News

In our September newsletter we pointed out that HMRC has now added the ability for you to pay your tax using a credit card. Although we would not normally advise this as a way forward we do feel that under the current climate there could be some merit in considering this route. We understand that there are still some credit cards out there that can be obtained with a 0% period of up to 6 months. If you are able to obtain one of these then there could be some advantages in using this method.

If for instance you have a builder with a £10,000 tax bill due on 31 January and they do not have the funds immediately available but believe that they will do so within the next six months they could simply ignore the tax due until they have the funds six months later. When they do so and pay the tax they will have additionally clocked up interest of £375 and surcharges of £500. If they had paid using a 0% credit card they would have had the credit card charge that HMRC imposes of 0.91% or £91 and that is all as long as they pay it off.

However, this is only the start of it. If they had not paid HMRC  they would probably have been knocking on the door and are likely to have obtained a judgement against the client. This would have had a detrimental effect on the business as it could stop credit. As we mentioned above they are a builder. If they have not paid their tax they are likely under the new CIS rules to have lost their gross payment status.

In these circumstances you can see that it is beneficial to use a credit card if 0% is available.

The VAT rate for work on "empty house renovations" is 5% provided that the house has not been occupied for more than two years.  The disposal is VAT exempt, which means that VAT incurred cannot normally be reclaimed.
 
Instances have come to light where HMRC has sought to argue that a house has not been empty for two or more years.  These seem to be in instances where the house occupier has been away from the property for a period of time, perhaps within a hospital or hospice, and subsequently died.  The house has then been sold on from the estate/owner.
 
The importance of checking the facts as to the history of occupation of the house, including any periods where it has been unoccupied due to, say, illness, cannot be stressed - failing to obtain the evidence may result in over three times the correct amount of VAT being paid on the refurbishment works.  If instances come to light where VAT has been charged at 17.5 and not 5%, the first step is to seek a refund from the building contractor.  There is no way of seeking a refund direct from HMRC.
 
As a footnote, we are seeing a number of instances where HMRC are seeking to claw back VAT from redevelopers of residential accommodation, or converters, but have "overlooked" contractors charging at 17.5% instead of 5%.  We can help with the problem!

HMRC officers are assessing veterinary practices for overclaimed input tax on the basis that the VAT on purchases from certain wholesalers has not been calculated on the discounted amount available.  The practices have reclaimed VAT as per the tax invoices they hold but the VAT shown does not take into account a prompt payment discount that automatically comes into play as they pay by direct debit.  This appears to follow on from the revised treatment some drug companies adopted in relation to supplies to doctors practices.

Whilst this may be legally correct it seems that HMRC has not gone back to the wholesalers involved to tell them about the issue. Officers are seemingly going from practice to practice raising assessments where, in reality, there has been no loss to the Revenue. HMRC seems to be using this as a way of collecting more VAT than is properly due.

An interesting Special Commissioners case has just been announced regarding Inheritance Tax. The case, McKelvey v Revenue and Customs Comrs SpC694, brings up a couple of points. The basics of the case are that Mrs McKelvey owned investment properties  which she gifted to her frail mother, who lived with her,  to allow her to pay for care at a later date. Mrs McKelvey had cancer and died two years after making the gift. You will all be aware that on the death of an individual that you look back to the previous seven years to see what gifts had been made. If there were any then the the gifts are added to the estate. However, in this case a claim was made under s11 IHTA 1984. This allows for any gifts to be exempt if they were made for the reasonable care of a dependant relative.

HMRC did not dispute this but said that the claim was invalid as neither property had been sold to provide care. The mother was refused care and other members of the family assisted until she died shortly after her daughter. The special commissioner decided for the taxpayer arguing that the intent was important rather than what happened. The fact that the authrorities refused care had no bearing on this. He used an approach taken in personal injury cases to determine the "reasonable provision" cost.

His calculation in this case allowed a sum of £140,500 to be covered by the exemption with the balance of the value of the properties, which in this case was £28,500, was taxable. 

This proves that the obvious answer is not always the correct one. If you would like to discuss this further please do not hesitate to call us.

We understand that HMRC has recently experienced significant growth in "repayment frauds".  These frauds tend to involve the registering of a business for VAT.  The business tends to be fictitious, but that is not always the case.  The fraudsters then make VAT repayment claims, but then disappear before the VATman can check things out properly.  In the past such frauds have sought a veneer of respectability at the registration stage.  Hence accountants may become unwittingly involved, even perhaps through submitting registration applications on behalf of "new clients".  In previous incarnations, the fraudsters have made multiple registration applications and some have used "post box" addresses.  As a general rule, the fraudulent registration applications are made for business activities which would normally receive repayments of VAT - a simple indication of this will be the answer to question 18 on the VAT 1.
 
Accountants are advised to treat new clients, or new enterprises of existing clients, with special care, and ensure that they carry out their money laundering identification checks thoroughly, perhaps treating such instances as "high risk" for these purposes.
 
A further, but less sophisticated, incarnation of the fraud tends to involve an existing and perhaps even long established business changing the pattern of VAT return declarations to HMRC with steadily increasing VAT repayment claims - effectively a variation on "long firm frauds".
 
As a result of the increased fraudulent activity, accountants may find that genuine VAT registration applications are delayed or even rejected. Similarly, difficulties may arise with genuine repayment claims being delayed for verification or even taken into "extended verification" routines.  If you experience such difficulties, please contact us as we may be able to drive things forward.

The government in Ireland has decided that to help with the economy they will raise the rate of VAT from 1 December from 21 to 21.5%. However by doing so they have caused some confusion.

Any invoices issued need to reflect the position of the person who you are supplying to as well as the date of supply rather than the invoice date. Therefore if the supply to an unregistered person was before 1 December but the fee note was after that date then 21% will still need to be charged.  For others it will be at 21.5% regardless of when it was supplied.

There are countless other issues which need to be managed. If you have anybody with any issues please contact us. Our Irish contact can assist you.

Lets just hope that Darling does not come up with a similar idea (which given the current crisis is probably not out of the question). 

This case is of some interest to Direct Tax practitioners and concerns a claim made under ICTA 1988, Section 574, by a shareholder claiming "negligible value" treatment on the conversion of a loan to an unquoted trading company into share capital. The conversion took place as a consequence of a refinancing exercise involving a third party.

Obtaining relief under S.574 allows for an Income Tax deduction and in these circumstances is a problematic issue, especially if the conversion does not amount to a reorganisation for CGT purposes,as seemed to be the case here. This case really concerned valuation, rather than a technical point and what is a little surprising is the Commissioner's rejection of HMRC's argument that the loss should be calculated by reference to the market value of the shares issued in consideration for the loan, and that this market value was minimal, if anything.

The Commissioner, clearly having sympathy for the taxpayer, allowed for relief in full. One would expect an appeal from HMRC, unless they consider circumstances are so unique as to make the decision of little practical use. If nothing else, it serves as a reminder of the issues at stake in debt-to-equity situations, which are of course not uncommon.

Accountants are increasingly at risk of negligence claims by clients in the construction industry.  The stringent compliance requirements of the new CIS regime allow very little leeway for late returns or late payments of Income Tax, Corporation Tax, and PAYE. The recession in the construction sector and the credit crisis have also combined to leave many contractors with cashflow problems. At these times, tax payments – especially PAYE -  tend to get put to the back of the queue. For construction industry businesses this could be fatal, because it may lead to loss of gross payment status with further drastic impact on cashflow as the 20% withholding tax kicks in.  This could literally mean the end for many businesses.

HMRC does not regard general lack of funds as a  “reasonable excuse” for non-payment, so will not accept appeals based on this alone.

If you are providing payroll services to CIS clients, you must warn them of the consequences of late payment.  Even if you are not specifically providing payroll services, your clients will expect you to proactively warn them of dangers such as this in these hard times.  In our experience most subcontractors do not understand the compliance requirements of new CIS, and we have seen examples of large and otherwise well-run companies being suddenly faced with loss of gross payment status for totally avoidable late tax payments. Clients in those circumstances may often blame their accountants for failing to warn them.

The good news in all this is that it presents an opportunity for accountants to become involved proactively on educating clients regarding new CIS, offering treasury management services, assisting with business finance consultancy, and even offering payroll and CIS return services if these are not being properly dealt with in-house by the client.

We would recommend that accountants should take this opportunity to write to all their CIS clients reminding them of the dangers and offering to help clients to navigate their way through them. 

We have very considerable experience on all aspects of CIS compliance and can help you with on all CIS issues, including:

• Conducting CIS compliance audits
• Defending appeals against loss of gross payment status

To assist our accountant contacts we have drafted a standard letter for issue to clients.  If you would like a copy, free of charge, please email tony.borman@bnbtax.com

HMRC has put out some useful reminders regarding the 31 October deadline. We all appreciate that 31 October is the deadline but HMRC are using their usual delivery date flexibility to accept tax returns up to returns up to Tuesday 4 November without attracting a late filing fine. You can, of course, still file  returns after this date electronically and avoid any problems. It needs to be noted that although HMRC will impose a penalty for paper filed Returns after 31 October the rules in TMA1970 s93 have not beeen changed and therefore if the tax is paid by 31 January then no penalty will be due. It should be noted that this only works for personal returns and does not work for partnerships.

This has also included an interesting point regarding enquiry dates. If the return is filed by 31 October the enquiry window closes on 31 October 2009. If the Return is filed after this date, even where it does not attract a penalty as it is before 4 November, the enquiry period will end on 31 January 2010!

Let’s all hope that they monitor the dates they receive the returns correctly after all it has recently come to light that HMRC’s online filing system has had clients disappearing from their system.  A number of people who had submitted a tax return last year on time are now receiving late penalty notices as the system cannot find their return.  How are we meant to trust the systems HMRC put in place if data can just disappear?

Suspected tax evaders may be under increased risk of investigation following new agreements signed by several offshore financial centres closely linked to the UK.

A report in the Financial Times says that Australia and The British Virgin Islands have entered into a new tax information exchange agreement with Britain.

This follows reports that Jersey has signed a similar agreement to provide tax information to the USA, Netherlands, Germany and seven Nordic Countries. It is believed that Jersey is at present in negotiation with Britain regarding an agreement to exchange information. The Isle of Man entered into an agreement with the UK in September.

With reports that a second round of the Offshore Disclosure Facility is imminent, it seems that any information gathered from offshore sources may be used in conjunction with that.

If this issue affects any of your clients and you feel you could benefit from BNB's expertise in this area, please contact John Hibbert (john.hibbert@bnbtax.com) who would be pleased to hear from you.

In Tower MCashback LLP1 and Tower MCashback LLP2 v HMRC [2008] the High Court upheld the taxpayer's appeal that HMRC could not change the basis of its arguments after it had issued a closure notice. The court stated that when HMRC had "pinned its colours to the mast" and a closure notice had been served, the inspector was not entitled to raise new arguments.

It appears initially that this is a positive step. Once a closure notice has been issued and appeals submitted we will know that in order to reach an agreed settlement the only points on which we have to reach agreement with the inspector will be those contained in the notice. However, it may result in the inspector dragging out the enquiry in order to avoid confining himself to the conditions of the closure notice. It may also lead to more open-ended closure notices being issued. We should remember that at any point during an enquiry, if we feel that we have answered all of the inspector's questions and provided sufficient information to allow HMRC to conclude their enquiries we can request that a closure notice is issued.

If you have any issues concerning closure notice applications in relation to enquiries into any of your clients or would like help in appealing against HMRC closure notices and assessments or feel that you need advice in reaching an agreed settlement with HMRC please contact Ian Shirley (ian.shirley@bnbtax.com) or John Hibbert (john.hibbert@bnbtax.com) who would be pleased to hear from you.  

Termination Payments
In the midst of the economic downturn redundancies are inevitable.  However businesses are not always aware of the full tax implications of termination payments.  The taxman is looking even closer than before in the hope to get a little more tax from these payments.  Although HMRC are usually open to discussions they are pushing for payments owed to them more than ever.

Research and Development tax credits.
If a company is relying on the cash rebate offer by R&D tax credits then they may have a nasty surprise heading their way. The EU has said that it does not want to keep afloat companies on the brink of going under.  Therefore companies will still be able to claim R&D tax relief but will not be entitled to a tax rebate.

Corporation Tax Dodgers
The government are now taking on retired tax accountants in order to try to reduce the amount of companies not paying 100% of the corporation tax due.  Any high risk businesses will now be targeted to get a full blown investigation into their affairs. 

If you are affected by any of these issues please contact us.

It has been some time since we were given tax breaks for owning our own homes - remember MIRAS? (Mortgage interest relief at source - tax relief at basic rate, up to certain limits, was deducted from the mortgage interest we paid).

As a consequence we have to fund both interest and capital repayments out of our taxed income.

For instance you would need to earn over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

As recession starts to bite and taking into account the difficult property market, we may consider letting either part or all of our homes. This article sets out a number of the tax considerations you will need to consider.

Rent-a-room relief

At present you can elect to claim this relief if you let out a room in your home. The following rules should be considered.

• If you don't make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).
• If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

(If your property is owned jointly the £4,250 will be shared between the partners, as will the rents.)

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

If the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home

If you decide to move from your home and let the whole property the following points should be considered.

• You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.
• As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.
• If part of the gain becomes taxable because of the property being let as residential accommodation, then you can also make a claim for lettings relief of up to £40,000. The relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

You may be eligible for tax credits if you fit into the following criteria:

• If you are responsible for at least one child or young person who normally lives with you, you may qualify for Child Tax Credit.
• If you work, but earn low wages, you may qualify for Working Tax Credit.

In both cases the amount of your claim will depend on your income.

As always there is a minefield of small print to negotiate before you can establish if you have a valid claim.

Generally speaking you may qualify for some element of tax credit if the following circumstances apply:

• You will need to live and work in the UK
• Be aged 16 years or over
• If you don't have children and you are under 25, you probably don't qualify for tax credits unless your partner is 25 or over and they normally work over 30 hours a week.

Your household income must not exceed £58,000 per year. Household income means money you (and your partner if you have one) have coming in each year including:

• your wages and benefits from employment
• any earnings from self-employment
• any interest on savings and investments you have
• some, but not all, state benefits
• pensions
• money from abroad
• money from property you own, e.g. rent

It does not include money that other members of your household have coming in.

If your income starts to fall as a result of the current slow-down you may become eligible to claim tax credits. Contact us if you feel this is the case.

There are a number of formal "tax-free bike schemes" which have been developed in response to the Government's "Green Transport Plan".

Basically your employer buys a bike and hires it to you until you have paid back its full cost.

The tax break is facilitated because you pay for the bike by agreeing to reduce your monthly/weekly salary, before tax and NIC is deducted. Paying in this way you can meet your repayments out of your pre-tax rather than post taxed income.

This can translate to almost a 50% cash discount on the price of a new bike. Higher rate tax payers will benefit more from the scheme.

The scheme only applies to employees, if you are self-employed the bike could probably be claimed as a business expense, if you use it for business purposes.

If you buy a business as a going concern, in other words if you continue with the existing trade in place of the seller, you do not have to pay VAT on the transfer of the trading assets.

But beware. The reason you do not need to pay VAT is that the transfer of a business is considered to be outside the scope of VAT. If the seller is advised to adopt a broad brush approach and just charge VAT because he cannot decide if a bona fide sale as a going concern applies, you may be denied recovery of the VAT added! 

It is therefore important to clarify whether the sale is a sale as a going concern or not.

Purchasing property

Further complications can arise if you purchase a business property which has an existing option to tax applied. This means that all income generated by the property is a standard rated output. It also means that a seller may be required to add VAT to the sale price.

However the seller can avoid this VAT add-on if one of two specific circumstances apply:

• if the new owner makes an election to opt to tax their interest in the same property. This election must be made before ownership is transferred,
• if the new owner is buying the property to convert to dwellings.

In both cases there are prescribed forms to fill in and file.

1 November 2008 - Due date for corporation tax due for the year ended 31 January 2008.

19 November 2008 - PAYE and NIC deductions due for month ended 5 November 2008. (If you pay your tax electronically the due date is 22 November 2008)

19 November 2008 - Filing deadline for the CIS300 monthly return for the month ended 5 November 2008.

19 November 2008 - CIS tax deducted for the month ended 5 November 2008 is payable by today.

1 December 2008 - Due date for corporation tax due for the year ended 28 February 2008.

19 December 2008 - PAYE and NIC deductions due for month ended 5 December 2008. (If you pay your tax electronically the due date is 22 December 2008)

19 December 2008 - Filing deadline for the CIS300 monthly return for the month ended 5 December 2008

19 December 2008 - CIS tax deducted for the month ended 5 October 2008 is payable by today.