Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: November 2015

Update on Intermediaries Review

The government estimates that around £420m a year is lost in tax and NICs by taxpayers ignoring or manipulating the intermediaries’ legislation (IR35). The September edition of this newsletter (see The future for intermediaries) contained details of the government’s consultation on proposals to improve the effectiveness of the rules. The consultation document set out proposals that could see the onus to verify the employment status of an individual being put on the shoulders of the ‘engager’. The option for aligning the IR35 test with that used for temporary workers in the agency rules, which is based on supervision, direction or control, was also discussed in the consultation document, along with the possible introduction of a rule that an engagement must last a certain minimum amount of time to be considered one of employment.

In response to the consultation, the Chartered Institute of Taxation (CIOT) has now suggested a new approach to tackle the problem.

With regards to whether the compliance obligation should be switched from the worker and his/her personal service company (PSC) to the organisation that they are physically working for, the CIOT does not believe this will simplify administration or reduce non-compliance. Instead the organisations that these workers are physically working for will simply err on the side of caution and deduct tax and NICs leaving it to the worker and HMRC to sort out the mess.

With regards to a ‘supervision, direction or control’ test, the Institute says that this is unlikely to increase compliance and the underlying danger with a broad brush IR35 test is that it would catch many who are genuinely in business for themselves and who would currently pass the hypothetical employment test.

The CIOT has suggested to HMRC that a better option would be to impose an annual reporting obligation on organisations that are engaging with these workers, based on the PSC notifying them whether or not it considers that IR35 applies. There should also be an obligation for the PSC to notify that organisation that it is committed to applying IR35. If this approach were to be adopted, the organisation would then report what it had been told by the PSC and whether or not it was in agreement. If the organisation was to wilfully mislead HMRC that IR35 does not apply, when in fact it did, then any debt owed by the PSC in relation to non-compliance with IR35 would fall back to the organisation concerned.

Feedback on the consultation, including the CIOT proposals, is currently being analysed and further announcements are expected in the 2015 Autumn Statement.

Flatrate Homeworking Expenses

Many small businesses can choose to be taxed on the basis of the cash that passes through their books, rather than being asked to spend their time doing calculations designed for big businesses (‘cash basis’). Where the cash basis is used, it is also possible for the business to use certain simplified arrangements for claiming expenditure in working out taxable profits for income tax purposes. Flat rate expenses can be claimed for business costs for vehicles, working from home, and living at your business premises.

Where a trader runs his business from his home, he will be able to claim flat rate expenses for business use of the property. Using flat rates means it is not necessary to work out the proportion of personal and business use, for example, how much of utility bills are for business. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are as follows:

  • 25 or more hours worked per month can claim £10.00
  • 51 or more hours worked per month can claim £18.00
  • 101 or more hours worked per month can claim £26.00

The number of hours worked in a month is the number of hours spent wholly and exclusively on work done by the person, or any employee of the person, in the person’s home wholly and exclusively for the purposes of the trade.

Some businesses use their business premises as their home, for example, guesthouses. Where premises are used for both business and private use, the trader may, instead of making the standard deduction outlined above, make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:

  • If there is 1 relevant occupant £350 can be claimed
  • If there are 2 relevant occupants £500 can be claimed
  • If there are 3 or more relevant occupants £650 can be claimed

A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises other than in the course of the trade.

Traders need to keep records of business miles for vehicles, the number of hours worked at home, and details of people living at the business premises over the year. A claim to tax relief can then be made on the relevant self-assessment return.

HMRC provide a simplified expenses checker, which can be used to compare what a trader can claim using simplified expenses with what he can claim by working out the actual costs. The checker can be found online at www.gov.uk/simplified-expenses-checker.

Follower Notices and Accelerated Payment Notices

When a court or the tribunal issue a ruling that potentially resolves a large number of cases, many ‘followers’ (i.e. taxpayers with similar circumstances) agree to settle their affairs with HMRC, but some do not. They argue that small differences in the arrangements mean that the decision does not apply to them. HMRC will issue a follower notice to such taxpayers requesting them to settle the liability they believe is due.

Alongside the ‘follower’ rules are the accelerated payment rules. HMRC may issue an accelerated payment notice (APN) requesting the recipient to pay the disputed tax and/or NICs. This means that if a person is given a follower notice but decides not to settle up with HMRC, HMRC can still request the tax they believe is due under the accelerated payment rules. The broad effect of these double-edged rules is that the Exchequer gets to hold on to the tax during a dispute period, so removing any cashflow advantage from the taxpayer.

APNs should not be ignored – anyone receiving a notice has 90 days to either pay the amount requested or make appropriate representations. Failure to act by the due date could lead to late payment penalties or surcharges becoming due and potential enforcement action being taken to recover the tax or NICs.

It is also worth noting that an APN will only cover the tax or NICs advantage relating to the specific avoidance scheme covered by that notice. The amount shown may not be the final liability agreed, which may be larger or smaller than the amount of the APN. It will not include any interest, penalties or other tax that may be due in the year. Therefore when the enquiry or appeal is finalised, there may be additional amounts to pay.

HMRC may issue a ‘follower notice’ if the following four conditions are satisfied:

Condition A: There must be an enquiry in progress into a tax return or claim made by the taxpayer and there must be a ‘live’ appeal with HMRC or the Tribunal;

Condition B: the return, claim or appeal must be made on the basis that particular tax arrangements lead to tax advantages;

Condition C: HMRC are of the opinion that there is a judicial ruling which is relevant to the chosen arrangements. In addition, any follower notice must be given within 12 months of the later of:

  • the date the claim, return or appeal was received; or
  • the date the relevant judicial ruling was made;

Condition D: no previous follower notice has been given to the same person in the same circumstances.

When a person is served with a follower notice, they have 90 days from the date of the notice within which to make representations in writing to HMRC objecting to the notice on the grounds that:

  • conditions A, B or D above are not met;
  • the judicial ruling specified in the notice is not relevant to the arrangements entered into; or
  • the notice was given outside the 12-month statutory limit.

HMRC must consider the representations taking into account the grounds for objection and must then decide whether to confirm (with or without amendment) or withdraw the notice and notify the taxpayer accordingly. There is no right to appeal against a follower notice, which means that the only way in which to challenge a HMRC decision is by making an application for judicial review.

With regards to APNs, HMRC may issue an APN where one or more of the following conditions are satisfied:

  • a follower notice has been issued;
  • a DOTAS notifiable arrangement has been used; or
  • they are subject to a GAAR counteraction notice.

Further information and guidance on this subject can be found at: www.gov.uk/government/publications/follower-notices-and-accelerated-payments/follower-notices-and-accelerated-payments.

Business Record Checks scrapped by HMRC

HMRC have announced that they have scrapped their compliance procedure known as ‘business record checks’ (BRCs) with immediate effect. However, businesses should be warned that keeping good records is still essential to enable them to produce accurate accounts and tax returns.

Broadly, BRCs were introduced in 2011 and used by HMRC to confirm that a business was keeping sufficient information on its income and expenses to produce an accurate tax return. The checks have, however, consistently been criticised for being ineffective and poorly targeted.

HMRC have acknowledged that the initiative has not proved a cost-effective way of achieving the desired result. Despite efforts by HMRC to identify businesses at ‘high risk’ of having inadequate records, most of those they called on were found to be keeping records to an acceptable standard. The evidence is that records are being kept to an appropriate standard by most small businesses in the UK.

It remains crucial for businesses of all sizes to keep records up to date and in good order. This is likely to become even more important as HMRC bring in digital tax accounts, which may require businesses to submit data more frequently.

November 2015 Q&A

Q. I am a director and employee of a trading limited company (A Ltd), of which I also own 100% of the shares. I am about to set up a holding company in the European Union, which will own 100% of the shares in A Ltd. I will own 100% of the new EU company. Will there be any capital gains tax or stamp duty payable on the transfer of shares?

A The ‘share for share’ rules should apply to the transfer, so there should be no capital gains tax or stamp duty payable on the transaction. Further information on these rules can be found in the HMRC Capital gains tax manual at www.hmrc.gov.uk/manuals/cgmanual/CG52521+.htm, and www.hmrc.gov.uk/manuals/cgmanual/CG52800.htm.

Q. I have recently registered for VAT. I understand that I can use a flat rate for working out the VAT payable to HMRC, but I am not sure how the scheme works and how to register for it.

A This scheme is designed to help small businesses with a turnover of no more than £150,000 a year, excluding VAT, by taking some of the work out of recording VAT sales and purchases. If you use the scheme, you pay HMRC a single percentage of your turnover in a VAT period.

The percentages applicable to this scheme currently vary from 4% for food and children’s clothing retailers up to 14.5% for builders and contractors who supply labour-only services.

In your first year of VAT registration you get a 1% reduction in flat rate, which means that you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.

The scheme works well for some but not others. On the positive side, the scheme may save you some admin because you don’t have to work out every item of input and output tax, but if your customers are VAT registered, you do have to calculate the VAT and issue VAT invoices in the normal way. Financially, the flat rates averages may work out cheaper for you than normal accounting or you may find this scheme more expensive – use HMRC’s ready reckoner to check.

Under the scheme, you pay the VAT quarterly and you can swap back to the normal VAT scheme at any time if your inputs rise. You can also claim VAT on any capital expenditure of more than £2,000 excluding VAT.

You can register to join the scheme online. See the GOV.UK website at www.gov.uk/vat-flat-rate-scheme/join-or-leave-the-scheme for further details.

Q. I am a self-employed painter and decorator. I own two properties, one of which I rent out. My next self-assessment payment on account is due for payment shortly. I will need to pay £13,500 to HMRC. The rental property is currently worth around £20,000 less than I paid for it. If I were to sell it now, would I be able to off-set the loss against my self-assessment tax bill?

A Sadly not! For capital gains tax purposes, allowable losses of an individual can generally only be set against capital gains in the same tax year or in future years.

The HMRC capital gains tax states:

“Allowable losses must be deducted:

  • as far as possible from chargeable gains accruing in the same year of assessment; and
  • any balance must be carried forward without time limit and deducted from chargeable gains accruing in the earliest later year. Losses brought forward are deducted after losses accruing in the year of assessment and cannot reduce the net chargeable gains to below the annual exempt amount. Any losses which thus cannot be deducted remain available for deduction in later years.”

See the HMRC Capital Gains Tax Manual at www.hmrc.gov.uk/manuals/cgmanual/CG15810.htm for further details.