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.

Latest news & blogs…

Making Tax Digital to be extended to all companies from April 2022

Tax Investigation Management Shipleys Tax Advisors

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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Back to School Fees Tax Planning: Good design or good fortune?

Tax Investigation Management Shipleys Tax Advisors

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.

VAT AND STAMP DUTY CUTS ANNOUNCED TODAY

Tax Investigation Management Shipleys Tax Advisors

IN A SEEMINGLY DESPERATE BID, the UK Chancellor gave his Summer economic update today in Parliament to revive jobs and the boost the ailing economy following the outbreak of COVID-19 Coronavirus. 

Along with a Stamp Duty holiday (£125k to £500k), a 15% VAT reduction for the catering/leisure industry he announced new job scheme subsidies for young unemployed workers. Here at Shipleys Tax Advisers we outline some of the plans below.

Stamp Duty Land Tax (SDLT)

  • The current residential SDLT threshold of £125,000 will rise to £500,000.
  • This will apply from 8 July 2020 until 31 March 2021.
  • First-time buyers qualify for relief, whereby they pay less, or no tax, if the purchase price is £500,000 or less.
  • Applies only to property purchased in England and Northern Ireland.

VAT: Temporary VAT cuts

The rate of VAT on food, accommodation, entry fees etc is cut from 20% to 5% for the next six months.

VAT on food and non-alcoholic drinks

  • From 15 July 2020 to 12 January 2021, to support businesses and jobs in the hospitality sector.
  • The reduced (5%) rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK.
  • Further guidance on the scope of this relief will be published by HMRC in the coming days.

VAT on accommodation and attractions

  • From 15 July 2020 to 12 January 2021, to support businesses and jobs.
  • The reduced (5%) rate of VAT will apply to supplies of accommodation and admission to attractions across the UK.
  • Further guidance on the scope of this relief will be published by HMRC in the coming days.

New Jobs Retention Bonus

  • A new bonus of £1,000 will be paid to employers for bringing back and retaining furloughed employees until January 2021.
  • Employees must be paid at least £520 per month.

Job Retention Scheme (JRS)

  • The Employee Job Retention Scheme (JRS) is due to wind down and it will end in October 2020. The Chancellor has said “It is a false hope to keep furloughing open forever”. 

Kickstart scheme

  • The Kickstart scheme will pay employers who take 16 to 24-year-olds for a minimum of 25 hours per week at the National Minimum Wage (NMW).
  • The grant will pay the wages or around up to £6,000 for the first six months.
  • No cap on the number of places available.

Training places

  • Pay employers £1,000 to take on new trainees.
  • Apprentices: pay employers to create new apprenticeships, £2,000 per place.
  • £1,500 payment for taking on apprentices aged over 25 years old.

Eat Out to Help Out

  • The ‘Eat Out to Help Out’ scheme aims to encourage people to return to eating out.
  • Every diner will be entitled to a 50% discount of up to £10 per head on their meal, at any participating restaurant, café, pub or other eligible food service establishments.
  • The discount can be used unlimited times and will be valid Monday to Wednesday on any eat-in meal (including non-alcoholic drinks) for the entire month of August 2020 across the UK.
  • Reclaimed by the business which must apply to participate.

If you need help with the issues above, please call Shipleys Tax Planning on 0114 272 4984 or email info@shipleystax.com – we are ready to assist.

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