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.

Sections


Areas

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

First steps

  • 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.

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.

Patterns

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 info@shipleystax.com.

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Residential property in a company – beware the ATED tax rules

Tax Investigation Management Shipleys Tax Advisors

MANY PROPERTY INVESTORS are increasingly using a limited company to hold properties for the perceived tax advantages. However, there are certain tax traps which the investor needs to be wary of in these situations.

One of these is the Annual Tax on Enveloped Dwellings (“ATED”) charge. The ATED is an annual tax on certain high-value residential properties that are held within an “envelope”, such as company or a partnership with at least one corporate partner.

The annual tax on enveloped dwellings (ATED) was introduced as part of a package of measures aimed at making it less attractive to hold high-value UK residential property indirectly, i.e. through a company etc, in order to avoid or minimise taxes such as stamp duty land tax (SDLT) on a subsequent disposal of the property.

In today’s Shipleys Tax brief we look into the rates and exemptions you need to know if the ATED tax applies to you and how you can avoid the charge.

The annual tax on enveloped dwellings (ATED) was introduced (to) make it less attractive to hold high-value UK residential property indirectly, i.e. through a company etc, in order to avoid or minimise taxes such as stamp duty land tax (SDLT) on a subsequent disposal of the property.

The Charge

The charge may potentially apply where a property in the UK which is valued at more than £500,000 is owned completely or partly by a company, a partnership with at least one corporate partner or a collective investment scheme (such as a unit trust or an open-ended investment company).

The charge is payable annually in advance. Where a property is within the scope of the ATED on 1 April, an ATED return must be made online by 30 April and the tax for the period from 1 April to the following 31 March must be paid by the same date. The table below shows the rates of ATED that applies for the period from 1 April 2022 to 31 March 2023.

Value of propertyATED (2022/23)
More than £500,000 to up to £1 million£3,800
More than £1 million up to £2 million£7,700
More than £2 million up to £5 million£26,050
More than £5 million up to £10 million£60,900
More than £10 million up to £20 million£122,250
More than £20 million£244,750

Letting exemption

You can avoid the tax charge by claiming an exemption.There are a number of exemptions from the ATED charge. One of these is the letting exemption.

The ATED charge does not apply if the property is let on a commercial basis and is not, at any time, occupied (or available for occupation) by anyone connected with the owner.

You can avoid the tax charge by claiming an exemption.There are a number of exemptions from the ATED charge.

Provided that this test is met, relief will be available. The relief must be claimed through HMRC’s ATED online forms service. If the claim reduces the ATED charge to nil (which will be the case if all high-value residential properties owned by the company are let on a commercial basis), a Relief Declaration Return needs to be completed.

Once this form is correctly completed and submitted, the property is exempt from paying the ATED charge.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

Giving Gifts – is there a tax penalty?

Tax Investigation Management Shipleys Tax Advisors

THE NATURE OF a gift is that it is something that is given to some without receiving a payment in return. Consequently, as nothing is received in return it would seem unlikely that making a gift could trigger a tax liability.

However, as we will see in today’s Shipleys Tax brief, in some cases making a gift could land you with tax to pay.

Gift issues

Many make the mistake of thinking that gifting isn’t taxable. Whilst gifts are usually given without receiving a payment, strangely that doesn’t exempt gifts from triggering tax liabilities. There are tax rules that apply to gifting in various circumstances which, unfortunately, can give rise to a capital gains tax liabilities.

Market value

The making of a gift is a “disposal” for capital gains tax purposes. As the disposal is not by way of an arm’s length bargain (i.e., the price in a free market), the disposal proceeds are the market value at the time the gift was made, rather than the amount received by the person making the gift (i.e. nothing). From a capital gains tax perspective, unless the gift is to a spouse and the no gain/no loss rules apply or is exempt from capital gains tax, rather than the donor making a loss equal to the cost of the gift, a gain may be realised instead.

There are tax rules that apply to gifting in various circumstances which, unfortunately, can give rise to a capital gains tax liabilities.

Example

Bella has a painting which her niece has always loved. She purchased the painting many years ago for £100. The artist is currently very popular and the painting is now worth £20,000.

On giving the gift to her niece, Bella is treated as if she had disposed of the painting for its market value of £20,000. Consequently, she makes a capital gain of £19,900. Assuming her annual allowance of £12,300 remains available, she must pay capital gains tax on a gain of £6,800!

Gifts to spouses/civil partners

Transfers between spouses are deemed to be at a value that gives rise to neither a gain nor a loss. If instead of giving the painting to her niece, Bella had given it to her husband Akbar, the deemed consideration would be £100 (the value that creates neither a gain nor a loss) and Akbar would be treated as having acquired the painting for £100. In this situation there is no capital gains tax liability on the gift.

Gifts to a charity

Capital gains tax is not payable on a gift to a charity.

Relief for gifts of business assets

The relief for gifts of business assets allows the capital gains tax that might arise on the gift of a business asset to be deferred by ‘rolling over’ the gain so that the recipients base cost is reduced by the deferred gain. However, while this means that there will be no capital gains tax to pay at the time of the gift, the recipient will realise a larger gain when they dispose of the asset. The relief effectively shifts the liability from the donor to the recipient.

Capital gains tax is not payable on a gift to a charity.

Don’t make the mistake of thinking that gifting isn’t taxable. In some cases, Capital Gains tax can still apply as we have seen above.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

Spring Statement 2022 – Sunak’s Tax Plan

Tax Investigation Management Shipleys Tax Advisors

The UK Chancellor today delivered his much heralded Spring Statement. At Shipleys Tax we look at some of the brief highlights.

Basic rate of income tax to be cut to 19p by 2024

  • Basic rate of income tax to be cut from 20% to 19% for the tax year ended 5 April 2024 (to be confirmed)
  • The first cut of income tax rates in 16 years

National Insurance threshold to be raised by £3k

  • National Insurance threshold raised by £3,000 for both Primary Class 1 and Class 4 NI
  • This will further align with income tax thresholds, removing an historic anomaly
  • The threshold at which employees and the self-employed will start to pay national insurance contributions will rise from £9,880 to £12,570 a year.
  • The increase will be implemented from July this year (2022)
  • Employers will benefit too, as the Employment Allowance that offsets Secondary Class 1 NI will increase from £4,000 to £5,000. This will also come into effect from April  2022.
  • Most likely to dampen effects of the incoming Health and Social care levy of 1.25%

VAT on energy saving devices to be cut to zero

  • VAT will be cut to zero on energy saving devices
  • This includes thermal insulation and solar panels, and similar items.
  • Fuel duty was also cut by 5p per litre, effective from 6pm on 23 March 2022.
  • This cut will last for one year, subject to any extension.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

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