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IF THERE’S ONE thing the tax man loves more than collecting tax, it’s dishing out penalties. But where you have forgotten to file your tax return or have made a mistake giving rise to a HMRC penalty, and you or a family member were ill with coronavirus, you may have a get out clause via the ‘reasonable excuse’ route.

In today’s note we explain what reasonable excuses are and how coronavirus might fall into this category.

Generally, HMRC may allow an appeal against a penalty if the taxpayer has a ‘reasonable excuse’ for failing to comply with an obligation, i.e. you filed a return late or paid your tax late.

A ‘reasonable excuse’ is something that prevented a taxpayer from meeting a tax obligation despite the fact that they took reasonable care. HMRC usually take a hard line as regards what they constitute as a ‘reasonable excuse’; providing the following examples of ‘acceptable’ reasonable excuses:

• the taxpayer’s partner or another close relative died shortly before the tax return or payment deadline;
• an unexpected stay in hospital that prevented the taxpayer from dealing with their tax affairs;
• a life-threatening illness;
• the failure of a computer or software just before or while the taxpayer was preparing their tax return;
• service issues with HMRC;
• a fire, flood or theft which prevented the completion of a tax return;
• postal delays which could not have been predicted; or
• delays relating to a disability.

A ‘reasonable excuse’ is something that prevented a taxpayer from meeting a tax obligation despite the fact that they took reasonable care.

By contrast, HMRC cite the following example of excuses that they will not accept as a valid reason for failing to meet a tax obligation:

• relying on someone else to send the return and they failed to send it;
• a cheque or payment bounced due to insufficient funds;
• the taxpayer found HMRC’s online system too complicated;
• the taxpayer did not receive a reminder from HMRC; or
• the taxpayer made a mistake on their return.

Impact of coronavirus

HMRC have confirmed that they will consider coronavirus as a reasonable excuse. Where claiming this, the taxpayer should explain in their appeal how they were affected by coronavirus. As a rule of thumb, HMRC are more likely to accept it as a reasonable excuse where the virus led to one of the circumstances listed above as ‘acceptable reasonable excuses’. Thus, the contention that the taxpayer had a reasonable excuse for failing to meet a tax obligation would be strong if a partner or close relative (such as a parent) died of Coronavirus around the tax deadline, the taxpayer was seriously ill with the virus or was in hospital unexpectedly.

HMRC have confirmed that they will consider coronavirus as a reasonable excuse. Where claiming this, the taxpayer should explain in their appeal how they were affected by coronavirus.

Where the taxpayer appeals on the grounds that they had a reasonable excuse for failing to file a return or pay a tax bill, they should file the return or pay the bill as soon as they are able after the reason for the reasonable excuse has been resolved.

If you have been hit with HMRC penalties or an HMRC enquiry, call our Specialist Tax Investigation Team on 0114 272 4984.

MEASURES REQUIRING businesses to submit and record VAT returns via digital means is to be extended to all companies from April 2022, the government announced this week.

The requirement is part of the government’s much vaunted Making Tax Digital (MTD) strategy which aims to see the end of the annual tax return and transform the tax system. The government say these reforms are “intended to make it easier to pay tax due, enhance resilience, effectiveness, and support for taxpayers”. Shipleys Tax Advisers, like most industry tax experts, are somewhat guarded about these aims.

Currently from April 2019, most VAT-registered taxpayers with a turnover above the VAT threshold have needed to operate Making Tax Digital for their VAT returns, keeping their records digitally and updating HMRC through secure software.

What’s changing?

In their announcement, the government set out the road map for the programme.

From April 2022, MTD will first be extended to all VAT registered businesses with turnover below the VAT threshold to “ensure every VAT-registered business takes the step to move to a digital tax service”.

Then from April 2023, it will be extended apply to businesses and landlords who file self-assessment tax returns for business or property income over £10,000 annually.

The government says this timetable will allow businesses, landlords and agents time to plan, while HMRC will expand its pilot service from April 2021 to allow businesses and landlords to test the full end-to-end service before the requirement to join.

What does this mean for you?

At Shipleys Tax Advisers we take most government announcements with a heavy pinch of salt. The current government has an unenviable track record of making far reaching changes with little thought and trying to do too much too quickly, it is usually the taxpayer and/or their agent/accountant who has to deal with the inevitable fall out (e.g. see the debacle around the introduction of RTI for PAYE, and more recently, the much-maligned original MTD roll-out).

So more admin, more red tape and more people being trapped by the overly complicated UK tax system. Is it all bad news then?

Surprisingly, not quite. At Shipleys Tax Advisers we have noted that, if implemented properly, there are valuable advantages to be gained with the right MTD process.

Efficiency – there is growing evidence that using software for VAT and record keeping does free up your time to focus on other aspects of your business.

Flexibility – not all taxpayers will want to be forced online. Those who run very small simple businesses the cost of digitalisation can be off-putting, however the system can be modified to accomodate a non-online solution.

Tax planning opportunities – for the serious business owner, MTD expanding should give agents room for tax planning. At Shipleys Tax Advisers, having an accountant or tax professional review your business performance regularly means avoiding unexpected tax bills and not miss tax planning opportunities.

Going forward

Much like the current pandemic, MTD will not go away anytime soon and as such taxpayers and businesses alike will need to get up to speed quickly.

Those company owners and sole traders currently behind the digital curve will need make plans to implement MTD especially if their bookkeeping is offline as well.

If you need help with MTD implementation or would like to discuss options, please call 0114 272 4984 or email us at info@shipleystax.com.

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IT IS ANECDOTALLY REPORTED that due to COVID-19 lockdown, birth rates are expected to rise. With estimates for children’s education to cost over hundreds of thousands, can setting up a trust for the benefit of children not only help save tax but also assist with education costs?

In this article Shipleys Tax Advisers takes a look at some of the pros and cons of school fees planning and why planning and design is key to achieving the right outcome if you want to avoid an expensive HMRC enquiry.

YOU SHOULD NOT ACT (OR OMIT TO ACT) ON THE BASIS OF THIS ARTICLE WITHOUT SPECIFIC PRIOR ADVICE. SHIPLEYS TAX PLANNING PROVIDES A TAX CONSULTANCY SERVICE AND CAN ADVISE YOU OF THE RIGHT COURSE OF ACTION.

Bank of (grand)Mum and Dad

Generally, the most common method we come across is the “grandparent solution”. This typically involves adult children (i.e.  the parents) transferring shares to their parents (i.e. the grandparents). This is then transferred to the grandchildren (minors) directly or indirectly held via a type of trust arrangement. The idea being that beneficiaries (e.g. grandchildren) in these circumstances are likely to be minors and are unlikely to have other income, the trust arrangement allows them to use their annual tax-free allowances such as the personal allowance, savings rate allowance and dividend allowance.

The idea being that beneficiaries (e.g. grandchildren) in these circumstances are likely to be minors and are unlikely to have other income, the trust arrangement allows them to use their annual tax-free allowances…

This is a seemingly a perfect solution for grandparents who wish to transfer shares to the grandchildren where the donor is not a basic rate taxpayer or where the donor wishes to reduce the value of their estate for inheritance tax (IHT) purposes.

Sorted, you would have thought.

Well not quite, there are significant pitfalls which need navigating.

Is the income taxed on the minor? 

The major problematic issue is that the income may not be treated as taxable on the minor. This type of planning is not straight forward and requires careful scrutiny of the settlements legislation and to ensure that there are no reciprocal arrangements in place.

Where parents are setting up trusts for their minor children anti-avoidance legislation can tax any income arising on the parents, so this method may not be tax efficient or indeed even work. In other words, there is a significant health warning with this planning which many are unaware of.

Gift of shares 

Where the adult children gift interests in their business to their parents and these are subsequently transferred to the minor/s in quick succession, the transaction will be at a serious risk of a successful HMRC challenge which will result in the income being taxed on the parents. 

Where parents are setting up trusts for their minor children anti-avoidance legislation can tax any income arising on the parents, so this method may not be tax efficient or indeed even work.

If, however,  the transaction can be structured in such a way that the asset is given to the grandparents with no onward obligation/intention that the asset will be transferred to the minors, and if the shares are held for a reasonable period of time (i.e. where the probity of ownership cannot be in issue) and where certain conditions are met, or due to a change of circumstances, the grandparents of their own volition decide to gift the asset to the minors, this should not be subject to a successful challenge by HMRC.  So, in reality it’s all a question of intention and timing. Get this right along with the surrounding facts and circumstances, then the prospect of having a successful fees planning increases.

Sale of shares

Where the grandparents acquire an interest in the parents’ business for full market value for/on behalf of the grandchildren, the anti-avoidance provisions do not apply. However, one will need to be mindful that the open market is actually paid and there are no reciprocal arrangements in place.  The cost of this may be prohibitive due to the costs of asset, valuation and other professional fees.

If, however,  the transaction can be structured in such a way that the asset is given to the grandparents with no onward obligation/intention that the asset will be transferred to the minors…
…this should not be subject to a successful challenge by HMRC.

COVID-19 Gifting income producing assets – a timely opportunity?

The grandparents could gift/acquire an income producing asset for the benefit of the minors and hold these on trust. This would typically be a bare trust – as opposed to a substantive trust mainly due to compliance and costs. However, this comes with a significant risk as minors (as beneficiaries) will have absolute entitlement and control of the business at the tender age of 18. The parent/grandparent may not wish for the minor to control these assets at such a young age.

It is said that a discretionary trust or an interest in possession trust may therefore be a more appropriate solution here due to its flexibility and control, and, unlike a bare trust, beneficiaries are not entitled to the assets of the trust upon attaining 18 years.

However, the tax anti-avoidance provisions apply here also. If the parents set up the trust with the intention to fund school fees, then a discretionary trust may not be a tax efficient option.

As such if income producing assets, for example stocks, shares or investment property, can be gifted/acquired by the grandparents for the benefit of minors, the income would be taxable on the minors and could go towards paying for their private school fees.  

if income producing assets… can be gifted/acquired by the grandparents for the benefit of minors, the income would be taxable on the minors and could go towards paying for their private school fees.

With COVID-19, the valuations of income producing assets may be at a value which allows gifting without significant capital gains tax consequences, perhaps a timely opportunity? 

HMRC Radar 

We have been told that a small minority of school fee planners have aggressive timeframes in implementing school fees planning. Currently this appears to fall under HMRC radar as it is not straight forward for HMRC to connect the dots with this planning. However, this does not mean this will continue forever – with the burgeoning big data revolution HMRC as poised to invest in IT systems to enable them to fill the gaps much quicker than they are now.

As such, school fees planning should be based on sound principle and careful thought; a matter of good design not a matter of good fortune.

YOU SHOULD NOT ACT (OR OMIT TO ACT) ON THE BASIS OF THIS ARTICLE WITHOUT SPECIFIC PRIOR ADVICE. SHIPLEYS TAX PLANNING PROVIDES A TAX CONSULTANCY SERVICE AND CAN ADVISE YOU OF THE RIGHT COURSE OF ACTION.

If you are interested in School Fees Tax planning, please call us on 0114 272 4984 or email us at info@shipleystax.com.