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…
Tax free rental income
WITH MANY now going through job changes and unemployment, renting out a room in your house or flat might be a great way to earn some tax-free income as well as providing an affordable space for someone else in need.
In today’s Shipleys Tax note we look at how renting a spare room in your house can earn you some tax free cash.
What is Rent-a-room relief?
The rent-a-room scheme allows those with a spare room in their home to let it out furnished and to receive rental income of £7,500 tax-free each year without the need to declare it to HMRC. Where more than one person receives the income, each can receive £3,750 tax-free. The limits are not reduced if the accommodation is let for less than 12 months.
Eligibility
The rent-a-room scheme can be used by anyone who lets a furnished room in their own to a lodger. They do no need to own their own home – it can also apply if they rent (but they should check with their landlord whether their lease allows this). The rent-a-room scheme can also be used by those running a guest-house or a bed-and-breakfast establishment and provide services, such as meals and cleaning, as well as accommodation.
The scheme allows those with a spare room to let it out furnished and to receive rental income of £7,500 tax-free each year…
The scheme is not available in relation to accommodation which is not in the individual’s main home or which is let unfurnished.
Automatic exemption
Where the rental receipts are £7,500 or less (or £3,750 or less where more than one person benefits from the rental income), the exemption is automatic. There is no need to tell HMRC about the rental income. Rental receipts are the rental income before deducting expenses, plus any charges made for services such as cleaning or meals.
Using the scheme where rental income exceeds the threshold
The rent-a-room scheme can also be used where the rental receipts exceeds the rent-a-room threshold (£7,500 or £3,750 as appropriate). Where this is a case, the taxable amount is simply the amount by which the rental receipts exceed the rent-a-room threshold. This approach will be beneficial if the rent-a-room threshold is more than actual expenses. However, where using actual figures will produce a loss, it is not beneficial to claim rent-a-room relief as this cannot create a loss and the benefit of the loss will be lost.
The exemption is automatic. There is no need to tell HMRC about the rental income.
Where rental receipts are more than the rent-a-room threshold, a tax return must be completed. If the relief is to be claimed, this can be done by ticking the relevant box in the return.
The election can be made each year, depending on whether it is beneficial to do so.
Example 1
Iqra lets out her spare room to a lodger for £100 a week, earning her £5,200 a year.
As the receipts are less than £7,500, she takes advantage of the automatic exemption for rent-a-room relief. She does not have to declare the income to HMRC.
Example 2
Mary lets out a room in her home for £10,000 a year. She incurs expenses of £1,000 a year.
If she does not claim rent-a-room relief, she will pay tax on her profit of £9,000. However, by claiming rent-a-room relief, she is only taxed to the extent that her rental income exceeds £7,500. She is therefore able to reduce her taxable profit from £9,000 to £2,500 by claiming the relief.
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.
Loans to company directors – is it tax free?
IN THESE tough times company profits maybe severely affected but what if your family company is lucky to have cash in the bank? Is there a tax-efficient way to make a short term loan to directors to meet personal bills with a view to clearing the loan with a dividend payment when the business picks up? This can be a tax-efficient strategy, but there are tax pitfalls – in today’s Shipleys Tax note we briefly look at the options.
Tax implications of making loans to directors
Where a family company has cash in the bank but profits have been adversely affected by the pandemic, directors of a family company may wish to take a short term loan to enable them to meet personal bills, with a view to clearing the loan with a dividend payment when business picks up. This can be a tax-efficient strategy, although there are tax implications to be aware of if the loan balance exceeds £10,000, or if the loan is not repaid by the corporation tax due date.
A tax-free loan?
It is possible to enjoy a loan of up to £10,000 tax-free for up to 21 months. To enjoy the maximum tax –free period, the loan must be taken out on the first day of the accounting period. Where the loan is taken out during the accounting period, as long as it is does not exceed £10,000, it can be enjoyed tax-free until nine months and one day after the end of the accounting period.
Provided the loan is for £10,000 or less, there is no benefit in kind tax to pay. But if the outstanding loan balance exceeds £10,000 at any point, the director is taxed on the benefit of the loan.
The dreaded tax charge
To avoid a tax charge, the loan must be repaid within nine months and one day of the end of the accounting period. This is the day by which corporation tax for the period must be due. A section 455 tax charge (named after the legislative provision imposing it) is a charge on the company set at 32.5% of the outstanding loan balance. The charge is aligned with the higher dividend tax rate.
If the loan is cleared by the corporation tax date, there is no section 455 tax to pay. There are various ways in which the loan could be cleared, for example, by declaring a dividend (assuming that the company has sufficient retained profits) or by paying a bonus. However, there will be tax implications of these too. Unless the director can use funds from outside the company to clear the loan or will pay tax on the dividend or bonus being used to clear it at a rate which is less than 32.5%, it may be better to pay the section 455 charge instead.
The section 455 charge is a temporary charge which is repaid if the loan is repaid. The repayment is made nine months and one day from the end of the accounting period in which the loan was repaid, usually be setting it against the corporation tax liability for that period.
However, it should be noted that anti-avoidance provisions apply to prevent a director from trying to clear the loan shortly before the corporation tax due date and re-borrowing the funds shortly afterwards. What mechanisms would work to circumnavigate these provisions are beyond the scope of this tax brief.
Benefit in kind charge
Note that a tax charge will also arise on the director under the benefit in kind legislation if the loan balance exceeds £10,000 at any point in the tax year. The amount charged to tax is the difference between interest due on the loan at the official rate (currently set at 2.25% since 6 April 2020) and the interest, if any, paid by the director. The company must also pay Class 1A National Insurance (at 13.8%) on the taxable amount.
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 we do not give free advice by email or telephone.
R&D Tax Credit Boost for SMEs
LEGISLATION introduced to tackle the abuse of Research and Development (R&D) tax relief claims, which inadvertently affected genuine claims from small businesses, is being amended.
In today’s tax brief, Shipleys Tax looks at the new proposed changes to R&D rules and suggests why it’s good news for SME’s looking to get tax relief on research expenditure.
For a general overview of R&D and its abuse see: https://www.shipleystax.com/2020/09/beware-of-unscrupulous-rd-tax-relief-claim-companies/
Under the UK R&D tax credit relief rules, R&D costs incurred for work done anywhere in the world can potentially qualify for R&D tax relief. This is a very generous aspect of the tax relief but one that was open to widespread abuse.
For example, companies outside the UK with no real business interests in the UK, would set up UK companies and run foreign R&D costs through the company only to obtain the refundable/payable R&D tax credit from HMRC. HMRC state they have identified approximately £300M in fraudulent claims.
In order to prevent this abuse, draft legislation was introduced whereby any payable R&D tax credit would be capped at three times the PAYE costs incurred (thereby limiting the claim).
Under the UK R&D tax credit relief rules, R&D costs incurred for work done anywhere in the world can potentially qualify for R&D tax relief.
One of the major problems with this cap was an unintended result to deny or substantially reduce the R&D tax credit payable for certain SMEs; in particular start-ups. In many cases, start-ups tend to engage staff on a contract basis as opposed to employee/PAYE basis for various reasons. This would mean a low PAYE base cost.
As such, you could have the situation where a start-up has one employee on a reduced salary (because the company is “bootstrapping”) and hiring R&D staff on a contract basis. For example, if the PAYE were £5,000, the payroll cap would be £15,000 and hence any payable tax credit over this amount would be denied even if the qualifying expenditure was much higher. With the average SME receiving over £55K in tax credits, this could result in a substantial reduction, or denial, of R&D tax credit relief.
Under new draft legislation however, these restrictions have been lifted and there are now two exceptions to the rule above.
Firstly, any payable R&D tax credit below £20K is not affected by the cap. Secondly, and more importantly, any SME will not be subject to the cap if:
- its employees created the intellectual property behind the R&D work and
- its expenditure on externally provided workers (and work subcontracted to a related party) is less than 15% of its overall R&D spend.
Currently the legislation is draft and, if passed, is welcome news to SMEs in the UK. In particular it would benefit those startups with very low PAYE costs and hand them a cash boost when it’s needed most.
The new legislation is expected to apply to accounting periods on or after 1 April 2021.
To talk through your potential R&D claim and how our team of experts might be able to help, please call 0114 272 4984 or email info@shipleystax.com.
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