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
- First steps
- How we can help
- How do HMRC investigate a business?
- What are the trigger points to look out for?
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.
Latest news & blogs…
BEWARE OF STAMP DUTY SCAM 
ANYONE THAT has recently purchased a property needs to be aware of stamp duty scam doing the rounds. HMRC is warning housebuyers to be wary of cold callers, or social media ads, claiming that they are owed a refund of stamp duty land tax.
While such firms in many cases may be legitimate, they tend to charge a sizeable fee on any refunds receivable. This is almost always disproportionate to the work undertaken as such claims can be made directly by completing a simple form.
So what do homeowners need to watch out for?
HMRC has long warned taxpayers about so-called “high volume” tax repayment companies. These are companies that have a very limited purpose – usually attracting people in with the promise of large tax refunds of unclaimed allowances, e.g. for uniforms or the marriage allowance.
While such firms in many cases may be legitimate, they tend to charge a sizeable fee on any refunds receivable. This is almost always disproportionate to the work undertaken as such claims can be made directly by completing a simple form.
However, some supposed refund firms are actually fraudsters with questionable motives. HMRC is now warning about a recent spate of stamp duty tax refund claims that have not met the criteria for a refund. These usually prey on the unsuspecting public via cold calling or social media ads.
One such method that Shipleys Tax have encountered appears to be where the scammer approaches a homeowner claiming that they could be eligible for “multiple dwellings relief” for extremely spurious reasons, e.g. because a bedroom has an en-suite bathroom or a built-in wardrobe which “could be used as a kitchen” etc. While these claims may simply be rejected outright, the worry is that in some cases the refund is initially processed, the scammer takes their “fee”, and the homeowner then receives a demand for repayment of the refund, with interest and possibly even penalties. Naturally, by then the potential scammer has then disappeared.
Anyone receiving such a letter or being approached should refer it to the professional that handled their conveyance to ensure nothing has been missed. We also advise them to contact a tax specialist for guidance. We would also reiterate that are also many legitimate firms who genuinely work to recover tax refunds and provide a thoroughly professional service.
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.
Getting VAT back on Electric Cars
CLIMATE CHANGE and sustainability are currently on everyone’s agenda, with society being encouraged to take steps to reduce its carbon footprint wherever possible.
As part of this, the Government has introduced various tax reliefs and favourable treatments for electric cars, encouraging business owners and individuals to opt for the new Tesla or Porsche Taycan as opposed to the petrol or diesel alternatives.
In today’s Shipleys Tax blog, we consider one of the most frequently asked VAT question: whether VAT can be reclaimed on the purchase or lease of electric cars. Note, the comments below are intended only to be a general guide and not advice on a VAT reclaim.
…we consider one of the most frequently asked VAT question: whether VAT can be reclaimed on the purchase or lease of electric cars.
VAT reclaim on electric vehicles
From a VAT perspective there are no special reliefs relating to electric vehicles. So currently, electric vehicles are subject to the same rates of VAT as their diesel or petrol counterparts, i.e. 20%. Further to this, the rules for reclaiming VAT incurred on an electric vehicle depends on whether it is purchased or leased and is the same as for non-electric vehicles:
- Leased cars – where an electric car on lease is available for any private use, only 50% of the VAT paid can be recovered. This is to take into account the private element of the vehicles use. Note however, VAT paid on any servicing or maintenance charge can be recovered in full. As such it is more tax efficient to ensure that a service contract is taken separately to the lease.
- Purchased cars – where an electric car is purchased but available for private use (e.g., has private insurance, is kept at home over night etc) no VAT is reclaimable. This includes cars purchased outright, hire purchase cars and generally personal contract purchases.
- Commercial vehicles – commercial electric vehicles such as vans, lorries etc with incidental private use are entitled to full VAT recovery. It is worthwhile noting that for VAT purposes commercial vehicles also include certain types of pick-up trucks and modified cars.
…where an electric car on lease is available for any private use, only 50% of the VAT paid can be recovered. This is to take into account the private element of the vehicles use.
How to reclaim all the VAT on electric cars
This is a complex area and quite beyond the scope of this blog. However, in some very specific circumstances, businesses may be entitled to recover full VAT on electric cars. This is where businesses can show that the car is used wholly for business and NOT available for private use. Typically this applies only to “pool cars” and cars use in a trade (e.g., taxi or vehicle leasing business). Whilst in theory it may be possible to argue 100% recovery on other cars under the “wholly for business” case, in practice it is a different matter altogether. Detailed evidence would need to be maintained proving the car is only available strictly for business and no private use is allowed. This could be for example ensuring the car is only insured for business journeys, or the car is only kept overnight at business premises, or contractual restrictions provide that the business only journeys are allowed. There is no standard process here and HMRC would certainly look to challenge the VAT treatment, as such this is an exception rather than the rule and would need careful planning.
…in some very specific circumstances, businesses may be entitled to recover full VAT on electric cars. This is where businesses can show that the car is used wholly for business and NOT available for private use.
Charging electric vehicles: Reclaiming VAT
HMRC currently allow recovery on VAT on electric charging costs on the following basis:
Home charging
VAT incurred on charging an electric vehicle at home for sole traders and or partners in a business can be recovered on the business miles only. As such, HMRC expect detailed mileage records to be kept showing the private use.
This does not apply to employees of a business as the supply of the electricity in this case is made directly to the individual employee and not the business, therefore does not meet the business test.
Public charging
Business miles incurred by sole traders, partners and employees can reclaim the VAT they incur when charging their vehicles at a public charging point. Mileage records detailing the business usage should be kept supporting the reclaim.
VAT incurred on charging an electric vehicle at home for sole traders and or partners in a business can be recovered on the business miles only.
Charging at a business premises
Where vehicles are charged at the business’s premises, and are used for business and private mileage, a record detailing business and private use should be kept.
The business has two options in this case as follows:
- The business can restrict the VAT it claims on electricity and reclaim VAT only on the electricity used for business purposes; or
- Reclaim all VAT on the cost of electricity and pay output VAT to HMRC on any electricity used privately.
HMRC to ease VAT burden?
Currently, these methods for VAT recovery involve significant amount of record keeping and administration for what is potentially small amounts of VAT recovery. HMRC have taken note of this and are considering simplifications which may reduce the burden of evidence on currently imposed – so watch this space.
If you are planning on purchasing or leasing an electric vehicle and would like to know whether you can recover the VAT, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
Business Asset disposals tax investigations
SELLING PART or all your business can be fraught with tax and legal issues. One aspect which many get wrong is the extremely valuable tax relief on disposal of a business asset. The relief, known as business asset disposal relief (“BADR”), has a lifetime limit of £1 million – an amount which was reduced in 2020. Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.
In today’s Shipleys tax brief we look at what’s going on and what should you do if you are unfortunate to receive a letter.
Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.
What is business asset disposal relief?
Business asset disposal relief was previously known as Entrepreneurs’ relief (ER). This was revamped in 2020 and, aside from being rebadged as BADR, there was no change to the underlying mechanics of the relief. However, the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million. This did not affect gains arising before 11 March 2020. So, for example, if a gain of £8 million had been realised on 10 March, it could qualify in full, but the unused £2 million disappeared the next day!
…the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million.
What’s the problem?
HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020, i.e. it was a retrospective test. It is now writing to taxpayers that claimed BADR in 2020/21 that it believes fall into one of two sets of circumstances:
- more than £1 million of gains have already been subject to an ER claim prior to the change, meaning the allowance for 2020/21 was £nil; or
- where less than £1 million gains were previously subject to a claim, but the claim in 2020/21 means the limit has been exceeded, e.g. where, say, £500,000 had previously been claimed, then a claim for £1 million was made in 2020/21.
HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020…
What should you do if you get a letter?
Although, this type of “nudge” letter is usually a precursor to the opening of a formal enquiry, you should not panic. Anyone receiving a letter should check their BADR/ER claim history (back to 2008) to check the position and amend their return if necessary. We recommend you promptly speak to a tax advisor to establish the position and determine the best course of action.
If you do so, although there will be late payment interest, it appears that no penalties will be charged as long as the correction is made before a compliance check is started.
What no to do would be to ignore the letter hoping HMRC will go away. They won’t. This type of “fishing” exercise conducted by HMRC is based on yielding returns and HMRC will not relent until it is satisfied there is no potential tax underpayment at stake.
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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