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If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can assist in all aspects of self-employment, from choosing the best time to start the business, the best time for your year-end, support you through the initial business registration and provide advice on all aspects of tax.
We provide a range of compliance services for sole traders:
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Our compliance services include:
We are a member firm of the Association of Chartered Certified Accountants and our rigorous internal procedures mean that clients can be confident that their accounts have been prepared in line with the Association’s standards of and the Companies Act 2006.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use our expertise and the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time. We have considerable experience in dealing with HMRC and are also experienced in representing our clients should they be subject to a tax enquiry or investigation.
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is highly tax efficient.
We are IR35 experts and will advise you on how to structure your next contract to minimise IR35 risk. We will ensure you claim all the tax deductible expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns ahead of deadlines and provide you with clarity over your future tax payments.
Free company incorporation and set up with HMRC if you are a new Contractor and sign up with us.
Included in this service:
VAT • Value added tax is one of the most complex and onerous tax regimes imposed on business. We provide an efficient cost effective VAT service which includes assistance with VAT registration and help with completing your VAT return.
Payroll • Administering your payroll can be time consuming and the task is made all the more difficult by the growing complexity of taxation and employment legislation. We provide a comprehensive payroll service.
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Management Accounting • Provision of management accounts
If you wish to know more about these services please contact us on 01332 202660.
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
We can work with you to:
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax returns, accounts preparation and tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively to minimise your tax liabilities.
Services we offer include:
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a free meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Confirm your expectations
Our aim is to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.
Build a relationship
Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time. Eddie Morris
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NIC and Company Directors
Unlike tax, National Insurance is generally worked out separately by reference to the earnings for the relevant earnings period, without any regard to other payments in the tax year. The earnings period generally corresponds to the pay interval, so, for example, NICs for weekly paid employees is worked out solely by reference to their earnings for that particular week; likewise for monthly paid employees, their NIC for the month depends only on their earnings for that month.
However, this rule does not apply to directors, who are deemed to have an annual earnings period for National Insurance purposes, regardless of their actual pay frequency. The effect of this is that NIC for the year is worked out (like tax) on their total earnings for the year, using the annual thresholds, rather than the weekly or monthly thresholds appropriate to the pay interval.
Annual earnings period
Directors can either apply the annual limits from the start of the year, paying no primary Class 1 contributions until their earnings for the year to date exceed the primary threshold (£8,060 for 2017/18), then paying contributions at the rate of 12% until their earnings for the year reach the upper earnings limit of £43,000, and thereafter paying contributions at the rate of 2%. The downside of this is that the NIC bill is not spread very evenly throughout the year.
Alternatively, directors can choose to work out their NICs using the alternative assessment method under which NICs are computed by reference to the normal pay interval initially (as for other employees) and recalculating the liability at the year-end on an annual basis.
Paul is a company director. He is paid a salary of £3,000 a month. In addition, he is paid a bonus of £50,000 in December 2016.
Under the alternative assessment method, his NIC is worked out each month initially using the monthly thresholds (primary threshold of £672, secondary threshold £676 and upper earnings limit of £3,583).
With the exception of December 2016, Paul pays NIC of £279.36 a month (12% (£3,000 - £672)). His employer pays NIC of £320.71
In December, with his bonus, Paul’s earnings are £53,000 and he pays NIC of £1,277.66 ((12% (£3,583 - £672) + (2% (£50,000 - £3,583)). His employer pays secondary NICs of £7,220.71.
To work out the NIC payable for month 12 (March 2017) it is necessary to recalculate the bill on an annual basis. Paul’s earnings for the year are £86,000 (salary of £36,000 and a bonus of £50,000). Primary contributions on these earnings are £5,052.80 ((12% (£43,000 - £8,060) + (2% (£86,000 - £42,000)) and secondary contributions are £10,748.54 (13.8% (£86,000 - £43.000)).
Paul has paid contributions of £4,071.26 ((10 x £279.36) + £1277.66) so far, so owes £981.54 for March 2017. His employer has paid NIC of £10,428.71 and owes £320.73 for March 2017.
Paul pays more on his March salary of £3,000 as some of the bonus on which contributions were paid at 2% was liable at 12% when the computation is performed on an annual basis.
The annual earnings basis prevent directors making inconsistent payments to save NICs.
Private Residence Relief
No capital gains tax liability arises where a person sells his or her home provided that the property has been his or her only or main residence throughout the period of ownership, except for all or any part of the last 18 months of ownership. If this condition is not met, principal private residence (PPR) relief generally applies to that fraction of the gain that related to the period for which the property was the taxpayer's only or main residence, including the last 18 months of ownership, divided by the length of ownership.
However, relief may be restricted where part of the property is used for the purposes of a trade, profession or vocation, or where there is a change in the part that is occupied as the individual's residence, or where the property was acquired wholly or partly for the purposes of realising a gain from its disposal.
Restriction 1 - use for purpose of a trade, business profession or vocation
Where a gain arises on all or part of a dwelling house, part of which is used exclusively for the purposes of a trade or business, or a profession or vocation, the gain must be apportioned between the part used as a main residence and the part used for the trade, business, profession or vocation. PPR is not available in respect of the portion of the gain that relates to the part of the dwelling house used exclusively for the purposes of the trade, profession or vocation.
It should be noted that the exclusion from PPR relief applies only to any part of the property which is used exclusively for the purposes of the trade, business, profession or vocation. Consequently, relief is not lost in relation to a room that is used for both business and private purposes.
In a case where a part of the property is used exclusively for the purposes of a trade, business, profession or vocation, the gain must be apportioned between the residential and non-residential parts. The legislation does not provide how the apportionment must be made, and this must be determined by reference to the facts of the particular case.
Some guidance as to HMRC’s approach to the apportionment calculation can be found in their Capital Gains manual. Their willingness to accept a simple apportionment based, for example, on the number of rooms used for each purposes, will depend on the tax at stake. HMRC note in their Capital Gains Tax manual (at CG64670) that in a mixed property, such as a pub with residential accommodation above, the business part would be expected to be of greater value than the residential value. Consequently, an apportionment based solely on the number of rooms or the floor area attributable to residential and non-residential use could produce an excessive amount of relief.
It should also be noted that HMRC do not accept computations based on taking the value of the residential accommodation in isolation and deducting it from the consideration to determine the proportion attracting relief, as this is likely to produce excessive relief.
Example: Apportioning the gain for PPR purposes
Holly runs a small guest house, in which she also lives as her main residence. The property comprises twelve rooms, of which four are used exclusively for the purposes of her business. In July 2016, she sells the property for £900,000. She originally purchased the property in 1990 for £300,000. On sale she realises a gain of £600,000.
On a simple apportionment by reference to the number of rooms, two-thirds (i.e. 8/12) of the gain would qualify for PPR relief, leaving one-third (£200,000) chargeable to capital gains tax. However, HMRC contend that a greater value attaches to the non-residential part and eventually it is agreed that the gain attributable to the part used for the business is £250,000. PPR is available in relation to the remaining gain of £350,000. continued ...
High-income Child Benefit Charge
The high-income child benefit charge claws back child benefit that has been paid where either the recipient or his or her partner has individual income in excess of £50,000. The person paying the charge may not be the recipient - or even a parent of the child.
You can still be liable for the high-income child benefit charge even if you do not receive child benefit and the child in respect of whom it is paid is not your child - the charge will bite if you live with the child and you contribute at least an equal amount to the child's upkeep.
The income threshold at which the high-income child benefit charge starts is £S0,000. The measure of income is known as adjusted net income. Adjusted net income is total taxable income before personal allowance and less certain tax reliefs, such as trading losses, donations to charity made through gift aid and pension contributions. (Link: www.gov.uk/guidance/adjusted-net-income )
The charge is set at 1% of the child benefit received in the tax year for every £100 by which adjusted net income exceeds £50,000. Once income reaches £60,000, the charge is equal to 100% of the child benefit for the tax year.
The charge is paid via the self-assessment system and is due by 31 January after the end of the tax year to which it relates.
If the prospect of being paid child benefit only to have to pay it back to HMRC does not appeal, you can opt to have your child benefit payments stopped instead. This can be done by contacting the child benefit helpline on 0300 200 3600. Once stopped, payment can be restarted by contacting the child benefit helpline or completing the online form.
Consider whether you are likely to be affected by the high-income child benefit charge and if so whether you would prefer not to receive the benefit in the first place. Where possible, couples should equalise income to retain as much child benefit as possible. Live in partners who are not a parent of the child will not be hit by the charge if they can show that they do not contribute equally to the costs. Parents who do not live with the child are unaffected by the charge, regardless of their income.
HMRC Offers Simpler Tax Method For Buy-To-Let Landlords
One of the potential implications for buy-to-let landlords of ‘making tax digital' is to make income tax payers send in quarterly returns rather than annual returns.
This will multiply paperwork and aggravation for individuals and businesses, without actually making the process of tax collection any more eflicient. On 15 August 2016, HMRC published a consultation document called 'simplified cash basis for unincorporated property businesses’. This cash basis of working out your tax is something which has already been proposed for unincorporated trading businesses, and so what we are talking about here is extending the availability of the cash basis to buy~to-let landlords as well.
MTD s still in consultation and not becoming fully operational until 2020. There will be a requirement to provide information every quarter to HMRC instead of doing an annual tax return. In conjunction with this there will be a requirement for everyone to keep their records on computer.
Is there any advantage for landlords? One advantage is that, as a buy-to-let landlord, you don’t have to take into account rent receipts until you actually receive them.
More interestingly, there is a proposal to give immediate 100% relief for capital expenditure. The example which HMRC give is of a tenant who requires expensive specialist furniture to be installed, costing £15,000. A little while later, that tenant moves out and the specialist furniture is sold for £6,000. Under cash accounting as proposed, the £15,000 would be an immediate deduction against the rents, when it was paid. On the flipside, the £6,000 you would get for selling the furniture is then a taxable receipt. The example HMRC give here is of a commercial letting, and that’s significant. Landlords of residential property are likely to be covered by the new 'replacement' rules which are replacing the wear and tear allowance (10% of rents) from this year.
Who will be able to use this 'simpler' method of tax accounting? Basically, individuals and partnerships consisting only of individuals will be eligible. As the proposals are drafted, there’s no upper limit, although the consultation paper does ask the question as to whether there should be an upper limit, for example based on rental turnover.
There are possible complications with applying the cash basis ln its simplest and most rigorous form. For example, what do you do about tenant deposits which are paid at the outset and held by the landlord under very stringent rules, which basically prevent him spending the deposit on anything? If you take cash accounting in its simplest form, this deposit would be taxable when received, and you would only get tax relief in the period including the end of the tenancy, when the deposit was paid back. Does it make a difference whether this deposit has to be handed over to a government approved agency to hold, or whether the landlord, in the case of a particular tenancy, is enabled to hang on to the deposit? All of these and more are issues which taxpayers and landlords may need to address in the future. Hl\/lRC's consultation closed on 7 November 2016, and its outcome is awaited.
Lettings relief increases the amount of the gain that is sheltered from capital gains tax when you sell a property which has at some time been your only or main residence, and in respect of which some private residence relief is due.
Private residence relief (PPR) is available on the disposal of a property that has been used as the owner’s only or main residence at some point during the period of ownership. If the property has been the only or main residence throughout the whole period of ownership, there is no capital gains tax to pay – the full amount of the gain is eligible for the relief. However, if the property has been used for business or let out for some of the period of ownership, part of the gain will be taxable. However, if some PRR is due, the gain relating to the last 18 months of ownership is exempt.
Nature of lettings relief
Lettings relief provides an element of additional relief where part of the gain on the disposal of a residential property is taxable because the property has been let out during the period of ownership. The relief is only available if the property has at some point been the only or main residence and private residence relief is available in respect of part of the gain.
The amount of lettings relief is the lowest of:
• the amount of private residence relief;
• £40,000; and
• the amount of the gain that is chargeable by reason of the letting.
David bought a flat on 1 September 2006 for £200,000. He lives in it as his main home for three years. He then moved in with his girlfriend, letting out the flat for seven years until he sold it on 31 August 2016 for £305,000. Costs of acquisition and sale were £5,000.
Before taking account of any available reliefs, David realises a gain of £100,000 (£305,000 – (£200,000 + £5,000)).
The property was David’s only or main residence for 3 years and qualifies for private residence relief for this period. Further, the last 18 months of ownership are also exempt, bringing the total period qualifying for private residence relief to four and half years.
The gain eligible for PPR is therefore £45,000 (£100,000 x 4.5/10).
The remaining gain of £55,000 is attributable to the letting and does not qualify for private residence relief.
However, lettings relief is available. The amount of the relief is the lowest of:
• the gain qualifying for private residence relief, i.e. £45,000;
• £40,000; and
• the gain attributable to the letting, i.e. £55,000.
Letting relief is therefore £40,000.
Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.
Double the relief
Although married couples and civil partners can only have one main residence between them for PPR purposes, each individual is entitled to lettings relief in respect of their share of the gain – doubling the potential letting relief available for spouses or civil partners to £80,000.
Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.
VAT Flat rate scheme
The VAT flat rate scheme is an optional simplified accounting scheme for small businesses. The scheme is available to businesses that are eligible to be registered for VAT and whose taxable turnover (excluding VAT) in the next year will be £150,000 or less. Once in the scheme, a business can remain in it as long as its taxable turnover for the current year is not more than £230,000.
The flat rate scheme is designed to simplify the recording of sales and purchases. Under the scheme, a business works out the VAT that it is required to pay over to HMRC by applying a flat rate percentage to its gross (VAT-inclusive) turnover. The flat rate percentage depends on the type of business. The percentages for each business sector can be found on the gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay. The percentages are all less than the standard rate of VAT of 20%, reflecting the VAT that would be recovered on purchases.
Jack is registered for the flat rate scheme. In a particular accounting period his turnover is £12,000. The flat rate percentage for his sector is 14%. Jack must pay VAT of £1,680 (14% of £12,000) over to HMRC. He does not need to work out the VAT on purchases.
The main advantage is that it reduces the record keeping burden, as it is not necessary to keep records of the VAT incurred on purchases. As the VAT percentages are averages it is possible that the business may pay less VAT than accounting for VAT under the traditional rules, particularly if purchases are low. However, the business may also pay more if purchases are higher than average – you may need to do the maths to see if it is for you.
Businesses also enjoy a discount of 1% from their flat rate percentage during their first year in the scheme.
Limited cost businesses
From 1 April 2017, a new flat rate percentage of 16.5% applies to a `limited cost business’. This is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive expenditure in a prescribed accounting period or greater than 2% but less than £1,000 if their prescribed accounting period is one year. The figure of £1,000 is adjusted accordingly for periods that are not one year. In determining whether this test is met, capital expenditure, food and drink for consumption by the flat rate business or its employees, and vehicle, vehicle parts and fuel (except where the business is one that carries out transport services) are excluded from the calculation.
However, a business with a VAT inclusive turnover of £20,000 in an accounting period would only need to incur expenditure of £400 or more to fall outside the definition of a limited cost business – for most businesses this will be doable, even taking account of the exclusions.
UK Resident Landlords
This overview relates to a schedule A business, which is applicable to most individual landlords. Special rules apply to the rent a room scheme and to holiday lets. Hotels and guest houses are also excluded from these general rules.
Rents & allowable expenses
Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.
The two biggest items allowable as a deduction in calculating taxable net rental income will often be mortgage interest and travel where the cost is attributable to the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will be allowable. From 6 April 2017 individuals receiving rental income on residential property in the UK will receive relief on mortgage interest at the basic rate of income tax (to be introduced progressively over four years from 6 April 2017)
Basis of determining ‘rent’
The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for unrecovered rental.
Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.
All UK residents with un-taxed income or profits are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £10,000. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated.
Sale of property
On disposal of the property any increase in value is potentially subject to capital gains tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence.
You are resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. If you believe you may be non-resident then you must pass several precise tests.
This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. We will be pleased to advise on any individual situation.
Tax Return Errors
Errors are sometimes made in tax returns. This can result in HM Revenue and Customs (HMRC) seeking to impose penalties in respect of the errors. If the tax return error has resulted (for example) in a tax liability being understated, HMRC will generally consider whether the error was careless or deliberate. An error is 'careless' if it arises due to a failure to take reasonable care. Thus no penalty can be charged if the error arose despite reasonable care having been taken.
Is it 'reasonable' or not?
Unfortunately, there is no statutory definition of 'reasonable care’ for these purposes. This has resulted in case law over the years on the distinction between reasonable care and careless (or negligent) behaviour.
For example, in Collis v Revenue & Customs the First-tier Tribunal commented: 'We consider that the standard by which [reasonable care] falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.'
HMRC considers that reasonable care depends on the particular taxpayer's abilities and circumstances. However, HMRC generally expects higher standards of taxpayers with professional advisers.
However, has a taxpayer taken reasonable care in relying on professional tax advice, if that advice results in a tax return error? The answer seems to be 'it depends'. For example, in Gedir v Revenue & Customs , the First-tier Tribunal held that the taxpayer took reasonable care despite a tax return error. In reaching that conclusion, the tribunal noted the following 'essential elements':
- the taxpayer consulted an adviser he reasonably believed to be competent;
- he provided the adviser with the relevant information and documents;
- he checked the adviser’s work to the extent that he was able to do so; and
- he implemented the advice.
The tribunal noted the earlier case Hanson v Revenue and Customs , and considered that the decision in that case sets out the correct basis for establishing whether a taxpayer who uses an agent to complete his tax return has taken reasonable care to avoid an inaccuracy in the return. In Hanson, the First-tier Tribunal considered that there was carelessness on the part of the taxpayer’s advisers. However, the taxpayer had taken reasonable care to avoid the error. In the circumstances, the taxpayer was entitled to rely on his accountants' advice without the taxpayer consulting the legislation or any HMRC guidance.
On the other hand, a taxpayer's reliance on professional advice does not represent a 'get out of jail' card in all circumstances. For example, in Shakoor v Revenue and Customs , the tribunal found that an accountant's incorrect advice was obviously wrong, and that the taxpayer realised, or ought to have realised, that it was obviously wrong, or so potentially wrong that it called for further explanation or justification. The taxpayer therefore incurred a penalty.
Tip: Taking a different view from HMRC on a technical point is not necessarily careless behaviour, if the taxpayer’s adviser's view turns out to be incorrect. Provided that the view is reasonable, the adviser is entitled to advise the taxpayer on that basis. The First-tier Tribunal decisions in Gedir and Hanson on reasonable care do not create a binding precedent, but may be persuasive in cases where the taxpayer has made a tax return error concerning a point on which professional advice has reasonably been taken, and HMRC is contending that the error it was careless.
Are Your Company's Dividends Valid?
Many family or owner-managed businesses will pay dividends several times a year. It is important to get the process correct, lest they be challenged by HMRC later on.
A dividend may be challenged where it is found to have been made otherwise than in accordance with the Companies Act 2006 or the company's own legal constitution.
Who authorises dividends? - It is generally the company's own Articles of Association that determine who may authorise dividends.
For these purposes, there are two types of dividend:
Dividends may only be paid when the company has the funds to do so. The Companies Act 2006 specifies that a dividend may be paid only out of profits available for that purpose.
Relevant accounts - In order to check what profits are available for distribution in the period, the directors/shareholders must refer to the relevant accounts. These are usually the latest annual accounts laid before the company in a general meeting.
Getting the paperwork right - It is essential that the paperwork be drawn up correctly to support the dividend. For final dividends, general meetings are no longer necessary provided a majority of shareholders approve the proposed dividend by ordinary resolution. The documentation should evidence that the relevant accounts have been considered, and the distribution approved.
An interim dividend may be varied at any time before it is actually paid, and as such is deemed to be paid only when the funds are placed unreservedly at the disposal of the shareholder. This is straightforward when dealing with a money transfer, but if effected by journal entry in the company's books of account - typically by way of a credit to a director's loan account or similar - then an interim dividend will be deemed to have been paid only when the relevant entries have been made.
Dividends should be paid in proportion to respective shareholdings. Dividend vouchers are still required, despite there no longer being a 'tax credit' in the new dividend regime.
Summary - Dividends are still a key tool for tax efficient income planning. But getting the procedure and paperwork right is essential, including:
Benefits in Kind and Making Good
Most benefits in kind are taxable and the employee is taxed on the cash equivalent of the value of that benefit. Where the employee is required to make a payment to the employer in return for the provision of the benefit and actually does so, the cash equivalent of the benefit is reduced by the amount `made good’ by the employee. Making good allows the employee to reduce or eliminate the tax charge.
Harry’s employer provides private medical insurance for Harry and his family. The cost to the employer is £500 a year. Harry is required to make a contribution of £200, which he does. By `making good’ £200 of the cost, the cash equivalent of the benefit on which tax is charged is reduced from £500 to £300.
Where the benefit in question is fuel for a company car, the amount made good by the employee can be computed using the advisory fuel rates.
Helen has a company car. The car is a petrol car, which for 2016/17 has an appropriate percentage of 22%. Helen’s employer pays for all fuel for the car, but Helen is required to make good the cost of fuel for private motoring.
In the year, Helen drives 10,000 private miles. Assuming the advisory fuel rate for her 1600 cc car is 14p per mile and Helen pays her employer £1,400 in respect of her private mileage, she will be regarded as having made good the cost of her private fuel. Consequently, the tax charge is reduced to nil.
Time for making good
Earlier in the year the Government consulted on the deadline by which the employee must make good in order to reduce or eliminate the tax charge that would arise on the benefit in kind. At the time of the 2016 Autumn Statement, it was announced that from 2017/18 the making good deadline for all benefits will be set at 6 July after the end of the tax year in which the benefit was provided. Previously, different dates applied to different benefits, with a deadline of the end of the tax year in which the benefit was provided applying to many.
Better to pay the tax
When thinking about whether to `make good’ to reduce the tax, remember that as the tax rate is less than 100%, you will always be better off paying the tax than making good. A higher rate taxpayer will only save £40 in tax for every £100 `made good’ – better to pay the £40 tax and keep the remaining £60.
Travel Expenses - Intermediaries: The New Rules
The Finance Bill 2016 introduces new rules which restrict the ability of workers providing their services through an intermediary to claim a deduction for the cost of travelling between home and work.
Employees are not allowed a deduction for home to work travel costs (ordinary commuting) and the new rules deny relief in certain situations to workers working through an intermediary for travel. However it should be noted that the rules do not affect all workers providing their services through an intermediary - a deduction for home-to-work travel is only denied if certain conditions are met.
Who is affected? - The new rules apply where a worker:
Employment intermediary - The rules apply where the worker does not provide his or her services direct to the client, but those services are provided through an intermediary. Thus, the intermediary provides an additional layer between the worker and the client. The intermediary may be a psc, an umbrella company, an employment agency or similar.
Supervision, direction and control - The 'supervision direction and control' test is critical in determining whether a worker who provides services through an intermediary is able to claim a deduction for the cost of travel between home and work. The new rules only bite where the worker is subject to, or is subject to the right of 'supervision, direction and control' of any person as to the manner in which the worker provides his or her services.
The 'supervision, direction and control' test is met if there is a right to supervise, direct or control, even if there is no actual supervision, direction or control. The supervision, direction or control can be provided by 'any person'. It does not have to be provided by the client - the test is met if it is provided by an agency, a project manager, a consultant, a manager, etc.
The worker only needs to meet one part of the test for it to apply.
Supervision - The 'supervision' element of the test is met if someone watches or oversees how the worker provides his or her services or checks the work that the worker is doing to make sure that it is done correctly or to the right standard.
Direction - Direction over the manner in which a worker provides his or her services means providing a worker with instructions, guidance or advice so that they do their work in a particular way.
Control - A person is subject to control as to how they do their work if another person tells or instructs them how to do the work. It is the right of a person to say to the worker 'don’t do it like that' or 'do it like this'.
A worker who provides personal services through an intermediary is still able to claim a deduction for home to work travel if they are not subject to supervision, direction & control.
Age 55 plus – unlock your pension
Changes were introduced with effect from April 2015, which provide those aged 55 plus with greater access to their pension savings. Where an individual has a defined contribution (money purchase) scheme, it is no longer necessary to purchase an annuity with the pension pot. Further, withdrawals in excess of the tax-free lump sum are taxed at the individual’s marginal rate of tax rather than at the punitive rate of 55% that applied prior to 6 April 2015.
Options - Once you reach age 55, there are various options available for your defined contribution pension pot:
Take it later - Although it is now possible to access pension savings at age 55, this is not the best option for everyone. It may suit you better, particularly if you are still working, to leave it where it is and to continue to invest so that you have a larger pot available to take later.
Tax-free lump sum - Once you have reached age 55 you can take 25% of your pension pot as a tax-free lump sum. Amounts in excess of the tax-free lump sum are taxed at the individual’s marginal rate of tax.
Annuity - It is no longer compulsory to use pension savings to buy an annuity, but those looking to secure an income in retirement may wish to invest some or all of the pension pot in an annuity. Financial advice should be sought to ensure that you purchase the right annuity for your personal circumstances.
Drawdown - If you want a flexible income in retirement you can opt for one of the drawdown options. This option allows you to take cash from your pension pot as you need it and can be achieved in one of two ways. The first option is to take the 25% tax-free lump sum in one chunk and then take the remainder of the pension pot as regular or irregular cash sums or as a one-off payment. Once the lump sum has been taken, the further withdrawals are taxed at the individual’s marginal rate of tax. The annual allowance drops to £10,000 once the first payment in excess of the tax-free lump sum is taken. If only the tax-free lump sum is withdrawn, the allowance remains at £40,000.
The alternative is to take smaller sums (uncrystallised fund pension lump sum). Under this approach, the first 25% of each withdrawal is tax-free and the balance is taxed at the individual’s marginal rate of tax. The annual allowance drops to £10,000 as soon as a withdrawal is made.
The annual allowance where a pension has been drawn down is to drop to £4,000 from April 2017.
Taking it all out - There is nothing to stop you withdrawing you pension pot at age 55 and splurging the lot. The first 25% is tax-free and the remainder taxed at your marginal rate. But remember, you may need an income to fund your life into your eighties and beyond.
Mix and match - Depending on the scheme rules, you could take some for a holiday of a lifetime, invest some in an annuity and leave the rest where it is.
Beware scams - Schemes that offer to unlock your pension before age 55 should be avoided at all cost. You will trigger punitive tax charges which will drastically reduce your pension pot.
New Lifetime ISA – earn up to £1,000 a year
Plans to introduce a new Lifetime ISA were unveiled in the 2016 Budget. The Lifetime ISA will be available from April 2017. It can be used either to save for a deposit for a first home or to save for retirement.
Who can open one?
A Lifetime ISA can be opened by anyone between the ages of 18 and 40. The procedure for opening a Lifetime ISA will be similar to that for existing ISAs. Savings into a Lifetime ISA will count towards the overall ISA limit for the year.
Sums saved in the account before the saver’s 50th birthday will earn a Government bonus of 25% of the amount saved. The Government bonus will be paid on savings of up to £4,000 a year, making it possible to earn up to £1,000 a year by investing in a Lifetime ISA. The bonus will be paid at the end of each tax year.
Save for your first home
The Lifetime ISA can only be used to save for a deposit on a first home or to save for retirement. However, a person must hold the Lifetime ISA for at least 12 months before they can make withdrawals that include the Government bonus. The savings, together with the Government bonus, can be put towards the purchase of a house in the UK costing up to £450,000. Where a house is purchased jointly, each purchaser can use savings from a Lifetime ISA, together with the Government bonus.
Where a person already has a Help-to-Buy ISA, they can either keep it and use it to save for a first home or transfer it into a Lifetime ISA. It is possible to have both a Help-to-Buy ISA and a Lifetime ISA, but only the Government bonus from one of the accounts can be used to buy the first home.
The bonus is only available to first time buyers.
Save for retirement – and earn a bonus of up to £32,000
The other purpose of the Lifetime ISA is to save for retirement. A person who saves £4,000 a year from age 18 to age 50 will accrue savings of £128,000 (before interest) and earn a Government bonus of £32,000, giving them a savings pot of £160,000 (plus interest). The savings and the Government bonus can be withdrawn from age 60.
Beware other withdrawals
The aim of the Lifetime ISA is to encourage long-term saving for specified purposes. Although individuals will not be prohibited from making withdrawals for other purposes, they will lose the Government bonus on any withdrawals that they make for other purposes. In addition, they will suffer a 5% charge. So, if you save £100 either towards a first home or retirement, that £100 will be worth £125 (plus interest). However, if you use the savings for other purposes, be warned, you will only get £95 of your initial £100 back (plus any interest earned).
Use a Help to Buy ISA for your first home and the Lifetime ISA to save for retirement. For other savings, choose a different account.
Cars and Benefits-in-Kind
Cars and leasing arrangements
The rules for car benefits have been problematic for employers. The days when a company car was a 'perk' are long gone for most employees except for the most fuel-efficient cars the benefit-in-kind charge is based on an amount far higher than the real benefit that the employee gets from it. It has become more common for employees to buy their own cars and claim back a mileage allowance from the employer. But employees then miss out on the buying power and freedom from hassle given by employer fleet management, and employers fear that the employees will not buy cars that project the right image when they visit clients.
So an alternative approach has been for the employer to be responsible for a fleet of cars that are leased to the employees. The employee has a commercially calculated, all-inclusive, lease payment to include servicing, repairs, etc., deducted directly from net pay, and pays for fuel. The employer reimburses the employee at the HMRC approved rates for the business mileage the employee reports. The net result will normally be much less expensive for the employee than having a company car and the accompanying benefit-in-kind charge.
Unfortunately, HMRC did not like this approach, and challenged it in a case, Apollo Fuels v HMRC . The history of this case is unusual, in that the taxpayer won all the way through the courts, but for different reasons at each stage. HMRC’s argument was that the benefit-in-kind legislation only required the employer to have provided the car by reason of the employment without a transfer of the property in it for the company car rules to bite. The First-tier Tribunal held that the lease gave the employee some ownership rights, so there was a transfer of the property in the car, and hence no benefit-in-kind charge. The Upper Tribunal disagreed, but said the company car rules were displaced by a
charge under s 62 on zero. The Court of Appeal, which is where the case has recently been decided, held that the arrangements were commercial and did not, on a purposive construction, give rise to a benefit-in-kind at all.
While the taxpayer has therefore succeeded three times, the victory won't hold in the longer term. Finance Bill 2016 includes provisions to prevent such arguments from succeeding in 2016/17 and subsequent years.
The legislation affects living accommodation, company cars or vans, and loans. In all three areas wording about 'fair bargain’ is introduced in similar terms. For cars and vans it says: 'In determining for the purposes of this Chapter whether this Chapter applies by virtue of subsection (1) to a car or van made available to an individual it is immaterial whether or not the terms on which the car or van is made available constitute a fair bargain’. For cars and vans there is an additional provision to deal with any argument that the vehicle is provided for reasons other than employment. This provision deems any car or van that an employer provides to an employee (or member of their family) to have been made available by reason of the employment except in two situations. The first is where the employer is an individual and the vehicle is provided in the normal course of domestic, personal or family relationships, and the second is where the employer runs a vehicle hire business and the vehicle is provided to the employee as a normal member of the public.
So any future Apollo Fuels type of scheme will be caught because the employer is 'providing' the car, and cannot argue that this is not because of the employment relationship. The first of the only two exceptions will be when, for example, a father employs his daughter in the business, and separately lets her have a car that she can use because she is his daughter. If the daughter is in a job where all the employees get cars, the exception will not apply. The other exception will require the employer to be running a car hire business, but it will not be possible to argue that the company fleet of lease cars is such a business. In order to meet the rules for the exception, not only would the vehicles have to be made available to the public for hire, they would also have to be hired by the employee acting as an ordinary member of the public. In other words, an employee of a genuine car hire company does not have to go to a competitor to hire a car when he needs one for a few months for fear of triggering a benefit-in-kind charge if he hires one from his employer, but a car hire company cannot use the exception to set up an Apollo Fuels type scheme for its employees.
Company Owners Beware of unpaid PAYE & NI Liabilities
Imagine a situation where an owner-managed company owed HM Revenue and Customs (HMRC) substantial amounts of PAYE income tax and National Insurance contributions (NIC) when it ceased trading and was liquidated. Those company liabilities may relate to remuneration paid to its owners. HMRC can pursue the individuals for the unpaid tax, broadly if there has been a failure to deduct PAYE, and HMRC considers that the company wilfully failed to make the deductions from relevant payments to them. A similar provision applies for NIC purposes in respect of the individual's primary contributions, if there is a wilful failure to pay by the company.
Whether the company owner(s) are liable for the unpaid PAYE and NIC of the business under the above rules will depend on the particular facts and circumstances, as two contrasting tribunal cases illustrate.
Personally liable: In Marsh & Anor v Revenue and Customs  , two individuals were directors and equal shareholders of a trading company. The company eventually experienced cashflow problems. Historically, the individuals received small amounts by way of salary from the company. Most of their income was received in dividends. However, for the tax year 2010/11, the director shareholders increased their salaries. The company had outstanding income tax and NIC, most of which related to the director shareholders. In April 2011, the company went into administration. HMRC sought to transfer the liabilities to the individuals.
The First-tier Tribunal noted that the individuals drew substantial salaries when the company’s profits could not support them. It was clear to the tribunal that the company was already in financial difficulties when the director shareholders decided to take salaries instead of dividends. The failure to make deductions from their salaries was held to be wilful, and the tribunal concluded that the director shareholders were personally liable to pay the relevant tax and NIC.
Not Iiable: By contrast, in West v Revenue and Customs , the appellant was the sole director and shareholder of a trading company. For a number of years, the appellant drew money from the company as director’s loans. However, the director’s loans remained outstanding and increased over a number of years. Following advice from an insolvency practitioner, the appellant's accountant was instructed to prepare accounts showing an amount of director’s remuneration which, after deducting PAYE and NIC, would be sufficient to offset the drawings on the director’s loan account. Subsequently, a resolution was passed for the winding up of the company. PAYE and NIC liabilities were still outstanding. HMRC sought to formally transfer the liabilities from the company to the appellant, on the basis that he received payments from the company knowing that it had wilfully failed to deduct sufficient tax.
The tribunal judge noted that the PAYE obligations fell on the employer, and this basic rule was set aside only in limited circumstances: (1) The employer did not deduct PAYE; (2) The failure was wilful and deliberate; and (3) The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax. HMRC had to show that all three circumstances were present. On the first condition, the tribunal judge found that tax was deducted from the remuneration provided by the company to the appellant; the total amount of PAYE and NIC liabilities was shown in the company's records. Thus the first condition was not satisfied. As all three conditions must be fulfilled, there was no basis for transferring the company's PAYE liability to the appellant. Furthermore, the tribunal judge found, on the facts and evidence, that the company's failure to pay the NIC liability was not wilful or deliberate. The appellant's appeal was allowed.
The decision in West begs the question whether it leaves the door open for company owners to pay themselves large amounts of remuneration, and allow the company to be liquidated owing substantial PAYE and NIC liabilities. In West, the tribunal panel reached different decisions (but the tribunal judge had the casting vote). The other tribunal member expressed concerns on this point. The tribunal judge commented: 'Although I have concerns as to the consequences of allowing Mr West’s appeal, I do not consider that the legislation in its current state is sufficient to deal with the problems to which [the disagreeing tribunal member] refers.’ A change in the law therefore seems a possibility.
Student Loan Repayments
Changes to student loan collection from April 2016.
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HM Revenue and Customs (HMRC). Employers have an obligation to deduct student loan repayments in certain circumstances, and to account for such payments 'in like manner as income tax payable under the Taxes Acts'.
With effect from 6 April 2016, there are two plan types for student loan repayments:
Plan 1 loans are pre-September 2012 income contingent student loans, and repayments will start when the £17,495 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £21,000 is reached. Previously, these have been repaid outside of the payroll directly to the SLC. From April 2016, they are to be calculated and repaid via deduction from an employer's payroll. So, employers and payrolls must now be capable of coping with both types of plans.
Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee's pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).
Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.
Owe tax to HMRC – take advantage of a campaign
Taxpayers who have not told HMRC about all their income and gains can make a disclosure online. It is always better to tell HMRC rather than waiting for HMRC to come to you. Even with the best of intentions, it is easy to make mistakes.
HMRC run various campaigns which encourage people to get their tax affairs up to date in return for more favourable terms.
Let property campaign
The let property campaign is open to all residential landlords with undisclosed taxes. This may include:
• landlords with multiple properties;
• landlords with single rentals;
• specialist landlords letting property to a particular type of tenant, such as student lets;
• holiday lettings;
• individuals renting out a room in their home under the rent-a-room scheme.
Those who rent out their home while abroad may also be able to use the scheme.
Credit card sales campaign
The credit card sales campaign is a settlement opportunity for individuals and companies who accept credit and debit cards and who have not reported credit and debit card transactions on a tax return. Reduced penalties are offered for making a disclosure
Second incomes campaign
The second incomes campaign is aimed at employed individuals who have additional income which is not taxed through PAYE and which has not been declared to HMRC. Taxpayers making a disclosure under the scheme benefit from reduced penalties.
Making a disclosure
An individual who wishes to take advantage of a campaign to tell HMRC about undeclared income and gains, must follow the following procedure:
The first step is notify HMRC of the intention to make a disclosure under the campaign. This can be done either by filling in the notification form or by calling the relevant campaign helpline. The taxpayer will be given a disclosure reference number (DRN).
Once HMRC have been notified of the intention to make a disclosure under the campaign, the next stage is to make the disclosure. The disclosure must be made within 90 days of the date on which the notification acknowledgement is received. The DRN must be quoted.
Once the disclosure is complete, the taxpayer must then complete the declaration. This is an important part of the disclosure and should be taken seriously.
The taxpayer must make an offer for the full amount owed. The offer, together with HMRC’s acceptance letter, creates a legally binding contract between the taxpayer and HMRC. Letters of offer are included in the disclosure forms, which the landlord or his or her agent must complete.
HMRC will review the disclosure and if they decide to accept it, an acceptance letter will be sent. In some cases they will undertake further enquiries. It is advisable to co-operate as this will ensure the best possible outcome in terms of penalties.
Unless HMRC have granted additional time to pay, payment should be made within 90 days of the deadline given on the notification acknowledgement letter. The Payment Reference Number (PRN) should be quoted when making the payment.
Overdrawn Directors' Loan Accounts
Overdrawn Directors' Loan Accounts – Traps to Avoid
The loans to participators provisions are relatively well-known among affected taxpayers. The legislation imposes a 25% tax charge in respect of loans or advances to participators.
The tax charge can be prevented on an overdrawn directors loan account to the extent that the 'Ioan' is repaid up to nine months after the end of the company's accounting period in which it is made. There is also relief if the loan is repaid or written off after that period.
'Bed and breakfasting’
There are anti-avoidance rules to rules to block 'bed and breakfasting’.
This practice involves the shareholder repaying the overdrawn loan account balance either just before the end of the accounting period or within the following nine months, so that the 25% tax charge is not due. The shareholder might then withdraw a similar (or greater) amount from the company shortly thereafter.
lf the anti-avoidance provisions apply, relief from the above tax charge is broadly denied (or withdrawn, if already given). The provisions can apply in the following circumstances:
If 'caught' by either of the above rules, the effect is broadly that the repayment is treated as repaying the 'new' loan(s), rather than the earlier ('old') one(s). Relief from the 25% charge is therefore wholly or partly denied (or withdrawn) in respect of the 'old' loan(s) (i.e. relief will only be potentially available to the extent that the repayment exceeds the 'new' loan(s)).
Repayments not 'caught'
However, the above anti-avoidance rules do not apply if the directors' loan account repayment gives rise to an income tax charge on the director shareholder (see below).
HMRC accepts that repayments can be made via 'book entries' in the company's accounting records, at the date when the book entries are made.
...Or are they?
The most common ways to repay an overdrawn directors' loan account balance in a 'taxable' form is by crediting the loan account with their salary or a bonus from the company. Similarly, a dividend from the company may be credited to the loan account.
Tax Return Enquiries: Check The Small Print
The UK's tax system might seem harsh to taxpayers who make a mistake, such as where a tax return error results in a penalty. Taxpayers (and their advisers) could be forgiven for thinking that in contrast, when HM Revenue and Customs (HMRC) makes a mistake such as a procedural or clerical error when opening an enquiry into a tax return, it suffers no significant repercussions. Whilst this will often be the case, the tax legislation does not always save HMRC from a fall when they slip up.
For example, in Mabbutt v Revenue and Customs , HMRC issued by letter a notice of its intention to enquire into the appellant's tax return 'for the year ending 6 April 2009’.
The appellant's agent pointed out to HMRC that the notice of enquiry did not refer to the tax year ended 5 April 2009. HMRC’s response was that the letter was a valid notice of its intention to enquire into the appellant's tax return for the year ended 5 April 2009. HMRC argued that the notice was 'saved' by legislation dealing with errors in assessments, etc. (see below).
HMRC later closed the enquiry. The difference between the calculations of HMRC and the appellant in respect of his tax liability for the year ended 5 April 2009 was around £653,000. The appellant appealed against HMRC's conclusions in the closure notice, and contended that an enquiry was not opened because no valid notice of enquiry was given.
An escape route for HMRC?
HMRC sought protection from its error by relying on TMA 1970, s 114(1), which broadly provides that assessments etc., are not invalidated by errors in certain circumstances. The First-tier Tribunal in Mabbutt considered that there are four requirements in s 114(1):
1. the provision only applies to certain documents, and an HMRC notice of enquiry must be one of them;
2. HMRC’s notice of enquiry must purport to be made pursuant to a provision of the Taxes Acts;
3. the notice of enquiry must be 'in substance and effect in conformity with or according to the intent and meaning of the Taxes Acts’; and
4. the person or property charged or affected by the notice of enquiry must be 'designated therein according to common intent and understanding.'
The tribunal held that the requirements in 1, 2 and 4 were all satisfied. Howeven the tribunal concluded that requirement 3 above was not satisfied, as the return described in HMRC’s letter giving notice of the enquiry was for a tax year which did not exist.
ln order to rely on s 114 to cure the error in the notice of enquiry sent to the appellant, HMRC needed to satisfy the tribunal that all four requirements in s 114(1) were met. Although satisfied that three of them were met, the tribunal held that the error in HMRC’s letter resulted in a stated intention to enquire into a tax return for a year which did not exist, and that 'the substance and effect did not conform to the intent and meaning of the Taxes Acts.'
The tribunal concluded that HMRC’s enquiry notice did not constitute a valid notice of enquiry into the appellant’s return for the tax year ended 5 April 2009, and s 114 did not apply to save the disputed notice. Without a valid enquiry notice, there was no enquiry. HMRC’s purported closure notice therefore had no standing. The appellant’s appeal was allowed.
Tip: Even though HMRC lost the above case, could they not have simply issued a new, correct tax return enquiry notice? In many cases, they can. However, in Mabbutt, HMRC were out of time to do so. ln addition, by the time this case reached the tribunal, HMRC were also out of time to raise a discovery assessment (under TMA 1970, s 29) outside the normal tax return enquiry window. HMRC’s error was therefore costly - to the tune of about £653,000.
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