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HMRC Taskforce at Large

HMRC has set up specialist tax investigation teams to concentrate on recovering unpaid tax from particular business sectors or as a result of tax fraud.

The latest HMRC taskforce teams are looking at:

  • fraudulent VAT repayments in the West Midlands and Nottingham areas; and
  • property tax evasion in South West England and South Wales.

The property taskforce is using data gathered about property transactions by the Valuation Office in order to target taxpayers who may have sold properties but not declared a capital gain on their tax returns. The same data set will be analysed for possible non-declaration of rental income.

Where rental income has been under-declared the taxpayer can use HMRC’s Let Property Campaign to make a full disclosure, and pay a minimum amount of penalties. This involves registering with HMRC to make a disclosure then paying all the tax, penalties and interest due within three months. However, once the HMRC taskforce is at your door, it’s too late to take up the generous terms offered under the Let Property Campaign.

If you receive a letter or visit from one of these HMRC taskforces, early intervention from one of our tax investigation experts could save you a considerable amount of stress, and possibly penalties.

If you have any concerns, please contact us

Scottish Taxes

The Scottish people have spoken and the majority have decided they want Scotland to remain part of the UK. However, that doesn’t mean everything will remain the same. We already know there will be two new taxes in Scotland from 1 April 2015, and a variation to income tax rates for Scottish taxpayers from 6 April 2016.

If you are planning to buy land or buildings in Scotland, you should be aware that the tax you will pay on top of the purchase price is currently uncertain for completion dates on or after 1 April 2015. This is because Stamp Duty Land Tax (SDLT) will be replaced by Land and Buildings Transaction Tax (LBTT) for sales of land and buildings in Scotland from that date.

The LBTT will have different rules to the SDLT, which will continue to apply to land transactions in England, Wales and Northern Ireland. For example LBTT will have a nil rate band as well as at least two other bands, but probably different bands and rates for residential and non-residential property.

The other new tax from 1 April 2015 is a Scottish replacement for landfill tax. The rates and thresholds for the Scottish landfill tax was announced as part of the Scottish Government’s Budget for 2015/16 in October 2014.

From 6 April 2016 the Scottish Government will be able to replace 10p out of each tax band with the Scottish Rate of Income Tax (SRIT). This will apply to all individuals resident in Scotland including pensioners, who fall into a new definition of “Scottish taxpayer”. However, the SRIT will have to apply within the tax bands imposed by the UK Government, and the personal allowances will not change.

As currently agreed (and this could change following negotiation for further powers) the rate of the SRIT must be the same for all the tax bands. For example if the SRIT is set at 10p, the total tax rates will remain where they currently stand for the whole of the UK: 20%, 40%, and 45%. If the SRIT is set at say 15p, Scottish taxpayers will pay income tax at 25%, 45% and 50%.

A new tax authority: Revenue Scotland, has been set up to administer the new Scottish taxes, and any other devolved taxes that may follow. Income tax, including SRIT, will continue to be administered by HMRC.

Travel and subsistence for directors and employees

Travelling and subsistence expenditure incurred by or on behalf of employees gives rise to many problems. We highlight below the main areas to consider in deciding whether tax relief is available on travel and subsistence.

Employees with a Permanent Workplace

Many employees have a place of work which they regularly attend and make occasional trips out of the normal workplace to a temporary workplace. Often an employee will travel directly from home to a temporary workplace and vice versa. An employee can claim full tax relief on business journeys made.

A business journey is one which either involves travel:

  • from one place of work to another or
  • from home to a temporary workplace or
  • to home from a temporary workplace.

Journeys between an employee’s home and a place of work which he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the costs of these have to be borne by the employee. The term ‘permanent workplace’ is defined as a place which the employee ‘regularly’ attends. It is used in order to fix one end of the journey for ordinary commuting. Home is the normal other end of the journey for ordinary commuting.

Example 1

An employee usually commutes by car between home in York and a normal place of work in Leeds. This is a daily round trip of 48 miles. On a particular day, the employee instead drives from home in York to a temporary place of work in Nottingham. A round trip of 174 miles. The cost here is the cost of the travel undertaken (174 miles). A deduction would be available for that amount.

Example 2

An employee who normally drives 40 miles in a northerly direction to work is required to make a 100 mile round trip south to a client’s premises. His employer reimburses him for the cost of the 100 miles trip. A deduction would be available for that amount.

Subsistence payments

Subsistence includes accommodation and food and drink costs whilst an employee is away from the permanent workplace. Subsistence expenditure is specifically treated as a product of business travel and is therefore treated as part of the cost of that travel.

Anti-avoidance

Some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar’ to the trip made to or from the permanent workplace.

‘Substantially similar’ is interpreted by HMRC as a trip using the same roads or the same train or bus for most of the journey.

Temporary postings

Where an employee is sent away from his permanent workplace for many months, the new workplace will still be regarded as a temporary workplace if the posting is either:

  • expected to be for less than 24 months, or
  • if it is expected to be for more than 24 months, the employee is expected to spend less than 40% of his working time at the new workplace.

The employee must still retain his permanent workplace.

Example 3

Edward works in New Brighton. His employer sends him to Wrexham for 1.5 days a week for 28 months. Edward will be entitled to relief. Any posting over 24 months will still qualify provided that the 40% rule is not breached.

Site based employees

Some employees do not have a normal place of work but work at a succession of places for several days, weeks or months. Examples of site-based employees include construction workers, safety inspectors, computer consultants and relief workers.

A site-based employee’s travel and subsistence can be reimbursed tax free if the period spent at the site is expected to be, and actually is, less than two years.

There are anti-avoidance provisions to ensure that the employment is genuinely site-based if relief is to be given. For example, temporary appointments may be excluded from relief where duties are performed at that workplace for all or almost all of that period of employment. This is aimed particularly at preventing manipulation of the 24 month limit through recurring temporary appointments.

Other employees with no permanent workplace

Travelling appointments

For some employees, travelling is an integral part of their job. For example, a travelling salesman who does not have a base at which he works, or where he is regularly required to report. Travelling and subsistence expenses incurred by such an employee are deductible.

Home based employees

Some employees work at home occasionally, or even regularly. This does not necessarily mean that their home can be regarded as a place of work. There must be an objective requirement for the work to be performed at home rather than elsewhere.

This may mean that another place becomes the permanent workplace for example, an office where the employee ‘regularly reports’. Therefore any commuting cost between home and the office would not be an allowable expense. But trips between home and temporary workplaces will be allowed.

If there is no permanent workplace then the employee is treated as a site-based employee. Thus all costs would be allowed including the occasional trip to the employer’s office.

The home may still be treated as a workplace under the objective test above. If so, trips between home and any other workplace in respect of the same employment will be allowable.

How we can help

Full tax relief can be given for travel and subsistence costs but there are borderline situations.

We can help you to decide whether an employee can be paid expense payments which are covered by tax relief and do not result in a taxable benefit.

Please note that if you do make payments for which tax relief is not available, there may be PAYE compliance problems if the payments are made free of tax.

Please contact us if you require advice whether payments can be made to employees tax free.

Accelerated Payments

The Taxman now has the power to demand tax from you if you have used a registered tax avoidance scheme, or if he thinks the tax scheme you have used is similar to one that has been judged to fail by a Court or Tribunal.

For some years most tax avoidance schemes have been registered under the Disclosure Of Tax Avoidance Scheme (DOTAS) rules. Each scheme was issued with a DOTAS reference number, known as a “DOTAS number” or SRN, which had to be shown on tax returns of taxpayers who used the scheme.

If you were advised to include a DOTAS number on your tax return, and HMRC has already opened an enquiry into that tax return you should watch the post for a tax demand headed “Accelerated Payment Notice”. This could arrive at anytime from now until April 2016.

If you receive an accelerated payment notice you can’t appeal against it, but you can ask HMRC to reconsider the amount demanded within 90 days. We can help you with this.

You may also want to consider some other options such as:

  1. negotiatingasettlementwithHMRCtoresolvethedisputeoverthetaxschemeyouused–theremaywellbeinterest and penalties to pay.
  2. askingtheTaxTribunaltoclosetheenquiryintoyourtaxreturn–thisisanoptionifyoureallybelievethetaxyou avoided is not due, i.e., the scheme works; or
  3. asking for a payment arrangement in which you agree to pay the tax demanded by instalments.

We should discuss the consequences of paying the accelerated tax demand on the rest of your tax affairs; will you be able to meet your other tax liabilities when they are due?

Scary letters

Have you received a scary letter from HMRC lately? Perhaps all HMRC letters are scary, but this latest nudge-letter really takes the biscuit.

In it HMRC says the taxpayer’s effective rate of income tax is lower than the average for taxpayers with similar levels of income. It goes on to suggest that there could be something wrong with the self-assessment tax return for 2011/12 and the taxpayer should check what they submitted for that year. Penalties and interest are mentioned, which would worry anyone – even those with nothing to hide.

Bear in mind the period in which the 2011/12 tax return can be investigated closed for most taxpayers on 31st January 2014. This means HMRC can’t open an enquiry into your tax return for that year unless it discovers new information which was previously not disclosed.

HMRC sent these letters as part of a pilot to nudge non-compliant taxpayers into paying the right amount of tax. However, in this case HMRC made no attempt to screen out those taxpayers who have good reasons for paying a low proportion of their income in tax – for example because of a loss claim, gift aid donation, or pension contribution. HMRC did not read the disclosures on the tax return before pressing the send button.

If you receive a scary letter from HMRC, call us immediately. It may be another “test” by HMRC trying to squeeze more tax and penalties out of innocent taxpayers, but it could be more serious.

PAYE reconciliations

If most of your income is taxed under PAYE (Pay As You Earn) you may soon receive a reconciliation of the income tax you have paid compared to the amount that was due to be paid for 2013/14. This calculation arrives on a form P800, which should be checked very carefully for errors and omissions. If mistakes are missed they can be carried forward for several years, resulting in escalating amounts of tax over or under-paid.

For example the High Income Child Benefit Charge (HICBC) may be due where you earn over £50,000 and your family receives child benefit. But the HICBC will not be reflected in the P800 calculation, as HMRC can’t accurately match child benefit claimants with the high earners in those families. If you believe you are due to pay the HICBC to claw-back the child benefit received, you need to register for a self-assessment and complete a tax return. We can help you with that.

Other common errors on the P800 arise from the changing value of taxable benefits, varying pension contributions, and estimated amounts of other income included in your PAYE code such as rents or interest.

If you have paid the right amount of tax under PAYE for 2013/14 you won’t receive a communication from HMRC. If you have overpaid tax you should receive a cheque from HMRC within two weeks of the issue of the P800. Don’t respond to emails promising a tax repayment – those are scams.

If the P800 shows you owe tax, that amount will normally be collected through your PAYE code for 2015/16. We can help you challenge the calculation if you think it’s wrong, but we will need to see the P800 you have received, as HMRC don’t send us a copy.

Marginal tax rates

What rate of tax would you pay on an additional £1 of earnings? If your annual income is between £41,865 and £150,000 you may think the tax rate would be 40%, but the peculiarities of the UK tax system mean you could pay much more.

To start with earned income above the 40% threshold carries a national insurance charge (NICs) of 2% so for every £1 you earn above £41,865 (for 2014/15) you will pay 42% in tax and NICs.

Child benefit is withdrawn from the highest earner in the family at the rate of 1% of the benefit for each £100 of income exceeding £50,000 per year. This translates into an effective marginal tax rate of 60% on income between £50,000 and £60,000.

When your income exceeds £100,000 your personal allowance is withdrawn at the rate of £1 for every £2 of income above £100,000. This is an effective tax rate of 62% including NICs.

From 6 April 2015 married couples will be able to transfer up to 10% of their personal allowance between them. This will allow up to £1,050 of the allowance to be transferred from the person who earns less than £10,500, to their spouse who earns up to the 40% threshold. Thus £1 of additional income that takes you over the 40% threshold will mean you lose the whole of that transferable allowance – an infinite marginal tax rate.

If you are able to control the level of your taxable income, perhaps because you run your own business, it makes sense to adjust your income to avoid those high marginal tax rates. Perhaps you could employ other members of your family, or take them into business with you as partners, to spread the business income.

Payments of pension contributions and Gift Aid donations can stretch your 40% threshold, so the higher earner in the family should making those charitable donations and pay pension contributions. We can help you plan to avoid the highest tax rates and make the best use of all allowances available.

Second Incomes

The taxman is reaching out to employees with second incomes; which could be anything from selling home-made items, to working as a self-employed consultant. All of the income and expenses from that second source of income should be declared to HMRC, and the correct tax must be paid where a profit has been made.

The Second Incomes Campaign provides a means to declare any ‘forgotten’ second income with minimal fuss and penalties. All the tax due must be paid alongside any interest, this will be calculated from the date the tax was originally due to be paid.

To use the Second Incomes Campaign you must first notify HMRC either by completing an online form, or by calling 0300 123 0945. HMRC will then respond with a disclosure reference number. You then have four months in which to make a full disclosure of the second source of income (quoting the reference number) and pay all the tax, interest and penalties due. We can help you calculate the amounts to be paid and claim any losses.

Disguised Employment

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes, and hence pay low amounts of NICs, but from the outside they appear to act as employees. The following changes in the tax law are proposed to block the use of ‘self-employed’ workers working through LLPs or who are hired-out through employment agencies.

LLPs

All individual members of LLPs are currently taxed as self-employed persons, even if they receive a regular ‘salary’. This is the default position of the law and nothing is being ‘fiddled’ to put workers in this position. However, HMRC believe this rule is being abused, and the workers involved may not realise that they are technically self-employed.

From 6 April 2014 salaried members of LLPs will be treated as employees of the LLP if all of the following conditions are met:

  • the member works for LLP and at least 80% of the pay he receives from the LLP is ‘disguised salary’;
  • where the member has contributed any capital to the LLP, that capital amounts to less than 25% of the member’s ‘disguised salary’ for the year; and
  • the member is not involved significantly in the management of the LLP.

The Government has not yet defined term ‘disguised salary’. If you have salaried members in your LLP we need to talk about these tax changes.

Employment Agencies

From 6 April 2014 if a worker supplied by an offshore employment agency personally carries out the work, or is involved in the provision of the services, the payment from the engager to the worker will have to be taxed under PAYE with class 1 NICs deducted. Any apparent right of substitution in the worker’s contract will not prevent PAYE and NICs being due at the employed rates. The agency at the end of the chain must be an off-shore agency for the new rules to apply, but there may be UK based agencies in between and it may not be obvious to the worker or the engager of that worker, that an off-shore agency is in the chain.

If you have any doubts about the contracts you are using either as a worker or an employer, our tax experts can help check the tax implications for you.

If you have a child aged 16, check whether you are still receiving all the child benefit and child tax credits you expect to.