Tag: HMRC

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Number of tax refund scams escalating

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A sharp rise in the number of scam emails and text messages targeting taxpayers has been flagged by HMRC, with renewed warnings that criminals are attempting to trick the public into thinking they have received a tax rebate so they hand over their account and personal details.

 

The tax authority says the scams are timed to coincide with the period in which HMR is processing tax refunds after the end of the 2017- 2018 tax year.

Mel Stride, financial secretary to the Treasury, said: ‘HMRC only informs you about tax refunds through the post or through your pay via your employer. All emails, text messages, or voicemail messages saying you have a tax refund are a scam. Do not click on any links in these messages, and forward them to HMRC’s phishing email address and phone number.

‘We know that criminals will try and use events like the end of the financial year, the self-assessment deadline, and the issuing of tax refunds to target the public and attempt to get them to reveal their personal data. It is important to be alert to the danger.’

In March 2018 HMRC requested 2,672 phishing websites be taken down and received 84,549 phishing reports, and the tax authority warns that this kind of phishing is expected to continue in the coming months as genuine tax refunds are issued.

HMRC advises that income tax for 6 April 2017 to 5 April 2018 will be calculated over the coming months and anyone owed a genuine tax rebate will receive a tax calculation letter by post between June and October.

HMRC advises taxpayers to recognise the signs – genuine organisations like banks and HMRC will never contact anyone out of the blue to ask for their PIN, password or bank details.

It also advises people to stay safe by not giving out private information, replying to text messages, downloading attachments or clicking on links in emails they were not expecting.

Avoid and report internet scams and phishing advice

Genuine HMRC contact and recognising phishing emails guidance

 

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How to make company car purchases cost effective

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Tax and NI charges can make company cars expensive. However, if you use your business to run a car for a family member, say a son or daughter, there are steps you can take to make it cheaper than personal ownership. What are they?

Expensive but still cost effective

In April 2018 the tax and NI charges for company cars crept up again. While the maximum charge didn’t increase, the CO2emissions bands moved so that the majority of company car drivers will pay more in 2018/19 and in 2017/18 for the same car. Despite this, financing a car through your company can be more cost effective than doing it personally. This is something to keep in mind if your spouse, son or daughter needs a new set of wheels.

Example. Peter is a director shareholder of Acom Ltd. He is a higher rate taxpayer. His daughter Katy needs a car and Peter agrees to fund the purchase. His budget is £13,000. To keep annual costs down Katy picks one with CO2 emissions of under 95g/km. Katy will pay the running costs, e.g. insurance, servicing, etc. How do personal and company ownership stack up against each other?

Katy as owner. The idea is for Katy to keep the car after four years and buy a replacement herself. At that time its expected value is £4,750. This means the net cost to him is £8,250 (£13,000 – £4,750). He takes extra dividends of £12,222 from Acom to cover this, which after tax at 32.5% leaves £8,250.

Acom as owner. The cost over the four years to Acom would also be £8,250, but it receives corporation tax (CT) relief at 19%, which makes the net cost to it £6,683. Peter must pay tax on the company car of £988 per year. He takes dividends each year of £1,464 to cover the tax bill. That’s £5,856 over four years. After 32.5% tax that’s £3,952. Acom has to pay Class 1A NI on the car benefit, which after CT relief is £1,104. The total cost to Acom for the car is £13,643 (£6,683 + £5,856 + £1,104). The calculations indicate that personal ownership by Katy is the cheaper option, but that’s not the full story.

Reimbursed costs

If Acom (and not Katy) pays the running costs and Peter reimburses Acom, and Katy reimburses him, this reduces the tax and NI payable on the company car option. This can tip the balance in favour of Acom owning the car.

Tip. For the reimbursed expenses to reduce the tax and NI, Acom must make it a condition of it providing the car. This should be put in writing in case HMRC asks questions.

Less tax and NI. Assume the average annual cost of insurance, road tax, servicing etc. is £1,700. If Acom pays this and requires Peter to reimburse it, the corresponding amount on which he is taxed for the car is reduced by the same amount. Over the four years of ownership that’s a tax saving of £2,720. Therefore, Peter needs correspondingly fewer dividends from Acom to cover the cost. Acom also saves money. Katy’s financial position is neutral, it’s just that she reimburses Peter for the running costs instead of paying them direct.

Tax saving makes the difference. In our example, the tax savings achieved by simply changing how the running costs are managed is over £4,500 (see The next step ). This makes company ownership significantly the cheaper option.

If your company buys the car and pays the running costs, but the family member reimburses it the latter, the usual company car tax and NI is reduced. The savings mean that overall company ownership can be cheaper than the family member buying the car themselves by up to several thousand pounds.
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Annual accounting – how to make it work for you

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A business associate says that his firm uses VAT annual accounting to help with its cash flow. What are the conditions for joining the scheme and can it offer you the same cash-flow advantages?

Annual accounting

As the name suggests, VAT annual accounting is an HMRC scheme that allows you to submit a single VAT return each year instead of the usual four. That alone makes the scheme attractive, but it also means you pay fixed VAT payments plus an annual balancing payment. Monthly payments are the norm, but you can ask HMRC to go quarterly.

Choose your date carefully

The annual accounting scheme rules allow you to choose the starting point for your annual return. Picking the right date to suit your business can give you a cash-flow advantage.

Tip. If your trade is seasonal, choosing an annual return period that starts at the beginning of the seasonal boom gives you the best result.

Example. Bill and Ben own three restaurants in seaside towns. 75% of their £800,000 (excluding VAT) annual turnover occurs in July to September. Before annual accounting they made VAT returns for calendar quarters meaning that £120,000 of their annual VAT was payable at the end of October each year, while the remaining £40,000 was spread over the other three VAT quarters.

They applied for an annual accounting year starting on 1 July. This meant their VAT bill in October was just £40,000 which allows them to hang on to the difference of £80,000 (£120,000 -£40,000) an extra three to nine months.

The annual return and payment

When you’re in the scheme your monthly or quarterly payments are based on your VAT bill for the previous twelve months. This means if your turnover is growing you gain another cash-flow advantage.

Example. In the first year of using the scheme Bill and Ben’s turnover increased so that their annual VAT bill rose to £200,000. However, their first three quarterly payments in the second year remain at £40,000. Of course, they must pay the difference and this is due one month after making their annual return, which must be submitted by 31 July. Their VAT payments for their third year in the scheme are based on their second year and so are £50,000 per quarter.

Beware a reducing VAT bill

If the VAT payable for a year is less than the previous one, say because of falling turnover or increased purchases, your fixed payments under the annual accounting scheme will exceed your actual liability. If you think that’s going to happen you can apply to HMRC to reduce your payments.

Joining the scheme

You can apply to HMRC to use the annual accounting scheme if you expect to make VATable supplies of up to £1,350,000 (excluding VAT) in the next twelve months (see The next step ). But you can’t apply if you’re registered for VAT as part of a group, have stopped using annual accounting in the previous twelve months or owe VAT which is overdue.

Your expected VATable supplies over the next twelve months must not be estimated at more than £1,350,000 (excluding VAT) and your business must not be part of a VAT group registration. You can usually gain a cash-flow advantage if your business income is growing or is seasonal.
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Self-Assessment tax return: less fuss if you file early

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We know that just the words ‘self-assessment tax return’ uttered in succession can induce feelings of trepidation in those required to file one. This often leads to a reluctance to tackle the task at hand, head-on.

Though the 31st January deadline remains a constant in the tax calendar, procrastination still sees thousands of taxpayers filing their return at the last minute, year in and year out.

As the festive period comes and goes, they watch the days in January tick past until their time is almost up and they eventually conclude that they can’t avoid the inevitable any longer.

If this sounds familiar, revel only briefly in the fact that you are not alone. In January 2018, 2.6 million people had still not filed their return by the 29th January. Over 6% of all returns due were filed in the final 24-hour window – yet, some 745,588 people still missed the deadline completely.

The truth of the matter is, it’s far better to file early than to risk finding yourself in tax-related trouble.

It’s all in the timing…

“Time is what we want most, but what we use worst.”
― William Penn

Preparation and submission of your self-assessment tax return takes time; whether it’s registering for self-assessment (if it’s your first time), sourcing and assembling all the necessary documentation or prospective tax planning.

Be aware of how much of it you have at your disposal and, more importantly, use it wisely. Doing so will undoubtedly give rise to a better outcome than if you find yourself still agonising over the details fifteen minutes before the deadline.

Procrastination = penalties

“You may delay, but time will not.”
― Benjamin Franklin

No matter how long you spend procrastinating, the self-assessment tax return deadline will still arrive at midnight on 31st January 2019, as it supposed to. If, by this time, you have not filed your return, you will unfortunately incur penalties.

The initial penalty for failing to meet the 31st January deadline is £100. After this point, the penalties increase steadily depending on the amount of time that has passed since the deadline.

If HMRC believe you are deliberately neglecting your responsibilities, you may be liable for a fine amounting to 100% of the tax owed.

It’s less fuss if you file early…

“Better three hours too soon than one minute too late.”
― William Shakespeare

Take Shakespeare’s advice and get the ball rolling sooner rather than later. Taking your time, whilst time is on your side, and filing ahead of the deadline can eliminate the frantic fussing and fretting you might otherwise experience if you leave it too late.

Aside from the obvious advantages of being proactive and filing ahead of the deadline, such as avoiding penalties, improved tax planning, time to prepare thoroughly and the ability to budget, it can also give you peace of mind. This can be particularly beneficial during the festive period which, for some businesses, can be their busiest time.

What happens if… I leave my self-assessment tax return until the last minute?

No matter when they are uttered, the words ‘self-assessment tax return’ can often induce feelings of fear and unease in those required to file one. This lack of enthusiasm then often leads to a lot of ‘foot-dragging’.

Though the 31st January deadline remains a constant in the tax calendar, procrastination still sees thousands of taxpayers cutting it fine every year. As Christmas comes and goes, they watch the days in January tick past until their time is almost up and they realise that they can’t avoid the inevitable any longer.

If this sounds familiar, revel only briefly in the fact that you are not alone. In January 2018, 2.6 million people had still not filed their return by the 29th January. Over 6% of all returns due were filed in the final 24-hour window – yet, some 745,588 people still missed the deadline completely.[1]

The truth of the matter is, it’s far better to file early than to risk finding yourself in tax-related trouble. If you still need convincing, then read on…

To file or not to file: How do I know if I’m eligible?

You will need to file a tax return if, in the last tax year:

  • your income from self-employment was more than £1,000
  • you received more than £2,500 from renting out property
  • you received more than £2,500 in other untaxed income
  • your income from savings or investments was £10,000 or more before tax
  • your income from dividends from shares was £10,000 or more before tax
  • you made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
  • you were a company director – unless it was for a non-profit organisation and you did not get any pay or benefits (e.g. company car)
  • your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit
  • you had taxable income from abroad or if you lived abroad and had a UK income
  • your taxable income exceeded £100,000
  • you were a trustee of a trust or registered pension scheme
  • you had a P800 from HMRC saying you did not pay enough tax last year – and you did not pay what you owe through your tax code or with a voluntary payment
  • your State Pension was more than your Personal Allowance and was your only source of income – unless you started getting your pension on or after 6 April 2016

A comprehensive list of eligibility criteria can be found on the Government website here. HMRC will contact you if they deem that you need to file a tax return; if they haven’t and you think you may be eligible, you should contact them at the earliest opportunity. Likewise, if HMRC have asked you to file a return but you don’t think it applies to you, you should notify them as soon as possible.

Time is of the essence

Preparing your tax return takes time and so you need to ensure that you allow yourself plenty of it.

The first thing to consider is whether you are already registered for self-assessment. If you haven’t filed a return before today, the likelihood is that you will need to register – a process that can take up to two weeks, if not longer.

Once this is done and dusted, the next challenge you face is gathering together all the paperwork required to prepare your tax return; from P45’s, P60’s and P11D’s to expenses, invoices and bank statements. Being organised and keeping your documents in an orderly fashion will drastically reduce the risk of potentially disastrous oversights.

Not only this, but your accountant, if you have one, will need you to hand over all the appropriate documents to accurately complete and submit the return on your behalf before the deadline, so it pays to make sure paperwork isn’t mislaid.

Getting the ball rolling sooner rather than later can also give you the perfect opportunity to budget for your tax bill. It’s as simple as it sounds; if you file six months early, it follows that you have six months to save if you need to.

If all of this isn’t enough to get you motivated, then consider how much nicer Christmas will be without the dreaded 31stJanuary deadline looming over you.

Guilty of procrastinating? You’ll pay for it…

Filing well in advance of the deadline means you have more time to address any issues that do arise and avoid any nasty penalties. For those who aren’t familiar with HMRCs penalties, they are as follows:

  • A £100 fine if you miss the January 31st deadline;
  • £10-per-day fines (for up to 90 days) if you still have not filed by 30th April;
  • whichever is the greater of £300 or 5% of the tax that you owe if you haven’t filed after another 90 days;
  • another £300 or 5% of the tax owed if you still haven’t filed within a year;
  • additional penalties – including up to 100% of owed tax – if HMRC believes you are purposely putting off the filing of your return.

Working close to the deadline also means you have less time to identify any opportunities to compliantly reduce your tax liabilities, meaning you could end up paying more than you need to. Tax returns are as much about effective planning as they are compliance.

The danger of going it alone

The DIY approach to self-assessment tax returns comes with a whole host of potential ‘dangers’ and under all but the simplest of circumstances is best avoided.

When juggling the preparation of your tax return and the day-to-day running of your business, it can be all too easy to miss important details and make costly mistakes. You may also find that you fall into the trap of evaluating your tax affairs purely in terms of the ‘here and now’ and as a result fail to protect your best interests.

You might argue that with so much online guidance available, you would be hard pushed to put a foot wrong – but this is not the case. The content that your search engine returns, for the most part, is designed to appeal to a very ‘standard’ set of circumstances, which your own may not align with.

Is it worth the panic, puzzlement and potential miscalculations?

Silly mistakes can make HMRC suspicious

If you submit your tax return on time, by the skin of your teeth, but it contains errors or anomalies as a result, then that may attract the attention of HMRC. This could prompt HMRC to launch a tax investigation, which can be a lengthy and expensive process.

Work with us = less fuss

As we’ve said already, preparing and filing your tax return takes time; time that would be better spent on running your business. Not only this, but in the absence of expert knowledge and years of experience you run the risk of making costly errors that will ultimately cause delays and leave you feeling unnecessarily stressed. Seeking online help may seem like the obvious answer, but the information is likely to be inadequate.

 

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IR35: Public sector rule roll-out seems inevitable

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HMRC has suggested three ways to improve compliance with IR35 in the private sector, none of which will be easy for contractors or their clients to comply with, writes Rebecca Cave.

Unconscious bias

The consultation is titled: Off-payroll working in the private sector. I feel the term “off-payroll working” implies that the correct tax treatment is to always pay the freelance worker through the payroll, which is certainly not true. Is this a case of unconscious bias by HMRC?

HMRC has also provided an IR35 factsheet which seeks to debunk some of the rumours about the IR35 rules which have applied for public sector contracts since April 2017. One of those “facts” is that its check employment status tool (CEST) has been rigorously tested in conjunction with HMRC lawyers against live and settled cases, and reflects employment status case law.

This is a half-truth at best, as independent checking of CEST by Chartergates legal services and ContractorCalculator has found that the tool does not take account of the test of mutuality of obligation (MOO). This is a vital test of self-employment, as was demonstrated by a recent IR35 win for an IT contractor over HMRC.

Whinge city

HMRC justifies changing the way in which the IR35 rules are applied in the private sector because it is time-consuming and expensive for it to investigate IR35 disputes. This, HMRC claims, is largely because every personal service company (PSC) must be investigated independently.

I have always believed that every taxpayer has the right to be considered individually by HMRC, and is thus required to pay tax based on their own circumstances, not according to some blanket categorisation.

HMRC also whinges that the complex supply chains involving multiple agencies means that it finds it hard to collect information from every organisation involved in the contract, and some of those agencies are not always cooperative.

Finally, HMRC complains that when it does win a case and demands back taxes plus interest and penalties, the PSC simply closes down, and the individual worker starts trading through another company. The consultation omits to explain that HMRC has the power to collect the unpaid PAYE, NIC and penalties from the directors in cases where the PSC is forced into liquidation due to deliberate errors or misstatements provided by the directors.

What’s off the table

The consultation is very clear that the underlying rules for establishing employment status will not be changed, and although the Taylor Review has made some suggestions in this area, those are not taken account of in this consultation.

In addition, the following ideas which have been put forward in the past as potential solutions to the IR35 “problem”, are dismissed as being outside the scope of the consultation:

  • Employment status tied to a minimum length of the engagement – with short-term engagements (not specified how short) never classified as employments.
  • A new structure called freelancer limited company – this was suggested by IPSE in 2014 and considered by the OTS in its small company taxation review in 2016.
  • Client tests the employment status of the worker, and if the relationship is employment pays the employer NIC (as under current public sector rules), but the worker would not be subject to PAYE (contrary to current public sector rules).
  • Client withholds tax from the contractor in a similar fashion to CIS deductions – this is a particularly bad idea, as Howard Royse has argued.

Extending public sector rules

This appears to be the favoured option for HMRC, as it believes the tweaked IR35 rules have worked well so far in the public sector.

Moving responsibility for assessing employment status onto the end client means the client will have to rely on CEST to provide an answer in the majority of cases. The consultation is asking for suggestions on how the public sector IR35 rules should be adjusted to work in the private sector.

David Kirk, an expert on IR35 and employment status, made the following points on the extension of the public sector IR35 rules to private sector contracts:

  • There is a distinct lack of public confidence in CEST, which will continue as long as it produces results visibly at variance with what case law would suggest. The most recent case that HMRC have lost (Jensal Technology) was lost on this issue – and in the public sector too.
  • All parties to the contract will have to rely on HMRC guidance on how to account for the tax payments by the client on behalf of the PSC under PAYE. The current HMRC guidance on the public sector rules appears to contravene both the Companies Act 2006 definition of turnover and the FRS 102 definition of revenue. Correcting these points will require a change in the law, which needs to accompany any other changes to IR35.
  • There is also serious lack of public confidence in HMRC’s policing of IR35, which will not be restored as long as they keep on losing cases in the tax tribunal. So far they have lost two cases out of three this year, six cases out of eight since the new tribunal system arrived in 2009, and 12 out of 24 since IR35 came into being in 2000. A record like this suggests that some of the increased compliance that HMRC has noted in the public sector is likely to have come from incorrect categorisation, resulting from misunderstanding of the legal tests.
  • In the private sector, this poor record will encourage those engaging workers to challenge HMRC aggressively in the courts. Less knowledgeable businesses will simply do what they have done in the public sector, which is to shift non-compliance to offshore umbrella companies that HMRC does not have the resources or the legislation to tackle properly.

Secure labour supply chains

An alternative approach suggested by HMRC is to require businesses to audit their labour supply chains, to ensure that all freelancers are complying with the IR35 rules correctly. There is already HMRC guidance on how to undertake due diligence checking on labour supply chains, and HMRC believe that some of these checks could be adapted to the IR35 rules, for example:

David Kirk commented: “These audit requirements would add a complex layer of bureaucracy and would be very unlikely to work in an environment where non-compliance is endemic.”

Additional record keeping

A third alternative approach is to require engagers to keep more records about the contractors they engage, such as copies of contracts, shift rotas, and line management reporting relating to the engagement. If this information was retained, HMRC would be able to quickly gather what it needs directly from the engager should it later open an enquiry into one or more contractors or PSCs.

David Kirk also believes that this level of record keeping simply would not happen in a business that has no other need to keep the information, and where the people who would need to collate it are far removed from the accounting/ tax function. He commented, “compliance officers will never be able to keep up with this, even assuming that they are themselves aware of the issue in the first place.”

Next stage

This is a stage 1 consultation, and as such it focuses on policy design rather than practical aspects of regulation. The “how to” stage will be fleshed out with draft legislation, likely to be released this Autumn, with a view to passing the law in time for implementation from 6 April 2019.

However, if enough respondents emphasis that a longer lead time is needed in order for businesses to properly prepare, and for systems to be changed and tested, the implementation could be pushed back to 2020.

How to respond

HMRC will be conducting roundtable discussions on the issues raises in this consultation with representative bodies, so if your professional body has not been invited to such a discussion ask them why.

You can respond individually by email to: offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk

IR35: Public sector rule roll-out seems inevitable

Written by: Rebecca Cave

Tax Writer
Taxwriter Ltd