understands your needs?
helps you keep more of your income?
delivers custom solutions?
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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Passing Shares To The Children
Many family companies have been trading for generations. Shares are often gifted when parents are approaching retirement, and wish to pass the business reins to their adult children. Alternatively, parents may wish their children to have some of the company's shares and possibly receive dividends to help fund further education.
The potential tax implications of gifting shares between parent(s) and adult child (e.g. father to son) should not be overlooked. This article outlines some important points to consider. An alternative to gifting shares might be for the company to issue new shares to the children, but the tax implications of that arrangement are not considered here.
Gift or reward?
If the son (in the above example) works for the company, it needs to be considered whether the gifted shares are employment income. If so, there could be income tax and National Insurance contributions implications. For example, there may be a charge on general earnings, under the ‘employment related securities' provisions or possibly under the 'disguised remuneration’ rules.
To constitute the son’s employment income, the shares would have to be received by reason of his employment with the company. It is a question of fact whether the company's shares are being gifted by reason of the son’s employment, or family relationships. Even though father may only be passing the business on to his son for family reasons, there still needs to be sufficient evidence to establish or support that fact, to reduce the risk of challenge by HM Revenue and Customs (HMRC).
For capital gains tax purposes, the above gift of share from father to son will be treated as a disposal at market value. If the shares are standing at a gain, it may be important to consider whether a gift relief claim is available to 'hold over’ (i.e. defer) the gain. Care is needed. For example, the company must be a trading company (or the holding company of a trading group). In addition, gift relief may be restricted if the company has chargeable non-business assets, such as investment property.
For inheritance tax purposes, a gift from one individual to another is a potentially exempt transfer, which becomes exempt if the donor survives at least seven years. lf the donor dies within that period, the gift is a chargeable transfer, on which IHT may become due. Whether or not business property relief is available in respect of the shares may therefore be another important consideration.
Don't get settled!
Following the gifting of the shares, the 'settlements' anti-avoidance rules may need to be addressed if the son is an unmarried minor, and dividends are paid on the gifted shares.
If the son is an adult, the settlements provisions may still apply to treat dividends as his father’s income if, for example, there are arrangements for the son’s shares to be returned to father (or mother), or for the son’s parents to benefit from the son’s dividend income.
Dividends may seem a tax-efficient way to extract profits from a company. However, if the sonis a paid director or employee, HMRC may seek to tax dividends as general earnings (HMRC v PA Holdings Ltd), or possibly under the employment related securities provisions in certain circumstances, such as if the dividends are 'disguised' earnings.
HMRC is less likely to challenge dividends (in the above example) if the son’s shares are plain vanilla ordinary shares, and he is already being paid a commercial rate of remuneration by the company for his work.
The inheritance tax (IHT) regime includes various useful reliefs and exemptions.
Perhaps one of the less well known IHT exemptions relates to the maintenance of family members. This applies broadly to the following:
▪ maintenance of the spouse (or civil partner), or former spouse (e.g. on divorce);
▪ maintenance, etc., of the transferor’s children;
▪ maintenance, etc., of other people’s children;
▪ care or maintenance of a dependent relative; or
▪ maintenance, etc., of the transferor’s illegitimate children.
The exemption is subject to certain conditions in each case (see IHTA 1984, s 11).
Is that ‘reasonable’?
For example, the exemption in respect of ‘dependent relatives’ (as defined) applies to the extent that the disposition represents a reasonable provision for care and maintenance of the relative. But what is a ‘reasonable provision’?
This point was considered in McKelvey (Personal Representative of McKelvey Deceased) v Revenue and Customs Commissioners  SpC 694. In that case, the deceased (D) was a spinster who lived with her widowed mother (M), who was 85 years old, blind and in poor health. D was diagnosed with terminal cancer, and in 2003 gave away two houses she owned to M. D died in 2005, and M died in 2007.
HM Revenue and Customs (HMRC) sought to charge IHT on the value of D’s gift of the houses to M of £169,000. D’s executor appealed, on the grounds that the gifts were exempt transfers, being a reasonable provision for the care and maintenance of a dependent relative (within s 11(3)). The executor contended that D gave the houses to M so that they could be sold to pay for nursing care. The executor’s appeal was allowed in part. The Special Commissioner held that it was reasonable for D to assume that M would need residential nursing care, and concluded that ‘reasonable provision at the time the transfers were made amounted in all to £140,500’. This amount qualified for exemption under s 11 (the balance of £28,500 was a chargeable transfer).
HMRC’s guidance on what represents ‘reasonable’ provision for the care or maintenance of a dependent relative (at IHTM04177) indicates that regard needs to be given to the financial and other circumstances of the transferor and the relative and the degree of incapacity of infirmity of the latter. HMRC will enquire into the recipient’s ‘financial incapacity’, and will refuse the exemption to the extent that the recipient had sufficient income or capital to make adequate provision for their own maintenance (IHTM04179).
The exemption may be potentially useful if (for example) the transferor’s life expectancy is less than the seven year period necessary for a potentially exempt transfer to become exempt, or the normal two-year ownership period normally required for business property relief.
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.
Trade or Hobby
Many people have hobbies that generate money, such as buying and selling items at car boot sales or on eBay. Some individuals seek to claim that an activity is a taxable trade, rather than a non-taxable hobby so that they can claim relief for trading losses against other income.
Is there a trade?
HMRC examine loss relief claims and may contend that there is no trade. If there is no trade, there can be no trading loss. There is very little guidance on the meaning of 'trade' in the tax legislation and the lack of guidance has resulted in case law over the years.
The 'badges of trade’ are helpful in determining what constitutes a trade. HMRC guidance lists the following:
However, HMRC guidance also urges caution about relying too heavily on the badges of trade.
Is it commercial?
Even if it is accepted that there is a trade, HMRC will sometimes argue that the trade is not being undertaken on a commercial basis, and/or with a view to the realisation of profits of the trade. Sideways loss relief is not available in those circumstances.
A number of recent cases have considered whether a trade was carried on, and if so, whether sideways loss relief restriction applied:
The government announced in Budget 2016 a new allowance of £1,000 for trading and property income from April 2017. This will be helpful for those whose trading activities are on the smallest scale.
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.
Your Charter & HMRC Enquiries
Dealing with HM Revenue and Customs (HMRC) is rarely a pleasant task. For example an enquiry by HMRC into a self-employed individual’s tax return and accounts can be a time-consuming, stressful experience for the taxpayer not to mention the financial cost implications (e.g. additional professional fees).
Answering questions from, and generally interacting with, HMRC officers can be an intimidating experience, particularly during an enquiry. Fortunately, HMRC has a Charter for taxpayers ('Your Charter'). There is a legal requirement for the Charter to '...include standards of behaviour and values to which [HMRC] will aspire when dealing with people in the exercise of their functions’ (CRCA 2005, s 16A(2)).
'Your Charter' applies to the conduct of HMRC officers during an enquiry, although it is important to appreciate that it applies to HMRC's interactions with taxpayers generally. The Charter was amended in January 2016. The amended version broadly comprises seven taxpayer 'rights':
1. 'respect you and treat you as honest; 2. provide a helpful, efficient and effective service; 3. be professional and act with integrity; 4. protect your information and respect your privacy; 5. accept that someone else can represent you; 6. deal with complaints quickly and fairly; and 7. tackle those who bend or break the rules.'
How can it help? - In the context of a tax return enquiry, the rights that taxpayers and agents should monitor in particular are the first and third above; the first in respect of the HMRC officer’s conduct from the outset of the enquiry; and the third in terms of HMRC's approach to the enquiry in general (e.g. helping to keep the practitioner’s professional fees to the client as low as possible).
HMRC states: 'We'll presume that you’re telling us the truth, unless we have good reason to think otherwise.' However, taxpayers and agents might be forgiven for thinking that HMRC sometimes seem to take the opposite approach.
For example, in the course of a tax return enquiry, a self-employed individual with a cash-based business (e.g. a café proprietor) might find that HMRC attempt to discredit the accuracy and/or completeness of his accounting records (a practice commonly known as 'breaking the records'), with a possible view to increasing turnover and taxable profits for the year of enquiry (and possibly for other tax years, as well). A respectful reminder by the taxpayer or agent of the Charter standards required of HMRC may sometimes be appropriate.
Two-way traffic - interestingly, the latest Charter also contains seven 'obligations' (i.e. what HMRC expects from taxpayers), namely: 'be honest and respect our staff; work with us to get things right; find out what you need to do and keep us informed; keep accurate records and protect your information; know what your representative does on your behalf; respond in good time; and take reasonable care to avoid mistakes'.
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.
Service Companies - Can They Help?
Use of service companies by unincorporated businesses - Individuals who operate their businesses as sole traders or partnerships may sometimes wish that they operated through a company instead.
For example, changes to dividend taxation from April 2016 include an income tax rate of 0% on the first £5,000 of dividend income. If some of the company's shares are held by spouses and possibly other family members, the benefit can be multiplied.
However, there may be commercial and/or other reasons why the unincorporated business owner may not wish to incorporate and operate through a company. The same applies to introducing a company into a partnership of individuals (i.e. a 'mixed partnership’). The tax implications of both operations can also be complex and difficult.
Why use a service company? As a possible alternative to incorporating the business a service company might be considered, to operate alongside the existing unincorporated business. For example, some professional partnerships have traditionally used service companies. The trade of the service company might include providing accommodation, office and/or other ancillary services to the main partnership. The service company may possibly also deal with the partnership’s suppliers, engage staff, etc., and sell its services to the partnership with a suitable mark-up on its costs.
For tax purposes, the service company's charges in the above example could effectively move some partnership profits away from immediate (and often higher) rates of income tax (and NICs) otherwise chargeable on the individual partners, and into the service company (on which corporation tax is charged at 20% (for financial year 2016)). This could also potentially allow the partners to take dividends (in their capacity as the company's shareholders), and possibly to transfer shares to their spouses to enable them to do so.
Plenty to consider - This may sound fairly straightforward. However, there are numerous tax implications to consider, and some possible traps.
For example, the service company's charges must be commercially established. If the service company's charges are excessive, this could result in a 'double whammy’; corporation tax for the company on its profits, but with no tax deduction for the partnership for the service charges incurred.
The trading transactions between the service company and partnership should also be on arm's length terms including any credit afforded by the company to the partnership. Otherwise, a tax charge could arise for the company under the 'loan to participator' provisions. There may also be beneficial loan implications to consider for the partners in their capacity as directors or employees of the service company, in respect of monies owed to the company by the partnership.
There are various other potential tax issues of service company structures to consider (e.g. VAT, the 'settlements' anti-avoidance provisions if service company shares are transferred to family members, etc.). The decision to use a service company should be a commercial one; it should not be tax motivated.
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.
Joint Property And Form 17
lt is relatively common for an asset (e.g. an investment property) to be jointly held in the names of a married couple (or civil partners). The general rule is that those individuals are treated for income tax purposes as beneficially entitled to the property income in equal shares.
For example, Adam and Brenda are married and living together. Adam is a basic rate taxpayer and Brenda pays tax at the higher rate. They jointly own an investment property (i.e. Adam 75%; Brenda 25%). The property rental income is £10,000. Adam and Brenda each pay tax on income of £5,000.
Splitting income differently
However, this 50:50 rule is subject to certain exceptions (in ITA 2007, s 836). One important exception is if the individuals make a declaration to HM Revenue and Customs (HMRC) of their unequal beneficial interests (under s 837). This is sometimes called the 'form 17 rule’. It broadly allows a couple with unequal beneficial interests to be taxed on their actual entitlement to income from jointly held property.
Thus in the above example, following a valid form 17 declaration, Adam would pay tax (at 20%) on rental income of £7,500, and Brenda would pay tax (at 40%) on £2,500. Their overall income tax bill is therefore lower.
Points to watch
The form 17 process appears straightforward. However, in practice there are various issues and potential problems, some of which are outlined below.
1. Husband and wife (or civil partners) should check that they jointly own the property as 'tenants in common'. A form 17 election cannot be made (i.e. the property income cannot be split other than in equal shares) if the couple own the property as 'joint tenants'.
2. HMRC requires evidence that the couple's beneficial interests are unequal (75:25 in the above example), such as a written declaration or deed.
3. lf the property is jointly held in equal shares, it is not possible to make a declaration for income to be divided in unequal shares.
4. The form 17 rule therefore applies if the individuals are beneficially entitled to the income in unequal shares (s 837(1)(a)), such as 60:40, or even 100:0 (see HMRC's Trusts, Settlements and Estates manual at TSEM9848).
5. The declaration on form 17 must be made by both spouses jointly. For example, it cannot be made by one spouse if the other disagrees.
6. The declaration on form 17 must reach HMRC within 60 days from the date of signature of the last spouse to sign; otherwise, it is invalid. HMRC generally enforces this time limit strictly.
7. The form 17 rule only applies to income arising from the date of the declaration (s 837(4)). Thus a declaration made very late in the tax year may have little or no effect on the couple's overall tax position for that year.
8. HMRC treats a valid declaration on form 17 as continuing to apply in later tax years, until one spouse dies, the couple separate permanently or divorce, or the beneficial interest of a spouse in the property or income changes (see TSEM9864).
Tip: A declaration on form 17 can be useful for income tax purposes. However, there may be other tax implications to consider, depending on the circumstances (e.g. stamp duty land tax) as well as non-tax implications in transferring beneficial interests in property.
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 ...
Private Residence Relief ... continued
Relief is only restricted where part of the property is used exclusively for business purposes. Where a small business is run from a room in the home, ensuring that the room is also used for private purposes will preserve relief. For example, a room used as an office in the day could be used in the evenings for the children to do their homework. However, there must be some actual private use - simply leaving private possessions in the room will not be sufficient.
Restriction 2 - change of use
A residence may be altered or extended over time and its use may change frequently. Provision is made (in TCGA 1992, s 224(2)) to ensure that where the use of the property changes, the amount of the gain qualifying for PPR is adjusted in a manner which is `just and reasonable'.
The provisions are wide ranging in their application; they bite where there is a change in what is occupied as a person's residence as a result of the reconstruction or conversion of a building or for another reason, and there is a change in the part that is used for a trade, business, profession or vocation or for any other purposes. The adjustment to the relief will again depend on the facts in each case. However, the adjustment should reflect the extent to which, and the length of time over which, each part of the dwelling house has been used as its owner's only or main residence. Relief is allowed for the final 18 months of ownership for any part which at some time has been the owner's only or main residence.
It should be noted that this adjustment is only needed for periods where there is some residential use, but there are changes to the parts used for residential and non- residential purposes. If a property is used entirely as a main residence and is then used entirely for business purposes, relief is determined on a time-apportioned basis, with PPR relief being given for the period for which the property was the main residence or fell within the last 18 months of ownership.
Restriction 3 - development gains
The final restriction imposed by TCGA 1992, s 224 is in relation to development gains. The aim of PPR relief is to enable a home owner to buy a property of a similar standard in a rising market. The relief is not intended to exempt speculative development gains from tax.
Relief is restricted (by s 224(3)) in circumstances in which a house is acquired wholly or partly for the purposes of realising a gain from disposal, or where there is subsequent expenditure on a property with a view to enhancing the property in order to make a gain. In the first case, no PPR relief is available. In the second case, no relief is given to the extent that the gain made relates to the enhancement expenditure incurred solely for the purposes of making such a gain.
It should be noted that the restriction is not imposed where a householder buys (say) a home in an up and coming area in the hope that it will increase in value. The legislation is intended to apply where a property is bought specifically to make a gain, for example where someone buys a rundown property, does it up in six months and sells it at a profit. In a situation such as this it is also necessary to consider whether the individual is trading. A person who is in business as a property developer will be trading and their profits on sale will be subject to income tax rather than the gain being charged to capital gains tax.
Practical Tip: PPR is a valuable relief, but it only applies where the property is used as a sole or main residence. Where this is not the case, relief may be restricted.
Hotels, Guesthouses And Motels Are Trading – Aren’t They?
Will the general trading status of hotels, guesthouses and motels come under HMRC’s scrutiny.
The question whether an individual’s activities constitute a ‘trade’ or a ‘business’ can be an important one for tax purposes. For example, loss relief against the taxpayer’s other income (i.e. ‘sideways’ loss relief) is generally available in respect of trading losses, but not rental property business losses.
In the recent case Nott v Revenue & Customs , the taxpayer owned an estate including a ‘manor’ house, gardens, a farmyard area which included working farm buildings, and holiday accommodation units. There were eight units in total on the estate, six of which were holiday ‘cottages’. The taxpayer owned all but one of the six cottages (the other was owned by his sister). There were two residential cottages on the estate, one of which was occupied by the taxpayer as his home.
The holiday cottages were generally let for two weeks or less. Cooked breakfasts were offered, usually for an additional charge. A daily cleaning service was also offered, on request and for an additional charge. Other facilities available to guests included: recreational grounds; a ‘working farm’ environment including guided tours for children; a ‘concierge’ service; a pool and pool house; and a games area.
Following an enquiry into the taxpayer’s tax return for 2009/10, HMRC concluded that the income from the holiday cottage complex was property income from furnished holiday lettings, such that losses from that activity could not be set against the taxpayer’s income from other trades for Class 4 National Insurance contributions purposes (n.b. sideways relief for such losses also generally ceased to be available for income tax purposes from 2011/12). The taxpayer appealed.
Trading or property income?
In considering whether the income from the holiday cottage complex was trading or property income, the First-tier Tribunal was referred to several cases. The taxpayer and HMRC both argued that case law identified two factors which should be given particular weight in distinguishing property and trading income; firstly, whether the taxpayer was in occupation of the property; and secondly, the level of services provided to guests by the taxpayer in relation to that property.
On the first issue of occupation, the tribunal concluded that the taxpayer did not ‘occupy’ each of the units. The taxpayer had contended that the estate, including the units, should properly be viewed as a single parcel of land, of which he was the occupier. However, the tribunal considered that argument unsustainable, because the estate was not comprised solely of the units. On the second issue of the additional services provided, the tribunal considered that they were largely consistent with the services normally provided by a landlord of furnished holiday accommodation. The taxpayer’s appeal was dismissed.
A worrying comment
The taxpayer in Nott also argued that his activity was, in all material respects, indistinguishable from that of many hotels and bed and breakfast establishments. The tribunal noted that some hotels provide very little in the way of additional services, while at the other end of the spectrum luxury hotels have available to rent self-contained properties within their grounds. The tribunal commented: ‘We would observe in passing that HMRC’s practice of treating all hotels and bed and breakfasts as trades may be unduly simplistic.’ Whilst this comment was obiter, and although decisions of the First-tier Tribunal do not create a binding precedent, it is a potentially worrying observation, as it could encourage HMRC to challenge the trading status of such establishments.
The tribunal considered that some ‘guiding principles’ were derived from authorities summarised in Maclean v Revenue and Customs Commissioners . One such principle offers a helpful clue on establishing a trade: ‘Activities over and above the mere exploitation of heritable property or turning to profitable account the land, of which he is the owner, may be significant enough to classify a man’s business as a trade. Whether the provision of services or other activities are significant enough to cross the line between land ownership and commercial enterprise in land is a question of fact and degree depending upon the nature and extent of the operations or activities concerned’.
What Are The Likely Effects on the VAT system of BREXIT?
It is still not clear when the UK will separate from the EU. However, it is quite likely that most trading rules and taxes will not change materially, as the UK will want to continue to trade freely with the EU.
In order to leave the EU, the UK needs to activate Article 50 of the Lisbon Treaty. Once Article 50 has been activated there is a negotiation process lasting two years that will lead to the UK leaving the EU. Therefore, the start of 2019 is probably the earliest date for an EU exit, so nothing will change until them.
Once the UK leaves the EU we will have more freedom to set our own VAT rates, so it is likely that some of the zero-ratings that were under threat from the EU will remain in place, and could be extended.
If the UK remains in the EU Single Market, our VAT system will remain very closely linked to the EU system and any charges will still apply to the UK. If the UK decided not to remain in the single market, we will not be bound by any changes to the EU VAT regime, but will have reduced access to the EU markets. However, to make it as simple as possible to trade with the EU, the UK is unlikely to change any of the main VAT regulations.
Businesses will no longer have to complete EC Sales lists or lntrastat Dispatches returns, and the distance sales thresholds will be unlikely to apply, so businesses should be able to zero-rate 'B2C’ (business to consumer) sales. The VAT return will be simplified as box 2, 3, 8 and 9 will no longer be required.
Sales of goods to the EU will still be zero-rated, although businesses will not be required to obtain the customer’s VAT number in order to zero-rate supplies but will, however, be required to treat the sales as exports. B2C sales should therefore be zero-rated, whereas they are currently subject to VAT.
Businesses supplying services into the EU will continue to be able to treat them as outside the scope of VAT, and no VAT will apply. It is likely that this treatment will also apply to supplies of services to private individuals (B2C), which are currently subject to standard rated UK VAT.
Other possible changes
Businesses supplying B2C electronic downloads into the EU will be required to register for the 'non-Union’ MOSS scheme, rather than the current system. This will require affected businesses to register for VAT in one EU member state and submit a ‘non-union’ MOSS return.
Goods purchased from the EU will no longer be treated as EU acquisitions, and will be treated in the same way as imports from outside the EU. There will, therefore, no longer be a requirement to account for acquisition tax on the UK VAT return, but import VAT will be due at the point of importation. This will add a small cashflow disadvantage for UK businesses buying from the EU. lntrastat Arrivals returns will no longer be required.
Services purchased from the EU will not be subject to VAT, but UK businesses will still have to account for VAT under the reverse charge procedures. This will, therefore, remain broadly the same as it is today.
In general terms, leaving the EU is likely to reduce administrative burdens on SMEs, but there may also be some cashflow disadvantages for businesses buying goods from the EU. Most other rules will probably remain broadly unchanged.
Contractor Loan Schemes - Beware
HMRC is challenging certain tax avoidance arrangements sometimes used by one man companies. Contractors and freelancers may be aware of schemes often referred to as ‘contractor loan schemes’ or ‘remuneration trusts’ which claim to avoid income tax by paying participants in the form of loans. This article outlines the arrangement and highlights reasons why such arrangements should be avoided.
How does the scheme operate?
In a contractor loans scheme, an individual is paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust. The payment is not made directly by the engaging company, and will be diverted through a chain of companies, trusts or partnerships.
Scheme promoters have claimed that payments are non-taxable, because they are just loans and don't count as income. However, since the loan is not paid back, the payments are to be treated as normal income and should be taxed accordingly. Those who use such schemes are highly likely to be regarded by HMRC as participating in tax avoidance arrangements, and this could result in additional taxes, penalties and interest becoming due.
In their guidance on the use of contractor loan schemes, HMRC specifically refer to the case of Boyle v HMRC  UKFTT 723 (TC), where the taxpayer’s appeals against discovery assessments and/or closure notices in respect of a scheme for 'soft currency loans' from his employer, an Isle of Man company, failed. The tribunal determined that the loans were not genuine and the money paid to Mr Boyle as loans was 'in substance and reality income from his employment’ and therefore taxable.
The first point to note is that all contractor loans schemes must be declared to HMRC. Once declared, the scheme promoter receives a scheme reference number, which must be passed on to all users of the scheme. So, if you are using a contractor loans scheme and you don’t show the correct scheme reference number on your tax return, you will be charged additional penalties. Note that HMRC also challenge undisclosed schemes, which means that even if a scheme hasn’t been declared, you may still need to pay additional tax, penalties and interest if you've used it.
Broadly, HMRC never 'approves' schemes, so the reality is that the reference number merely identifies users, which in turn, prompts HMRC to investigate it! It is also worth noting here that HMRC wins around 80% of avoidance cases that taxpayers take to court, and many more users choose to settle their affairs before that stage.
It is highly likely that an individual using a scheme will receive an 'accelerated payment notice’ (APN) from HMRC, requesting them to pay tax and NIC 'up front’, whilst the scheme is being investigated. The APN will only cover the tax or NICs advantage relating to the specific avoidance scheme covered by the APN. 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 points out that it may contact a scheme user’s clients to check their position relating to the contract. This may put vital working relationships at risk. HMRC may also seek information held by mortgage providers and other creditors about loans from schemes. If the level of income on your tax return is lower than the income disclosed on a mortgage application, HMRC may seek penalties.
If the loan was paid through a trust, inheritance tax may also be payable, either immediately or at some stage in the future.
HMRC strongly advises anyone using a scheme to withdraw from it and settle their tax affairs.
Entrepreneurs’ Relief: Timing matters
A valuable capital gains tax relief can easily be lost through unfortunate timing.
Entrepreneurs’ relief (ER) is among the most popular and well-known of tax reliefs. ER offers a capital gains tax (CGT) rate of 10% on net chargeable gains of up to £10 million. A claim for ER is available on a material disposal of business assets, such as an individual’s company shares, where certain conditions are satisfied.
A disposal of shares will typically involve a sale (or possibly a gift). However, for ER purposes the disposal of an interest in shares can also include a company purchase of its own shares from the individual shareholder. Such payments are normally treated as income distributions. However, if certain requirements are met, the shareholder is normally treated as receiving a capital payment instead.
Share disposals require certain alternative conditions to be met for ER purposes, depending on the circumstances. The most common of those conditions requires that the following criteria are met throughout the period of one year ending with the date of disposal: firstly, the company is the individual’s personal company and is either a trading company or the holding company of a trading group; and secondly, the individual is an officer or employee of the company (or, if the company is a trading group member, of one or more companies which are members of the trading group).
Thus ER can be inadvertently lost if the individual resigns as an officer and employee before the date of disposal of the shares.
ln Moore v Revenue v Customs  UKFTT 115 (TC), the taxpayer was a director shareholder of a trading company, and was also employed with the company under a contract of employment. Following a dispute between the taxpayer and the other director shareholders, it was agreed that the taxpayer would leave the business.
There were unsigned and undated Heads of Terms prepared in February 2009, in which it was agreed that the company would purchase 2,700 of the taxpayer's 3,000 shares. It was also agreed that the taxpayer's employment would be terminated, and that he would resign as a director.
Subsequently, at a general meeting of the company on 29 May 2009, it was resolved that the company would purchase the 2,700 shares from the taxpayer. On the same day, the taxpayer signed a compromise agreement for the termination of his employment, and also Companies House papers concerning his resignation as a director. However, that documentation stated the effective date of the taxpayer's resignation as 28 February 2009.
HMRC refused an ER claim on the share disposal, because the taxpayer was not an officer or employee of the company throughout the period of one year ending with the disposal of his shares on 29 May 2009. The taxpayer appealed.
A company purchase of own shares must comply with company law requirements to be valid. The First-tier Tribunal noted that a contract for the purchase must be approved in advance by resolution. That resolution was not passed until 29 May 2009. The taxpayer ceased to be a director or employee on 28 February 2009. Therefore, the 'officer or employee' condition for ER purposes was not satisfied for the one-year period up to the date of disposal on 29 May 2009. The taxpayer’s appeal was dismissed.
(The taxpayer in Moore continued to provide services to the company after his employment had ended. Even though he ceased to be a director and employee of the company in February 2009, it might have been possible to argue that he effectively continued to be an employee, based on ER case law. Unfortunately, in Moore the taxpayer’s services were provided through a personal service company, and not directly.)
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.
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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