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…
HMRC’s New Dividend Non-Disclosure Campaign
HMRC HAVE ADVISED that they have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends (and/or distributions).
Unfortunately, this typical “wide net” approach from HMRC means that many individuals, perhaps including vulnerable ones, will receive HMRC letters which could be misinterpreted as an accusation of tax avoidance. If you have receive a letter, don’t panic.
In today’s Shipleys Tax brief we look at what you need to know about HMRC’s One to Many letter campaign and how to respond effectively to avoid escalation.
What is HMRC’s One to Many Letter?
The HMRC has initiated a campaign targeting taxpayers who may not have declared income from distributions or dividends. Using data from company year-end accounts, which show significant drops in profit and loss account reserves, HMRC is pinpointing individuals who might have received a distribution or dividend but not declared it on their self assessment tax return.
HMRC… have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends
The letter provides a 30-day window for recipients to either declare any undeclared income or to inform HMRC that all income has been accounted for. Ignoring the letter could lead to a compliance check and potential penalties.
Why You Might Have Received The Letter
HMRC’s usual method involves analysing publicly available company accounts to spot decreases in reserves and other factors, which could indicate dividend payments. However, this typically broad approach doesn’t account for dividends payments which may not be chargeable, e.g. they fall within personal and dividend allowances and are tax-free or issues relating to timing. Accordingly, if you’ve received such a letter, it may simply be part of this blanket strategy to ensure tax compliance but it’s best not to ignore it.
How to Respond to the Letter
If You Have Declared Everything:
- Contact HMRC using the details provided in the letter.
- Confirm that all necessary declarations have been made.
If You Need to Make a Declaration:
- Review your tax return and determine if there’s any undeclared dividend income.
- Visit the HMRC’s GOV.UK link on making a disclosure and use the specific online disclosure facility.
The Implications of Not Responding
Failing to respond to the HMRC’s letter can result in a compliance check and possibly higher penalties if undeclared income is discovered. It’s crucial to take action within the specified 30-day period stated in the letter. If they believe that they have no income to declare, the letter asks them to let HMRC know either by telephone or by email, again within 30 days. If they do not respond, the letter says that HMRC may open a compliance check and charge higher penalties.
Conclusion
The One to Many letter from HMRC is part of a proactive approach to tax compliance. If you’ve received one, take a moment to review your finances and speak to your adviser. With the right response, you can quickly resolve any issues or confirm your compliance, ensuring peace of mind and maintaining good standing with HMRC.
For further assistance or queries, please contact us by phone or email.
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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The ABC of Tax Planning with Alphabet Shares
THE USE OF so-called Alphabet shares has been a staple in the world of tax planning for some time. These types of shares generally allow for a flexible approach to how dividends are paid out to shareholders of a company, enabling a tailored distribution that can be adjusted according to the individual tax circumstances of the shareholders.
In today’s Shipleys Tax brief, we will cover the basic concept of Alphabet shares, their benefits and drawbacks, and the likely approach adopted by HMRC to their use.
What are Alphabet shares?
Alphabet shares are so named because they categorize shares into different classes, each denoted by a letter of the alphabet (e.g., Class A shares, Class B shares, etc.). This classification allows companies to assign different rights to each class, particularly concerning dividend payments. The flexibility in dividend allocation means that shareholders can be paid varying amounts, which can be adjusted to optimise their personal tax positions.
What are they used for?
Historically, Alphabet shares have been used as a popular method for family-run businesses to manage internal dynamics and tax liabilities. Families could allocate different dividend rights to members based on their involvement in the business or their financial needs, without altering the overall control or structure of the company.
They have also been employed in start-ups and growing businesses looking to reward key employees with a stake in the company without immediately giving away voting rights or an equal share in the distribution of profits. By issuing different classes of shares to employees, businesses could align staff interests with the company’s performance without giving away significant control.
Families could allocate different dividend rights to members based on their involvement in the business or their financial needs, without altering the overall control or structure of the company.
In corporate fundraising they provided a means to attract investment by offering variable dividend rights while retaining management control. This aspect is particularly attractive to small and medium-sized enterprises (SMEs) that are keen on securing capital but wary of outside influence over business decisions.
This flexibility makes Alphabet shares a valuable instrument for companies to structure their equity in a way that satisfied a multitude of shareholder requirements.
Tax Planning and Tailoring to Specific Needs
For certain commercial transactions, tax planning with Alphabet shares can be particularly useful in the right circumstances. Generally, you would find the following potential benefits:
– Minimise personal tax liability: shareholders can receive dividends up to the higher-rate tax threshold, effectively reducing their income tax liability.
– Utilise allowances and rates: shareholders can make full use of their dividend allowance and lower tax bands.
Minimise personal tax liability: shareholders can receive dividends up to the higher-rate tax threshold, effectively reducing their income tax liability.
– Planning for succession: Different classes can be allocated to future generations for long-term planning, without disrupting the current control of the company.
– Family estate planning: Alphabet shares can help in assigning income to family members in lower tax brackets where circumstances allow.
Not all a bed of roses…
While Alphabet shares offer flexibility as seen above, they come with a rack of potential drawbacks that can complicate their use.
– Administrative Burden: maintaining different classes of shares requires meticulous record-keeping and administrative oversight. Each class may have its own dividend schedules, voting rights, and restrictions, which must be managed and documented appropriately.
– Legal Challenges: alphabet shares can sometimes lead to legal challenges, especially if shareholders feel their rights are being impinged upon. Disputes may arise over the interpretation of rights attached to various classes, or if there are allegations of unfair treatment among shareholders.
– Corporate Governance: having multiple share classes can complicate corporate governance. The differing rights and privileges can lead to conflicts of interest and make decision-making processes more complex.
What sayeth the Taxman?
HMRC views Alphabet shares with a healthy degree of suspicion because they can be used to artificially manipulate income streams for tax advantages. One specific piece of anti-avoidance legislation (“the settlements legislation”) can apply if HMRC believes that Alphabet shares are being used to divert income to someone else and reduce tax liability.
In the context of family businesses, the use of Alphabet shares for estate planning must be done with caution. HMRC may challenge arrangements that appear to be designed to avoid inheritance tax, particularly if shares are rapidly transferred between family members in a way that seems to be timed to minimise tax liability for example.
HMRC views Alphabet shares with a healthy degree of suspicion because they can be used to artificially manipulate income streams for tax advantages.
As such, if not structured correctly, the arrangements can be easily challenged under these anti-avoidance regulations, leading to the tax advantages being negated, tax investigations and potential penalties.
Conclusion
Alphabet shares can be a useful tool for tax planning when used correctly. They allow for a high degree of flexibility and can be tailored to meet the specific needs of both the company and its shareholders. However, their use must be considered carefully, with a clear understanding of the potential pitfalls and the close scrutiny they attract from HMRC. As always, when considering the use of Alphabet shares, it is prudent to seek professional advice to ensure that they are implemented effectively.
For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking any action.
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Taxman Targets Online Sellers
WITH THE GROWING popularity of online selling platforms like TikTok and Etsy, HMRC has increased attention on the tax implications for those earning income from these sources.
In today’s Shipleys Tax note we briefly look at what’s happening and what you should do avoid falling foul of these new tax measures.
What’s the deal?
From the 1st of January 2024, digital marketplaces such as eBay, Vinted, Airbnb, and Etsy, have been mandated to gather and report details of seller transactions and income to HMRC. These platforms have until January 2025 to report sellers’ income from the previous year. This measure is part of a broader initiative to ensure tax compliance and to capture undeclared income from individuals who trade with the intention of making a profit but fail to report their earnings correctly.
The targeted platforms include:
- eBay
- Vinted
- Airbnb
- Etsy
- TikTok
From the 1st of January 2024, digital marketplaces such as eBay, Vinted, Airbnb, and Etsy, have been mandated to gather and report details of seller transactions and income to HMRC.
These platforms will need to collect and report the following information:
- Seller Details: Identification of the sellers.
- Transaction Details: Information on the transactions made by the sellers.
- Income Information: The income generated by the sellers through these platforms.
This measure is part of the UK’s implementation of the OECD rules to improve international cooperation and tax compliance.
While there’s been talk in the media of a new ‘side hustle’ tax, it’s important to clarify that no new taxes have been introduced. However, understanding the existing tax laws and how they apply to online selling is crucial.
What should you do?
As an online seller in the face of HMRC’s focus on side hustles, it’s important to take proactive steps to ensure you’re on the right side of tax laws. Below we have summarised the key issues you need to consider.
Are you Trading or Hobby-ing?
First and foremost, determine whether your online selling activities constitute a hobby or a trade. This is tricky at best and HMRC considers several factors to make this distinction. These include the frequency of transactions, profit motive, nature of the goods, and sale method. Regular sales of new or self-made items with the intent of profit are typically considered trading, whereas selling personal, used items occasionally is generally seen as a hobby. For online sellers, understanding these nuances is critical to accurately ascertain tax obligations.
Trading Allowance
One key aspect is the trading allowance, which allows individuals to earn up to £1,000 annually from self-employment, including online selling, without the need to declare this income to HMRC. This is particularly beneficial for small-scale traders or those starting out. However, it’s vital to note that once your income surpasses this threshold, the entire amount becomes reportable.
First and foremost, determine whether your online selling activities constitute a hobby or a trade. This is tricky at best and HMRC considers several factors to make this distinction
For those earning profits exceeding £1,000 from online selling, income tax and National Insurance contributions may be applicable. These profits must be reported via a self-assessment tax return, even if no tax is due, such as when profits fall below the personal allowance (currently £12,570. This rule also applies if you are using online selling as a secondary income source, with the £1,000 limit still relevant.
If you have already received income over the £1,000 allowance, or if you have received a ‘nudge’ letter from HMRC indicating you may have undeclared income, take immediate action. Do not ignore these letters; they are a prompt for you to review your tax situation.
Record it
Maintain good records of all your online selling activities, including receipts, listings, and correspondence. This documentation will be invaluable for completing your tax return accurately. If your online selling is a side hustle in addition to your main job, remember that different rules might apply, especially if your main income already exceeds your personal allowance.
Consider the use of digital tools and accounting software that can assist in tracking your earnings and expenses, making the process of reporting to HMRC more straightforward.
Information Sharing by Online Platforms
It’s also important to be aware that online selling platforms may share information with HMRC, including seller identities, transaction volumes, and values. This increased transparency aims to ensure tax compliance and makes accurate self-reporting by sellers more important than ever.
Maintain good records of all your online selling activities, including receipts, listings, and correspondence. This documentation will be invaluable for completing your tax return accurately.
Conclusion
If you’re unsure about your tax position or obligations, consult with a tax professional. A tax expert can provide clarity on your individual circumstances, help you understand your tax liabilities, and ensure you’re taking advantage of any allowable deductions or exemptions. This step is not just about compliance; it’s also about optimizing your tax situation.
For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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