Are HMRC charging the new PAYE late payment penalties mentioned in the October 2010 blog?

To date I have only seen one case personally where the new penalties have been charged. I understand that HMRC have limits based on value and the number of late payments below which they are not charging penalties for 2010/11. Also they appear to only be charging the penalties once the full 2010/11 PAYE liability is settled – therefore where employers may have had financial difficulties in the current climate and have only just managed to pay in full, they may not have received a penalty notice yet.

In talking to other tax specialists, I know that there are numerous cases where employers have received notice of significant penalties. The lowest penalty I know of is just under £4,000 and the highest nearly £80,000. In all cases we would advise clients to consider appealing against the penalties partly because of the way HMRC have dealt with the new legislation – as far as we are aware HMRC only sent out one warning notice in May or June 2010 and HMRC have made no other effort to warn employers of the penalties they were building up.

I know that a number of penalties have been appealed against and cases are pending with the Tax Tribunal – I understand the first case may have been heard last month and the decision is awaited. Some Judges of the Tax Tribunal have been taken a strong line with HMRC when they consider they have not dealt with taxpayers fairly

If you have been charged any penalties (including VAT Default Surcharge) for late payment of tax or late submission of Returns by HMRC, it is always worthwhile speaking to your accountant or if they do not have experience in the Appeals field, a specialist, as there may be grounds for an appeal against these. The key is to do this promptly as if you leave it you may be too late to appeal. I am always happy to talk through a case in principle and advise whether we can help.

HMRC Tax Code Chaos : second time lucky ?

HM Revenue and Customs has been in the news twice this week and neither report has been favourable.

At one extreme they have been questioned in parliament about letting Goldman Sachs, the investment bank, off a £10m interest charge when settling the tax due on an alleged tax avoidance scheme.

Whilst this may have a small cost to all taxpayer, their second problem will be more significant to many individuals, for good or bad. For the lucky ones, this will mean that they have the pleasant surprise of a small refund from HMRC in time to help with buying Christmas presents. However, for the unlucky ones this will mean getting a bill from HMRC saying that insufficient tax has been deducted from their salary and they owe more (probably a few hundred pounds).

These errors (or as HMRC probably describe them adjustments) arise from the way the Pay As You Earn system works, particularly when you receive benefits from your employer (a company car, medical insurance and other items) and the time scale for HMRC to receive the information from employers.

In this case though it appears that, earlier in the year, HMRC made refunds and may now be want these back having processed more information.

We still find that for most taxpayers who submit Self Assessment Tax Returns the system works smoothly. Unfortunately, it often works less well for those within the PATE system who do not submit Tax Returns. The key things people can do to make sure they are not losing out are :

· Check you payslips regularly and particularly when your pay changes

· Make sure you understand how the tax (PAYE) deduction is calculated

· If you think the figures are wrong check them by speaking to HMRC or an accountant, your employer may also be happy to help

· If you are due a refund contact HMRC immediately and if you need to submit a Tax Return do this promptly and if possibly electronically

· If you owe tax, contact HMRC as soon as possible (so the debt does not grow) and ask them if you can settle it over time (whether through PAYE or by monthly payments to HMRC).

Separating from your spouse - what about the tax?

Unfortunately along with the personal and other issues there are a few tax issues which need to be considered as the financial side of a divorce settlement is being agreed. The same issues will apply to the dissolution of a civil partnership

The most important thing to be aware of is that the special treatment for Capital Gains Tax purposes for transfers between spouses only applies for a tax year where the couple are married AND living together at some point in the tax year (to 5 April). This means that from the 6 April following the separation transfers and gifts of assets will be subject to Capital Gains Tax in the normal way

In contrast the special treatment for Inheritance Tax purposes applies to spouses until the time of divorce or dissolution. This means that transfers are not chargeable to IHT (subject to special rules if one spouse is not UK domiciled).

If assets such as shares, second homes, buy to let property or businesses interests are being transferred between spouses are part of the financial arrangements, it is therefore vital that advice is taken on the Capital Gains Tax implications. Even if no tax is payable immediately it is important that you know what tax might be payable in the future if the asset is sold – it may affect the overall detail of the settlement.

1) If the is an exchange of shares in different properties, there is a concession which allows the Capital Gains which would otherwise arise to be deferred.

2) If the property is subject to a ‘Mesher’ order where one spouse is not entitled to their share until the children reach a specific age or leave education, then they should still be entitled to Principle Private Residence (PPR) relief and the gain not be taxable.

3) The last three years of ownership of a PPR are eligible for relief even if one spouse has moved out and there another concession which can extend this if they do not have a new PPR.

All of these areas can be complex and it is important that you understand the tax implications of separation, divorce and any transactions involved in the financial settlement.

Are HM Revenue & Customs taking a stronger line and challenging items in accounts and Tax Returns?

There are some types of business which have always interested the tax man as they are viewed as high risk and generally these are unchanged. Generally these are the types of business where customers do (or can be persuaded to) pay in cash and they fall into two main categories : retail shops and takeaways etc where not all cash may be recorded in the till and service type businesses (builders, gardeners etc) where there whole jobs (or part of the price) can be left out of the records.

At a more detailed level, there are a number of areas where we are seeing HM Revenue & Customs challenging or checking on specific items, including :

1) Travelling expenses are often being challenged particularly if these include home to site travel. HMRC appear to be much less willing to just accept that someone runs their business from home, if they have any form or regular other location.

2) Often employees and employers make assumptions that redundancy payments and other termination payments are tax free. The rules on this are complex and very dependent on the specific circumstances and HMRC are challenging the treatment regularly, often will extra tax being due. This is an area where it is vital that advice is taken before the payment is finalised.

3) HMRC will generally look into any large capital gain on a Tax Return and they are now often challenging where a property sale is eligible for Principle Private Residence relief. They have recently had a number of successes in the Tax Tribunal on this issue and these show how important it is to check the facts before assuming the relief is available.

All of our experience with these cases highlight the importance of dealing very carefully once HMRC start to look into a taxpayers affairs. If is very easy for a question or answer to be misinterpreted in the early stages of the enquiry and the impression given to be very difficult to correct later on. Unless you are very sure of your ground (both in fact and law) and your ability to express this clearly, it is almost always helpful to with someone experienced in this specialist area.

Hectic week for the middle of summer – what’s happening in tax?

This week seems to have included a number of potentially significant announcements and news items affecting taxpayers and tax professionals. As a quick summary, here are a few :

HMRC have announced details of the first five arrests for tax evasion following the closure of the initial notification period for the Plumbers Tax Safe Plan on 31 May. Locally these include the arrest of a Ringwood man alleged to have evaded income tax of over £150,000. This is a useful reminder of the advantage of making an unprompted disclosure to HMRC if you have past tax failings – not only will the penalties be reduced, but it is extremely rare for HMRC to consider criminal prosecution if you voluntarily disclose things. Anyone with concerns about their past record should consider taking advice from someone experienced in tax investigations and disclosures.

The government have today announced seven move Enterprise Zones, which includes one locally, the Solent Enterprise Zone at Daedalus Airfield in Gosport. At present we appear to be awaiting more details of the specific incentives available to businesses setting up in the Zone.

A recent Supreme Court case (Autoclenz Ltd v Belcher) has raised concerns in the mind of many tax advisers about whether some self-employment contracts ‘work’ for tax purposes. Although the case was an appeal from an Employment Tribunal case on minimum wage and hoiday entitlement, it is quite possible HMRC will try and use this in the tax arena. In my mind the key reminder this decision gives is that the written contract and the reality of the commercial relationship must be consistent. This case consider whether a substitution clause in the written contract was relevant given the realities of the situation. Again a reminder to take proper advice not just on the initial contract but on how the ongoing relationship works.

I have heard that the tax man is going to prosecute more people in the Criminal Courts, should I be worried if I make a mistake?

Earlier in the year HM Revenue & Customs announced that would be looking to increase the number of criminal prosecutions they bring annually to about 1,000 – a fivefold increase.

This is however a tiny proportion of the number of enquiries into Tax Returns they undertake. Historically HMRC have found it far more cost effective to use their general powers and civil penalties to collect extra tax which is due. Their intention is usually to collect any extra tax due and encourage taxpayers to comply with their obligations in the future and the significant penalties which can be charged without going to the Criminal Courts are enough to achieve this

There is clear guidance on the types of cases where criminal action might be considered appropriate which includes situations where there has been previous offences, the taxpayer is a professional advisor, there are threats to HMRC officers or there are links to wider criminal activity

So, in summary, there is almost no chance that HMRC will take criminal proceedings if you have made a mistake, but you may still get a financial penalty if HMRC take the view that you have been careless. This is however a sign of the increased effort which HMRC are putting into targeting tax evasion and what they see as tax avoidance.

Should you be paying VAT to HMRC when your customers have not paid you?

There are provisions which allow you to reclaim the VAT you have paid to HMRC if your customer has not paid you within six months of the due date of the invoice. It is always sensible to keep your list of debtors under review to identify these items and reduce the amount you pay to HMRC in a later VAT period accordingly. Of course you have to pay over the VAT again later on when the customer pays you

There are a couple of warnings to be aware of as : you must document the write off for VAT purposes and must not have factored the debt.

The other side of these rules are that you need to remember that if you have not paid a supplier six months after the due date of an invoice, you must adjust your next VAT Return for the VAT you have not paid to the supplier. Again you reclaim when you actually pay. It is easy to overlook this and very easy for a VAT Officer to find this type of error on an inspection

If you are a small business (with a turnover of less than £1,350,000) you can join the cash accounting scheme where you deal your VAT according to when your customers pay you or when you pay your suppliers. If you invoice your customers and have to wait for them to pay you, this can be much better for your business cashflow. You do need to be careful that you deal with any changes in the VAT rate (as in January) properly, but otherwise the scheme is easy to operate.

Did you receive your tax return last month and whats changed?

The basics are the same as last year :

- if you fill in the paper form you must return the complete return by 31 October 2011

- if you complete and submit an ‘on-line’ form you must submit this by 31 January 2012

Again as usual, if you are completing a paper form check early on that you have the right pages for your employments, self-employments, capital gains etc. It will take a few days to get these through if you have to telephone HM Revenue & Customs for them (the number is on page two of the Return).

If you are completing on-line and using the HMRC service for the first time, make sure you request and activate your access codes well in advance of the deadline. Again it take a week or more to get these through if you do not have them.

If you are using an accountant it is likely that they will use commercial software to prepare and submit your Tax Return avoiding some of these problems.

The big change this year is that if you are due to submit a Tax Return and this is submitted late you will be charged a penalty of £100 even if you have paid all your tax or are due a refund. If you are more than three months late a further penalty of £10 per day will be charged for the next 90 days. If you are struggling to obtain part of the information you should consider submitting the Return with an estimate – just make sure you tick box 20 and provide the accurate information as soon as you can.

If you are unable to meet the filing deadline and think you may have a ‘reasonable excuse’ you may be able to get the penalty cancelled. Relying on this should always be a last resort and if you think you need help with your Tax Return, it is vital to arrange this early and not leave it until just before the filing deadline.

Could your business claim Research & Development Tax Credits?

R&D Tax Credits are an ‘incentive’ through the Corporation Tax system to encourage companies to undertake Research and Development. There are two schemes :

Under the large company scheme (companies with over 500 employees) where the company gets a tax deduction for 130% of the costs (so an extra 30% of tax relief).

Under the SME scheme (companies with under 500 employees) where the company gets a tax deduction for 175% of the costs. Under the SME scheme, the company (if loss-making) may be able to get a cash refund of 24% of the costs (there are other restrictions on this cash refund as well).

The key rules are that the company must spend at least £10,000 on R&D. An R&D project must seek to achieve and advance in science or technology and directly contribute to this through the resolution of scientific or technological uncertainty. This does not have to be something completely new, but can be an appreciable improvement to an existing process, material, product or service. It must however be an increase in overall knowledge not just the companies own knowledge.

The key costs which can be claimed under the scheme are staff costs, sub-contract costs, direct material costs, fuel and power costs.

This is a complex area, but there will definitely be cases where companies may have activities which potentially fall within the definitions of R&D but they do not consider the possibility of a claim. In some cases, their accountants may not have been given or perhaps asked for sufficient detailed knowledge of the company’s activities – they do not therefore highlight the opportunity either. If you do any development work on products, software, production processes, you should always discuss this with your accountant to see if a claim is possible.

When will you get your state pension?

As I am sure you are aware, historically men could take their state pension from age 65 and women from age 60. From April 2010 a process began to increase the age or women from 60 to 65. This change means that women born between April 1950 and April 1955 would retire later than they expected between May 2010 and April 2020.

The new proposals are that women born between April 1953 and December 1953 will have their State Pension delayed by up to a further 16 months. Men and women born between December 1953 and April 1954 will also have their State Pension delayed further. There are then future changes to increase the state pension age to 67 and then 68.

You can check for your actual State Pension age (based on your date of birth) at

http://pensions.direct.gov.uk/en/state-pension-age-calculator/home.asp

and see the new proposals in detail at

http://www.direct.gov.uk/en/Nl1/Newsroom/SpendingReview/DG_192159

Building Contractors and Developers failing to submit CIS Returns. What to do to avoid problems?

There are two different problems here. Firstly, contractors within the construction industry must submit monthly returns of their payments to and income tax deductions from sub-contractors. Secondly, sub-contractors may benefit from ‘gross status’ whereby the have no tax deducted from payments made to them.

For the contractor filing returns, it is vital that the monthly returns are filed on time (e.g. for return to 5 February by 19 February). If the return is late there is a penalty due which starts at £100 for each return which is late. Under current rules this increases by £100 each month until the return is 12 months late making a penalty of potentially £1,200 for each late return! New rules come in from November 2011 which changes the rules but, penalties can still be significant. There are further penalties if the tax which has been deducted is not paid over on time.

There are three things a contractor can do to avoid or minimse these penalties : (1) make sure they have processes in place to ensure that the Returns are filed on time and tax paid over when due and (2) if either a return or payment is made late due to unforeseen circumstances or events outside the contractors control, make sure that an prompt appeal is made that there was a ‘reasonable excuse’ for the delay. (3) if the new rules give a lower penalty, you can ask HMRC to apply these early.

For the sub-contractor with ‘gross status’ it is important that all the sub-contractors tax returns are submitted on time and all tax payments made on time. If the sub-contractor fails to do this they can lose this status and would then have 20% income tax deducted from all payments made to them by the contractors for whom they work – a very negative impact on their cashflow. This is a very wide field and includes a company’s Corporation Tax obligations, PAYE/CIS obligations and if a partnership/sole trade the individuals own Self Assessment Tax Returns. Some occasional minor delays can be overlooked, but it is dangerous to rely on this. Again if there are unforeseen circumstances behind the late payment or return, an appeal can be made on the grounds of ‘reasonable excuse’.

If you are a contractor or sub-contractor in the position where returns or payments are late and you think you have reasonable excuse, it is important to properly present your case to HM Revenue & Customs (or on appeal to the Tax Tribunal). The way the facts are presented can be important to whether the penalty is withdrawn or you keep your gross payment status.