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…
£20 million in grants for small businesses – here’s how to apply
Back in July the government announced a £20 million new funding to help businesses across England get back on track.
Small and medium sized businesses in England can access grants between £1,000 – £5,000 for new equipment and technology and accountancy advice.
But getting to the right location to apply is a bit of a kerfuffle. So here at Shipleys Tax we have done the legwork for you.
The The funding has been allocated to Growth Hubs within each Local Enterprise Partnerships (LEP). You can view it here: Growth Hub funding: allocations for each LEP area.
How to apply
Activities supported through the grant must be to directly respond to the impact of COVID-19 and can include:
- help businesses access specialist professional advice e.g. human resources, accountants, legal, financial, IT / digital
- purchase minor equipment to adapt or adopt new technology in order to continue to deliver business activity or diversify
The nature and value of grants awarded will be tailored to local circumstances, and will typically be up to £3,000. Under certain circumstances, and on a case-by-case basis, grants of up to £5,000 may be awarded.
To apply for the grant and find out more, please you can locate and contact your local area Growth Hub here.
Does no company profit mean no income?
Extracting income from a family company with no retained profits
THE COVID-19 pandemic has had an adverse effect on millions of family companies, potentially reducing or eliminating profits. So where there are no retained profits, no dividends can be paid. If funds are needed to meet personal living costs, although not as tax efficient, other routes can be taken.
Where there is cash in the business that can be withdrawn, possibly because the business has received a Coronavirus Bounce Back Loan or a Coronavirus Business Interruption Loan, and the family need to withdraw funds to meet their living costs, the lack of retained profits may affect how those funds are withdrawn. Here at Shipleys Tax we explain more in today’s brief tax note.
So where there are no retained profits, no dividends can be paid. If funds are needed to meet personal living costs, although not as tax efficient, other routes can be taken.
No retained profits, no dividends
A popular and tax-efficient strategy is to pay a small salary and extract further profits as dividends. For 2020/21, the optimal salary is around £9,500 (threshold for Class 1 National Insurance purposes) where the employment allowance is not available and £12,500 (equal to the personal allowance) where it is.
Dividends can only be paid out of retained profits, so where there are no retained profits, no dividends can be paid.
Thus, if funds are needed to meet personal living costs, are there other routes that can be taken?
Higher salary or a bonus
Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss. Paying an additional salary or a bonus will come with a personal tax bill once the personal allowance has been utilised and will attract primary and secondary Class 1 National Insurance where earnings exceed the relevant thresholds, set, respectively, at £9,500 and £8,788 per year, and where secondary contributions are not sheltered by the employment allowance. It should be remembered that company directors have an annual earnings period for Class 1 National Insurance purposes.
Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss.
However, on the plus side, salary payments and any associated secondary National Insurance contributions are deductible when working out the company’s taxable profits.
Taking a company loan
Taking a loan can be tax efficient route in some circumstances if done correctly. So rather than paying a higher salary and paying tax at the higher rates, it may be preferable to take a loan from the company. Most family companies are “close” companies such that if the loan is not repaid within nine months and one day of the end of the accounting period in which it was taken, a tax charge arises and 32.5% of the outstanding balance must be paid by the company over to HMRC.
Although some good news is that the tax charge is refunded if the loan is repaid – this is repayable nine months and one day after the end of the accounting period in which the loan is paid.
A benefit in kind tax charge will also arise on the director if the loan balance tops £10,000 at any point in the tax year, even if only for one day. The amount charged to tax is the interest that would be payable at official rate (set at 2.25% from 6 April 2020), less any interest actually paid.
Taking a loan can be tax efficient, particularly if done correctly and paid back before the trigger date for the 32.5% tax charge. It may be an attractive option to get over a difficult period where a return to profitability is anticipated, allowing a dividend to be declared to clear to loan balance.
Benefits-in-kind
The provision of benefits in kind can also be attractive as the recipient will pay tax on the cash equivalent value rather than having to meet the full cost personally. Benefits in kind are even more attractive where an exemption can be utilised allowing them to be provided tax free. The trivial benefits exemption can be put to use here where the cost is not more than £50 (and the total cost of trivial benefits is not more than £300 for the tax year).
Taking a loan can be tax efficient, particularly if done correctly. It may be an attractive option to get over a difficult period where a return to profitability is anticipated…
From the company’s perspective, Class 1 National Insurance will be payable on the cash equivalent amount, but the cost of the benefit and the NIC cost is deductible in computing taxable profits for corporation tax purposes.
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.
COVID-19: New wage subsidy Jobs Support Scheme – what does it mean for you?
***UPDATED 25/9/20***
WITH THE THREAT of a second UK lockdown looming, the Chancellor has today sprung into action to unveil his “Winter Economy Plan”.
Measures in Mr Sunak’s Plan include a new Jobs Support Scheme, an extension to the VAT cut for some sectors and support for businesses and workers.
At Shipleys Tax we have gathered the most relevant parts of the plan and summarised them below.
Measures in Mr Sunak’s Plan include a new Jobs Support Scheme, an extension to the VAT cut for some sectors and support for businesses and workers.
What is the New Jobs Support Scheme?
- The new Scheme, which is available to all small and medium-sized businesses, will see the Government top up the wages of workers forced to cut their hours due to the pandemic. It is intended to replace the somewhat successful employer furlough scheme.
- Employees will get paid for work as normal, with the state and employers then increasing those wages to cover up to two-thirds of the pay they have lost by working reduced hours.
- This means that employees must work a minimum of 33% of their normal hours (capped at £697.92 per month). For the remaining hours not worked, the government and employer will pay one third of the wages each, meaning that employees working 33% of their hours will receive at least 77% of their pay.
- The idea behind the scheme is that it will enable employers to retain workers on reduced hours, so that employees are not made redundant.
- The Job Support scheme will start from November 2020 and last for six months, taking over from the current furlough scheme, which is due to end on the 31 October 2020.
- It will run alongside the Job Retention Bonus, as well as other initiatives aimed to help get people back into work such as the Kickstart Scheme.
This means that employees must work a minimum of 33% of their normal hours. For the remaining hours not worked, the government and employer will pay one third of the wages each, meaning that employees working 33% of their hours will receive at least 77% of their pay.
Who is eligible for the Job Support Scheme?
To be eligible, employees must:
- be registered on your PAYE payroll on or before 23 September 2020. This means a Real Time Information (RTI) submission notifying payment in respect of that employee must have been made to HMRC on or before 23 September 2020
- work at least 33% of their usual hours. The government will consider whether to increase this minimum hours threshold after the first three months of the scheme.
The Job Support Scheme will be open to employers across the UK even if you have not previously applied under the Coronavirus Job Retention Scheme (CJRS) which closes on 31 October.
How do you apply for the Job Support Scheme?
No details were provided by Chancellor about how the Job Support Scheme can be applied for. Here at Shipleys Tax we envisage it would work in the same way as the furlough scheme, which would mean that employees would not have to do anything, but instead it will be down to their employer to apply for the scheme.
The Job Support Scheme will start from 1 November and you will be able to claim in December. Grants will be paid on a monthly basis.
Autumn Budget cancelled
Some further good news. Yesterday, the Chancellor announced that there would be no Autumn Budget. Many were predicting that the Autumn Budget would involve tax increases (notable capital gains tax) to help pay for Government schemes that were announced at the beginning of the nationwide lockdown in March. Instead, the next budget is now set to take place in spring 2021.
Self-employment income support scheme
For the self-employed, the grant available for those qualifying has been extended. A further two taxable grants each covering a three month period:
- The first to cover November 2020 to January 2021 will be based on 20% of average monthly trading profits, capped at £1,875.
- The details of the second grant, covering February to April 2021 are to be announced in due course.
Deferred tax bills
- Businesses who deferred VAT payments which were due between 20 March 2020 and 30 June 2020 to 31 March 2021 will now be able to pay these in 11 interest-free instalments.
- Taxpayers who deferred their July 2020 Income Tax payments on account to 31 January 2021 will now be able to pay these over a twelve-month period. This applies to taxpayers with liabilities under self-assessment of up to £30,000. No specific announcement has been made about whether interest will be charged however as this will be under the existing time to pay arrangements it is likely that it will be.
VAT cut
The temporary VAT cut, to 5%, for the hospitality and tourism sectors, was due to end on 12 January 2021 but has now been extended to 31 March 2021.
If you are affected by the 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.
Testimonials
“We value the close working relationship we have with Shabeer and the specialist teams at Shipleys Tax...(read more)
Dr K, GP Surgery – Yorkshire
“One of the most frequent issues we had with our previous accountants was not being made aware, in advance... (read more)
FM Medical Practice – Manchester
“Accountants seem to promise the earth but don’t deliver do they? Well we found the opposite. Abdul made himself... (read more)
Mrs Khan – JL Healthcare
Contact us
