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.

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The Bitcoin Tax Bombshell

Tax Investigation Management Shipleys Tax Advisors

THE RAPID GROWTH in cryptocurrency and distributed ledger technologies, such as Bitcoin and Ethereum, has seen a large spike in businesses, traders and investors entering the fray. Naturally, the unique characteristics of cryptoassets has attracted significant attention from HMRC and tax authorities worldwide in a bid to clamp down on those purportedly using cryptocurrencies to avoid tax and hide assets.

As a result, HMRC are increasingly enquiring into businesses, traders and investors using cryptocurrencies and other hidden “value transfer systems” to ensure that all individuals and businesses involved declare their fair share of tax.

In today Shipleys Tax brief we look at what cryptocurrency and “value transfer systems” are under scrutiny and why businesses, traders and investors need to ensure they understand the taxation implications of holding these assets and structure them properly in order to be tax efficient and remain HMRC compliant.

What types of assets are covered?

Surprisingly, it’s not only cryptoassets like Bitcoin and Ethereum  on the taxman’s watchlist, other wide ranging assets types include: 

  • assets in E-money wallets like PayPal.
  • assets in ‘value transfer’ systems, such as Black Market Pesos (a system reportedly used by drug cartels, which converts drug sale revenues in the US and Europe to local currencies without the money having to cross a border);
  • Hawala, a similar money transfer system common in the Middle East, Asia and Africa
  • “Committee” – a trust-based money transfer system commonly practised in the UK within some Asian communities.

Naturally, the unique characteristics of cryptoassets has attracted significant attention from HMRC and tax authorities worldwide in a bid to clamp down on those using cryptocurrencies to avoid tax and hide assets.

According to HMRC, although the majority of individuals and businesses pay the tax due, it suspects there are taxpayers using e-money, value transfer systems and cryptos to hide assets and commit tax evasion and avoidance. The fact that some of the systems mentioned above are rooted in cultural, societal or even religious traditions is perhaps lost in translation by HMRC. Unfortunately, misunderstanding and cultural insensitivity in some these cases can give rise to unfounded allegations of tax fraud and tax evasion.

How are Cryptoassets taxed?

Generally, cryptoassets are not considered to be currency or money (fiat) by key financial institutions. From a tax perspective, cryptoassets are treated as with other investment assets such as stocks and shares and is taxed accordingly.

In practice, tax follows the underlying activity in which cryptocurrency is being acquired or sold. As such, crypto investors and traders must consider the wide degree of transactions ranging from basic purchase and sell orders to hard forks, airdrops, and such like.

Cryptoassets are not considered to be currency or money by key financial institutions. From a tax perspective, cryptoassets are treated as with other assets such as stocks and shares and is taxed accordingly.

Income tax – this is generally applied to individuals who are buying and selling, or receiving cryptocurrency, as part of a trade. The most obvious would be the ‘day-trader’ who is actively buying and selling cryptoassets with the view to realising a short-term profit. However, there multiple hurdles to overcome before you can be treated as trader, so a person who trades on their own account alone is unlikely to meet the description of a “trader“  for income tax purposes

Capital Gains Tax – in most cases therefore, an individual buying, holding and selling cryptocurrency on their own account will be deemed to carry on an investment activity and subject to capital gains tax.

Non-UK Residents and Domicile

For those that are not UK tax resident or do not have a domicile in the UK, they could potentially benefit from favourable tax rules in relation to cryptoassets.

This revolves around the issue of location or “situs” of the cryptocurrency. The current HMRC view is that cryptoassets follows the residency of the individual.

As such, if a person is non-UK resident, then there will not generally be any tax exposure in the UK.

Furthermore, where a person is UK tax resident, but is not domiciled in the UK, they may elect for the remittance basis to apply. This generally allows a person to escape UK taxation on foreign income and gains until those foreign income and gains are remitted to the UK but would indefinitely avoid it otherwise.

However, this is a simplistic approach to a complex issue and there is currently little authority in favour of HMRCs interpretation. For example, there is no consensus as to the location of the cryptoassets. Is the location for example,

  • the exchange entity holding cryptoassets, or
  • the services which host the technology?

Due to the complexity involved, any such position taken should be well thought out and disclosed accordingly with the potential for HMRC to query and/or challenge any claim.

Cryptoassets Planning

With that said, it would not be an unreasonable approach to properly structure cryptoassets such that income tax or capital gains tax can be mitigated, subject of course to the appropriate disclosure and filings.

At Shipleys Tax we can help you ensure that your cryptoassets are structured properly. We can assist in calculating your taxable gains or losses on your cryptocurrency transactions, and deal with your HMRC filing obligations thus ensuring you are fully compliant. We can also advise on the structure of holding cryptoassets to minimise UK taxation. We can also assist those who are non-UK domiciled and who may have specific tax needs relating to this area.

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.

Buying Property in Joint names – simple tax saving tips

Tax Investigation Management Shipleys Tax Advisors

AS THE RESIDENTIAL property market spikes due the lockdown easing and the stamp duty threshold increase, many property buyers are missing a simple trick which can save them tax in the right circumstances. If you’re buying a property with a friend or partner you should know the difference between two types of joint ownership.

In today’s Shipleys Tax brief we look at the the basic tax implications of jointly owning residential property and how using a few simple methods at the outset can potentially save you tax.

Basic position

Under English law, there are basically two ways in which property can be owned jointly: tenants in common or as joint tenants. The way in which the property is owned can affect the overall tax position.

Tenants in common

Where a property is purchased as “tenants in common”, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.

…there are basically two ways in which property can be owned jointly: tenants in common or as joint tenants. The way in which the property is owned can affect the overall tax position.

Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.

Joint tenants

Where a property is owned as “joint tenants”, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.

Basic Tax considerations

If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.

However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an HMRC election for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split, for example to a lower tax paying spouse. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Thus, where a 50:50 split does not give the best result, you would look to consider owning the property as tenants in common.

For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.

… (you) can make an HMRC election for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split, for example to a lower tax paying spouse.

On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.

Plan ahead

So when buying a property, it is worthwhile considering the tax implications when deciding whether to own a property as joint tenants or tenants in common. In some circumstances, transferring part ownership to a low tax paying partner could result in a lower tax bill overall.

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.

Illegal Dividends for small companies

Tax Investigation Management Shipleys Tax Advisors

AS LOCKDOWN eases with small business owners looking to re-open and beginning to trade again, companies have to be very careful about making sure their dividends are legal.

The Companies Act 2006 requires that a dividend, amongst other things, can only be paid only if there are sufficient distributable profits. In todays Shipleys Tax brief we go through the basics of what you need to know.

Dividend Payments

Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company’s financial position may have deteriorated significantly from that shown in its last annual accounts.

The Companies Act 2006 requires that a dividend be paid only if there are “sufficient distributable profits”. Even if the bank account is in credit the company will need to have sufficient retained profits (reserves) to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.

What is an “illegal dividend”?

If a dividend is paid that proves to be more than sufficient profits, or is made out of capital or even made when there are losses that exceed the accumulated profits, then this is termed ‘ultra vires’ and is, potentially, ‘illegal.’

The law requires that a dividend be paid only if there are sufficient distributable profits. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment.

What steps can you take to avoid this?

Essentially, the financial status of the company needs to be considered each time a dividend payment is made. In practice without management accounts this can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. However, the test must be satisfied “immediately before the dividend is declared” and this is generally interpreted to mean that the ‘net assets’ test must be satisfied immediately before the company’s directors decide to pay the dividend. If the directors correctly prepare basic interim accounts and a dividend is paid based on those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that there was an insufficient amount for distributable profits.

For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend but they will be needed for the declaration of a final dividend. HMRC’s guidance states that the accounts need only to be sufficiently detailed enough to enable ‘a reasonable judgement to be made as to the amount of the distributable profits’ as at the payment date.

For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend…

If regular amounts have been withdrawn then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts or other accounts information show a trading loss or the profit cannot support the payment. HMRC will argue in the majority of such cases that the director/shareholder of a small company will be aware (or had reasonable grounds to believe) that such a payment as dividend was not out of profits and therefore ‘illegal’.

Consequence of illegal dividends

A significant consequence of paying an ‘illegal’ dividend could arise if the company goes into liquidation when the liquidator or administrator routinely reviews the director’s conduct over the three years before insolvency. If it is found that a dividend has been paid ‘illegally’ then under the Companies Act 2006 rules the shareholders will be expected to repay the amount withdrawn (or the ‘unlawful part’). HMRC will actively pursue this route being as they are often the largest unsecured creditor. Furthermore, under the Insolvency Act a director can be held personally liable for any breach of his or her fiduciary duty to the company.

However, it is not only in liquidation that HMRC could open an enquiry into the treatment of a dividend. HMRC treats a dividend that it perceives to be illegal as being equivalent to a loan and, for a small company, this means being a loan to a participator and as such it must be declared on the company tax return. If such a ‘loan’ is not so declared and the financial statements filed online show that the company’s reserves are in deficit at the end of the relevant period then HMRC may raise enquiries. Likewise where the opening balance next year is in deficit but dividends are still paid.

HMRC have also been known to argue that the repayable amount is an interest-free loan and for a director employee could result in a taxable benefit-in-kind should the loan be less than £10,000 triggering income tax and NIC complications.

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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