into work such as the Kickstart Scheme.
Who is eligible for the Job Support Scheme?
Employees eligible for the Job Support Scheme must be employed to work two-thirds of their normal hours and it is available to anyone who is in employment from 23 September 2020.
How do you apply for the Job Support Scheme?
No details were provided by Chancellor about how the Job Support Scheme can be applied for. At Shipleys Tax we envisage it would work in the same way as the furlough scheme, which would mean that employees would not have to do anything, but instead it will be down to their employer to apply for the scheme.
Autumn Budget cancelled
Some further good news. Yesterday, the Chancellor announced that there would be no Autumn Budget. Many were predicting that the Autumn Budget would involve tax increases (notable capital gains tax) to help pay for Government schemes that were announced at the beginning of the nationwide lockdown in March. Instead, the next budget is now set to take place in spring 2021.
Self-employment income support scheme
For the self-employed, the grant available for those qualifying has been extended.
The 15% VAT cut for the hospitality and tourism sectors has also been extended.
If you are affected by the above and would like more information, please call 0114 272 4984 or email email@example.com.
Please note that we do not give free advice by email or telephone.
TO PREVENT the abuse of Research & Development tax credit relief claims, HMRC are looking to step up their crackdown on unscrupulous companies promoting exaggerated claims.
At Shipleys Tax, we are aware of the many pitfalls of an ill-prepared claim and the issues to avoid and how you can maximise the the tax relief claim.
This was borne out by the recent case of AHK Recruitment v The Commissioners for HMRC in the First Tier tax tribunal where a claim for Research & Development (R&D) was denied due to lack of credible evidence. In particular, the R&D report which was submitted did not give clear evidence as to how the research and development took place. The Tribunal was amazed that no competent professional gave evidence, not even a witness statement. Nor was there any professional representation.
What is R&D?
Research & Development is a significant driver of innovation, economic growth and employment across all regions of the UK.
The R&D tax relief is a very valuable relief. Under the SME scheme, where expenditure incurred by a SME qualifies for relief, the company can claim an extra deduction in calculating its taxable profits. That extra deduction is 130% of the qualifying expenditure, which means that the company obtains a total deduction of 230% (that is the original spend plus the additional deduction) of the original qualifying expenses.
If the company makes a loss for corporation tax purposes, the loss from the R&D deduction can (with some restrictions) be ‘surrendered’ in return for a payment of R&D tax credit. The payable tax credit is then 14.5% of the loss surrendered.
Abuse of R&D claims
Unfortunately, R&D is not a regulated industry and there are no real barriers to entry which has resulted in a tsunami of new overly enthusiastic entrants who exaggerate what should be considered as true R&D within the rules of the scheme. They may have incorrect suggestions as to what might qualify to encourage potential clients to sign up to their commission-based fee engagements.
The consequences of incorrect claims can be significant on the business. Not only will the business need to repay tax and interest, it may have significant tax penalties which may hit cash flow hard.
One underlying issue is that taxpayers are still failing to understand that the UK tax system is inherently “process now” and “check later”. Therefore whilst the business may receive a tax repayment from HMRC, HMRC have a window to enquire into the affairs of the business and this can be extended in some cases to 20 years.
Therefore, it is imperative to ensure that you instruct experienced and credible R&D firms who are real professionals and technically competent, as well as having high ethical standards, as this is a complicated area of tax law.
- The importance of the competent professional and their experience and qualifications.
- With software claims, the advance and uncertainties have to be in the field of software, not the industry it is being used in.
- Concentrating too much on functionality as opposed to advancement in the field of research, and uncertainty in the report.
- Lack of detailed evidence of costs.
At Shipleys Tax we expect to see a significant rise in cases such as AHK Recruitment above. HMRC are stepping up their crackdown on fraudulent R&D claims and have increased resources to tackle tax abuse due to a significant increase in incorrect and fraudulent R&D claims.
HMRC’s consultation on preventing abuse of R&D tax relief for SMEs closed Friday, 28 August 2020.
To talk through your potential R&D claim and how our team of experts might be able to help, please call 0114 272 4984 or email firstname.lastname@example.org.
IN STRIFE AS IN DEATH, tax is never far away it seems. The government has made various support payments available to individuals and businesses to help mitigate the profound effects of the Covid-19 pandemic but there is a sting in the tail. What is the tax position of these payments?
Those self-employed people and business owners who have received a grant during the coronavirus pandemic, do they need to take these into account when preparing their tax returns for 2020/21. Shipleys Tax looks at the lesser known tax impact of these payments here.
Payments under the Coronavirus Job Retention Scheme?
Grants payments made under the Coronavirus Job Retention Scheme (CJRS) for fully furloughed and flexibly furloughed employees are included in the calculation of the employer’s profits. However, they can deduct payments made to employees and associated employer’s National Insurance and pension contributions.
As far as the employee is concerned, grant payments paid over to them are treated in the same way as normal payments of wages and salary. They are taxable under PAYE and liable to Class 1 National Insurance contributions.
Grants under the Self-employment Income Support Scheme
The self-employed, can, if eligible, claim grants under the Self-employment Income Support Scheme if their business has been adversely affected by the Covid-19 pandemic. The first grant could be claimed in May and the second can be claimed in August.
The grants should be taken into account in computing profits for 2020/21, returned on the self-assessment tax return due by 31 January 2022. As they are included in profits, where these exceed £9,500 for 2020/21, Class 4 National Insurance contributions are payable. If profits exceed £6,475, the trader must also pay Class 2 contributions.
Where profits are below £6,475 for 2020/21, there is no obligation to pay Class 2 contributions. However, it can be beneficial to pay them voluntarily to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes.
Various other grants were also paid to particular types of business, such as those eligible for small business rate relief and grants to those in specific sectors, such as those payable to businesses in the hospitality, retail and leisure sectors and to Ofsted registered nurseries.
Where the business operates as a company, the grants should be taken into account in calculating the profits chargeable to corporation tax.
If the grants were payable to a sole trader or unincorporated business, they should be taken into account in computing the profits chargeable to income tax.
If you need assistance regarding the tax treatment of government support grants, please call us on 0114 272 4984 or email email@example.com.