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…

TAXING BEAUTY – HMRC’s new approach to VAT for cosmetic procedures

Tax Investigation Management Shipleys Tax Advisors

DUE TO THE rapid growth of the private cosmetic medical sector in the UK, some noticeable shifts have begun to appear in HMRC’s approach to VAT in the cosmetic medical sector. HMRC have reportedly now established a dedicated team to examine the VAT implications of treatments such as Botox, skin fillers and facial peels.

In today’s Shipleys Tax brief, we consider whether HMRC’s position is now seemingly leaning towards categorizing certain treatments as standard-rated for VAT rather than exempt.

Historical Stance vs. Current Direction

While traditionally, treatments aimed at medical purposes have often been exempt from VAT, those perceived as purely cosmetic have leaned towards being standard rated (20%). This distinct separation is becoming more blurred. Procedures that serve dual purposes, such as Botox, now find themselves in a VAT grey area. There’s a growing inclination from HMRC to classify certain ambiguous cosmetic treatments as standard-rated unless they solidly fit within the medical exemption.

There’s a growing inclination from HMRC to classify certain ambiguous cosmetic treatments as standard-rated unless they solidly fit within the medical exemption.

Recent court case

In one recent tribunal case involving a prominent skin clinic, these VAT issues were brought to the forefront. The clinic had applied for a VAT credit for a specific timeframe, a claim which HMRC challenged asserting that the services during that period were not exempt from VAT.

During the tribunal, a wealth of evidence was presented, including testimonies from the clinic’s lead practitioner, a highly qualified registered medical professional who had pivoted to ‘aesthetic medicine’ and operated the clinic, offering an array of cosmetic treatments.

While the tribunal acknowledged the lead practitioner’s expertise and dedication to professional ethics, it ruled that that cosmetic treatments provided by the clinic did not qualify for VAT medical exemption. It found that the treatments were for “aesthetic reasons” and not for clinical reasons.  

The Impact

This evolving stance means that businesses offering cosmetic treatments need to be extra vigilant. The ruling underscores the importance of the nature and intent behind services in determining VAT status, emphasizing the need for meticulous record-keeping and understanding of HMRC’s evolving views on VAT exemptions in the cosmetic medical sector.

…cosmetic treatments provided by the clinic did not qualify for VAT medical exemption. It found that the treatments were for “aesthetic reasons” and not for clinical reasons.  

How Shipleys Tax can help

With the landscape shifting, our Shipleys VAT team can help ensure that your practice remains compliant, anticipating and adapting to any changes in HMRC’s perspective on VAT within the sector.

Adapting to change is vital in today’s dynamic environment and ensuring your practice stays ahead and compliant is crucial to avoid falling foul of the legislation.

If you would like assistance, or 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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Offshore Companies and Rental Income Tax

Tax Investigation Management Shipleys Tax Advisors

HMRC IS SENDING letters to some offshore (non-resident) companies that appear to have failed to notify that they own commercial property in the UK.

In today’s Shipleys Tax note we look at what this means for overseas landlords owning property in the UK and what you need to do to avoid falling foul of HMRC’s rules.

From Income Tax to Corporation Tax

Before 6 April 2020, rental income garnered by non-UK resident companies fell under the domain of income tax. However, post this date, these companies are required to adhere to corporation tax rules for any liability.

HMRC’s Requirement for Registration

HMRC is actively reaching out to companies that have so far missed registering under either of the tax rules. It appears that their knowledge about these companies and their property holdings originates from HM Land Registry or the newly established Register of Overseas Entities, which itself went live this year on 31 January 2023.

Before 6 April 2020, rental income garnered by non-UK resident companies fell under the domain of income tax. However, post this date, these companies are required to adhere to corporation tax rules…

In these letters, companies are prompted to fill out a certificate to ascertain if there’s a need to declare any unpaid tax on their rental income. Depending on the company’s declaration, they are guided either towards the voluntary disclosure procedure or, in cases of potential tax fraud, towards the contractual disclosure facility.

Additionally, the letters urge companies to evaluate if the UK’s complicated “transfer of assets abroad provisions” apply, especially concerning UK-resident individuals who might have an interest in the company’s income or capital.

Interestingly, this isn’t the first instance of such letters being dispatched. Similar letters were sent to offshore corporates owning UK properties in the past, chiefly concerning residential property income and potential tax liabilities under the annual tax on enveloped dwellings (ATED).

A Warning and the Potential Consequences

HMRC’s current communication comes with a clear warning: Companies are given a window of 40 days to either initiate the disclosure process or provide an explanation if they believe they’re exempt from disclosure. Failure to respond could see HMRC estimating what it believes the company owes, potentially sparking an investigation. This could further culminate in added penalties. The statement in the letter is quite straightforward, stating, “If we later find that you have not told us everything, we’ll view this very seriously.”

Alternative Disclosure Methods?

While the letters might sound imposing, recipients should note that they’re not legally bound to complete and return the certificates. As per the guidance from the Chartered Institute of Taxation (CIOT), there are other disclosure methods at their disposal, some of which might be more suitable than those delineated in HMRC’s letter.

Companies are given a window of 40 days to either initiate the disclosure process or provide an explanation if they believe they’re exempt from disclosure.

According to the CIOT, HMRC cannot compel a taxpayer to use any specific method for their disclosure. Depending on the situation, other methods may be more apt. Therefore, taxpayers and companies should be discerning, consider the unique facts of their situation, and seek advice on the best disclosure approach.

Conclusion

For non-UK resident companies with UK property assets, staying abreast of the latest tax regulations is paramount. With HMRC actively reaching out to those who haven’t registered under the updated tax rules, it’s crucial to understand one’s obligations and rights, ensuring compliance while also leveraging the most appropriate disclosure methods. If in doubt, always seek expert guidance to navigate these complex tax waters.

If you would like assistance, or 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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Tax Planning with Beneficial Interest Company Trusts – the challenges for Landlords

Tax Investigation Management Shipleys Tax Advisors

THE EVER-CHANGING landscape of UK tax law has prompted landlords to explore alternative legal structures for tax efficient property ownership. One such structure gaining more attention recently is the Beneficial Interest Company Trust (BICT). However, as will be seem below this complex model is not without its challenges and debate.

In today’s Shipleys Tax brief we will look at the workings of a BICT, its potential benefits, drawbacks, and the key considerations for landlords considering this route.

What is a Beneficial Interest Company Trust (BICT)?

A Beneficial Interest Company Trust (BICT) is a legal structure that has gained popularity among landlords in the UK, particularly following changes to the infamous Section 24 income tax relief in 2017 for rental income. BICTs seemingly allows landlords to strategically manage the economic value of their properties in a company, while retaining the “legal” title of the property, and thus the mortgage, in their personal name.

BICTs: The Appeal for Landlords

There are several key reasons why landlords are increasingly adopting BICTs. The trust structure purportedly enables landlords to enjoy personal mortgage rates on properties, while treating them as company assets from a tax perspective. In light of the restrictions on interest relief announced in 2015, landlords can put the rental income from personally held property (and related borrowing costs) through a Limited Company to help minimize their tax liability.

BICTs allows landlords to strategically manage the economic value of their properties in a company, while retaining the “legal” title of the property, and thus the mortgage, in their personal name.

Perceived Key Advantages of BICTs for Landlords

  • Mitigating the Impact of Section 24 Interest Relief Restriction: BICTs can help landlords offset mortgage interest against rental income, thus reducing their tax liability.
  • Preserving Personal Tax Allowances: BICTs allow landlords to ensure rental income falls within the corporation tax regime, not subject to personal income tax. This can maintain access to personal tax allowances, beneficial when rental income is taxed at higher individual tax rates.
  • Future Planning and Flexibility: BICTs offer flexibility for estate planning and asset transfer to future generations. The trust structure allows for the addition of beneficiaries or changing the ownership structure without transferring the property’s legal title.

The Risks and Challenges of BICTs

While BICTs might seem like a silver bullet, they are not without significant complexities and potential pitfalls. Landlords should exercise caution and thoroughly consider these key challenges:

  • Complex Legal and Tax Implications: BICTs involve intricate legal and tax arrangements. Ensuring compliance and avoiding unintended consequences requires advice from professionals well-versed in trust law and tax legislation. There is debate within the tax profession about this structure. Some have suggested potential mortgage fraud, mismatch of income and mortgage interest relief, and likely challenges from HMRC on the basis that such a structure is “tax-motivated” rather than commercially motivated and therefore subject to anti-avoidance legislation. HMRC will not provide approval for BICTs because these have nothing whatsoever to do with tax. This is because the company itself has no tax advantages over and above any other form of UK limited company.
  • Lender’s Reluctance: Some lenders are wary of BICTs, fearing they could be seen as contrived and fall foul of HMRC anti-avoidance legislation. This perception could impact a landlord’s ability to secure mortgage finance, and if the BICT is deemed a tax avoidance scheme, landlords could face a hefty tax bill.
  • Costs and Administrative Burden: Establishing and maintaining a BICT can be costly. The ongoing administrative responsibilities include filing annual accounts and tax returns for the SPV, which can be time-consuming.

There is debate within the tax profession about this structure. Some have suggested potential mortgage fraud, mismatch of income and mortgage interest relief, and likely challenges from HMRC…

  • Potential Future Legislative Changes: Tax laws and regulations evolve over time. There’s no guarantee that the current tax advantages linked with BICTs will persist. Future legislative changes could impact the viability of BICTs.
  • Financing Challenges: Transitioning properties into a BICT can create financing difficulties. Lenders often have different criteria and loan products for SPVs compared to individual landlords.

To BICT or Not to BICT

BICTs have provided some landlords with a strategy to navigate the tax challenges, but they are not a one-size-fits-all solution, nor are they a sure fit. Each landlord’s circumstances and objectives are unique, making it crucial to conduct a thorough assessment and seek professional advice tailored to your specific situation before considering such a legal structure.

Always remember that tax planning is not a short-term endeavour. Before moving forward with a BICT or any other tax planning strategy, taxpayers need to ensure that they are comfortable with the potential outcomes and have considered all available options.

Consulting with a qualified tax adviser and a mortgage consultant before making any decisions is crucial. As the tax difference between personal name and limited company rates continues to narrow, the cost-effectiveness of BICTs may also change.

In conclusion, while the BICT is an available solution for some landlords, understanding its pros and cons is essential to making an informed decision. Remember, effective tax planning is about strategy, not just short-term gains.

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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