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…
Winding up your IT/personal service company? Do it the stress-free way
****UPDATE 18 MARCH 20****: New Off-payroll working rules announced see – https://www.shipleystax.com/coronavirus-off-payroll-ir35-reforms-to-be-postponed-until-april-2021/
Do the off-payroll working rules apply to you? Are you considering winding up your personal service company in April? We explain generally the best way to wind up your company from a tax perspective.
Come April 2020, the much maligned off-payroll working rules come in effect and many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because that tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies with no choice but to go on the payroll or an umbrella company.
Where the personal service company is not needed, what is the best way to wind it up and extract any remaining cash?
Come April 2020, the much maligned off-payroll working rules come in effect and many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed
Striking off
Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.
The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.
If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.
The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend…
Members’ voluntary liquidation (MVL)
Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.
An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.
Entrepreneurs’ relief
One important pitfall which many fail to appreciate is that the availability of entrepreneurs’ relief is not automatic and must be claimed based on facts. Using a liquidator to wind up a company does not automatically mean the company shares will qualify for entrepreneurs’ relief, the shareholder needs to ensure that the shares will qualify for the relief as the company may fail one or more the tests.
If you are thinking of liquidation and would like to check whether you qualify for entrepreneurs’ relief, please call us on 0114 275 62 92 or email us at info@shipleystax.com.
Trivial benefits tax trap – businesses beware
Do employers have to pay tax on gifts provided to employees? And if it is provided each year, or is provided to all staff members, does it mean that employees have a contractual entitlement to it? We look at some general principles.
Certain tax exemptions allow employers to provide employees with low cost benefits free of tax and National Insurance and without any reporting obligations. These are known as “trivial benefits” and, for the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of smaller companies or a member of their family or household, an annual cap of £300 per tax year also applies.
Certain tax exemptions allow employers to provide employees with low cost benefits free of tax and National Insurance and without any reporting obligations
For the tax exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.
Contractual entitlement
Contractual entitlement is wider than simple inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.
Recently, HMRC highlighted a number of ways in which a contractual obligation may arise, including:
- a letter to the main contract document
- a staff handbook
- a redundancy agreement
- an employer union agreement
If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.
Beware of creating a ‘legitimate obligation’
Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; this implies a contractual obligation may also arise if the employee has a legitimate expectation to receive the benefit.
Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap
Suppose an employer provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday can create a legitimate expectation, potentially taking the provision of the cakes outside the trivial benefits exemption.
Frequency is one element which seems to be an issue here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s own guidance states:
“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”
The guidance also instructs HMRC officers that they “should not normally challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year – for example, a Christmas or birthday gift”.
So what’s best practice?
Generally, to avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees. Better still, seek advice from our tax experts on info@shipleystax.com or email us on 0114 275 6292.
How can you save tax by putting property into joint names?
By transferring a property into joint names prior to selling is an easily avoided mistake – read our blog to see if this could potentially save you tax.
Disclaimer Alert: This blog is intended as general guidance only. We strongly recommend you seek professional advice before taking any action.
Where a property is wholly treated as your only home and qualifies for Private Residence Relief, whether owned jointly or in one name, the relief shelters any gain that arises on sale and there is generally is no tax to pay.
However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.
Take advantage of certain rules for spouses and civil partners
There are some breaks in the tax system for married couples and civil partners in certain situation which gives them the ability to transfer assets between each other at a value that gives rise to no tax. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. In the right circumstances this could enable a couple to utilise available annual exempt amounts and lower tax bands.
There are some breaks in the tax system for married couples and civil partners in certain situation which gives them the ability to transfer assets between each other at a value that gives rise to no tax.
Capital gains tax on residential property gains is charged at 18% where total income for basic rate taxpayers (set at £37,500 for 2019/20) and 28% thereafter.
Case study
Suppose Ron and Rita have been married a number of years. In addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.
Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).
If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of around £24,640.
However, as Rita has her basic rate band and annual exempt amount available, making use of the spousal rule to transfer the property in jointly held names prior to sale can potentially save the couple a lot of tax. If the circumstances qualify, each will realise a gain of £50,000.
As far as Ron is concerned, he will have a chargeable gain of £38,000 on which tax of £10,640 will be payable.
Rita will also have a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.
By taking advantage of tax exemptions, the couple could be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110!
By taking advantage of tax exemptions, the couple could be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110!
Sorted you would think.
Not quite. As with most things in life, it’s not always that easy. Although the above can work in theory there are dangerous pitfalls which must be avoided to ensure the transaction doesn’t fall foul of HMRC anti-avoidance. This is where specialist tax planning advice required to guide you through the legal maze.
If you need help with this, or have a property transaction with a potential large tax bill whether CGT, Stamp Duty or VAT, speak to us in the first instance by calling 0114 275 6292 or email info@shipleystax.com. We may be able to help you save some money.
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
