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…

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

Tax Investigation Management Shipleys Tax Advisors

UPDATED 27/8/21

IT IS ANECDOTALLY REPORTED that due to the pandemic, 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 child 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 challenge.

YOU SHOULD NOT ACT (OR OMIT TO ACT) ON THE BASIS OF THIS ARTICLE WITHOUT SPECIFIC PRIOR ADVICE. SHIPLEYS TAX PLANNING PROVIDES A BESPOKE 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…

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.

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.

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.

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.

Gifting property to the children – avoiding the tax pitfalls

Tax Investigation Management Shipleys Tax Advisors

AS THE PANDEMIC becomes more of a way of life rather than something that can be avoided, many are looking to straighten their tax affairs with regards to passing wealth to the next generation and mitigate Inheritance Tax (“IHT”). Current social media trends are questioning whether it is even right to leave a legacy to heirs.

Away from these discussions, in today’s Shipleys Tax brief we look at whether it is possible to reduce or avoid inheritance tax by gifting property to your children, but it can be quite complicated, and it is easy to get it wrong. Professional advice should be taken in advance, but as a quick explainer see today’s blog below

What is IHT?

A brief explainer here. If you plan to pass on assets or money after you die, your heirs could face a tax bill of up to 40% of your estate. Your estate is defined as your property, savings and other assets after any debts and funeral expenses have been deducted. You can reduce or avoid IHT in a number of ways (IHT is often called the “voluntary tax”) There’s a tax-free allowance, and you can also give away a certain amount of your money during your lifetime, tax-free and without it counting towards your estate.

If you plan to pass on assets or money after you die, your heirs could face a tax bill of up to 40% of your estate.

So whats the plan?

No one likes the idea of the taxman taking a chunk of their estate when they die, particularly if it will be necessary to sell a much-loved property to pay the inheritance (IHT) bill.

The introduction of the residence nil rate band (“RNRB” – currently set at £175,000) means that a couple can now leave combined estates worth £1 million free of inheritance tax where this includes a residence valued at £350,000 or more, which is left to direct descendants. However, the RNRB is reduced where a person’s estate is worth more than £2 million and lost where the value of the estate exceeds £2.35 million.

If it looks likely that there may be IHT to pay, the idea of taking steps to reduce this is attractive. Where property is given away more than seven years before the donor’s death, it escapes IHT. Giving property to the children may, at first sight, be an attractive option, but are there are traps to be aware of?

The introduction of the residence nil rate band means that a couple can now leave combined estates worth £1 million free of inheritance tax..

Giving away the main residence

If the main residence is given away, there will be no capital gains tax to pay as long as the main residence exemption applies in full. However, if the property is retained by the children as an investment property, the capital gains tax clock will start to run from the date that they acquire it. By contrast, if the property is gifted at death, there will be a capital gains tax uplift to the value at death, but there may be some inheritance tax to pay (potentially at 40%).

Tax problems arise if the parents give the property to the children but continue to live in it. There are two sets of rules that can affect this adversely – the gifts with reservation rules (GWR) and the pre-owned asset (POA) rules.

The GWR rules apply where a donor gives an asset away but continues to derive benefit from it. An example would be parents who transferred their home to their children but continued to live in it. In this case the rules effectively ignore the transfer for inheritance tax purposes, such that it forms part of the death estate.

The POA rules impose an income tax charge on the previous owner if they give a property away but continue to live in it, based on a notional market rent of the property.

If the main residence is given away, there will be no capital gains tax to pay as long as the main residence exemption applies. However, if the property is retained by the children as an investment property, the capital gains tax clock will start to run from the date that they acquire it.

Investment property

Seeking to take an investment property outside of the death estate can trigger a capital gains tax charge where a property is given to a child, even if no money changes hands. The child is a connected person and the property is deemed to be disposed at market value. This may trigger a capital gains tax bill of 18% or 28% of the gain (to the extent it exceeds the annual exemption), which must be paid within 30 days (but with no proceeds from which to pay the tax).

The best advice?

Giving away property in an attempt to save inheritance tax can be very complicated and it is easy to get it wrong; professional advice should be taken in advance to avoid the many pitfalls that lay in tax legislation.

Shipleys Tax have a wealth of experience providing practical and affordable IHT mitigation strategies.

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 to arrange a free no obligation consultation.

No company profits? How to take cash out tax efficiently

Tax Investigation Management Shipleys Tax Advisors

THE PANDEMIC has left many businesses struggling for cashflow who may not have enough profits to pay the usual dividends. So how should you extract cash from your company? In today’s short Shipleys Tax brief we look at some basic strategies to help you manage your cashflow tax efficiently.

If you operate through a limited company, for example as a personal or family company, you will need to extract funds from your company in order to use them to meet your personal bills. There are various ways of doing this. However, a popular and tax efficient strategy is to take a small salary which is at least equal to the lower earnings limit (set at £6,240 or 2021/22) to ensure that the year is a qualifying year for state pension and contributory benefits purposes, and to extract further profits as dividends.

If you operate through a limited company, for example as a personal or family company, you will need to extract funds from your company in order to use them to meet your personal bills

However, this strategy requires the company to have sufficient retained profits from which to pay a dividend. If the company has been adversely affected by the Covid-19 pandemic, it may have used up any reserves that it had. As dividends must be paid from ‘retained’ profits, if there are none, it is not possible to pay a dividend.

So what are there other options for extracting funds to meet living expenses?

Pay additional salary or bonus

Unlike a dividend, a salary or bonus can be paid even if doing so creates a loss – it does not have to be paid from profits. However, this will not be tax efficient once the salary exceeds the optimal level due to the National Insurance hit and the higher income tax rates applicable to salary payments.

Take a director’s loan

If it is expected that the company will return to profitability, taking a director’s loan can be an attractive option. Depending when in the accounting period a loan is taken, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance. If the company has returned to profitability within nine months of the year end, a dividend can be declared to clear the loan in time to prevent a special company tax charge from arising. If the account is overdrawn at the corporation tax due date nine months and one day after the year end, the special tax charge of 32.5% of the outstanding amount must be paid by the company (although this will be repaid after the corporation tax due date for the accounting period in which the loan balance is cleared).

Depending when in the accounting period a loan is taken, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance

Put personal bills through the director’s loan account

Another option is for the company to pay the bills on the director’s behalf and to charge them to the director’s loan account. Again, if the company has sufficient profits to clear the outstanding balance within nine months of the year end, a dividend can be declared to prevent a special tax charge from arising. A benefit in kind tax charge (and a Class 1A National Insurance liability on the company) will also arise if the outstanding balance is more than £10,000 at any point in the tax year.

Provide benefits in kind

Use can be made of various tax exemptions, such as those for trivial benefits and mobile phones, to provide certain benefits in kind in a tax-free fashion.

Pay rent

If the company is run from the director’s home, the company can pay rent to the director for the office space. This should be at a commercial rate, and the director will pay tax on the rental income. However, there is no National Insurance to worry about and the rent can be deducted in computing the company’s profits, even if this creates a loss.

As a bonus, if the extraction policy creates a loss, it may be possible to carry the loss back and set against previous profits of the company to generate a much-needed tax repayment.

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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