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Tuesday, 28 August 2018 10:08

Will HMRC Come After You?

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HMRC are under pressure from politicians who are demanding that they recover more unpaid tax even though they delivered a record haul of almost 30 billion pounds from their compliance activity during the last financial year.

Despite popular opinion that some large companies ought to be targeted for their blatant tax avoidance, it appears that small business owners are more likely to be brought under the microscope. HMRC can opt to instigate criminal or civil investigations and the way in which business owners react initially often determines the way proceedings are handled. As a result, it is essential that expert advice is taken immediately.

This expert advice would normally be sought from an accountant but the cost of defence can be extremely expensive. An investigation can be targeted or random and it is up to the business owner to prove their innocence. It is not uncommon for investigations to last for longer than a year and to cost several thousands of pounds in accountancy fees. This is without any additional tax that may be found owing.

Insurance to pay accountancy fees in such circumstances is available but is costly because of both the volume of investigations and their length. Basically, on your own, you are a bad risk

Members of Your Business Community (YBC) enjoy this protection as part of their membership and by joining you will become a good risk relatively speaking.

We insure our cars and houses as routine so, for many, it is prudent to insure our businesses too.

Related items

  • Tax Investigation Is On The Increase
    Despite widespread media coverage of large companies blatant avoidance of paying tax, it is still the smallest of businesses coming under the microscope of HMRC.

    Surprisingly in the past sectors such as Barristers, Dentists and Doctors have come under investigation as well as the more expected areas such as Building and Motor related firms.

    However, with more and more people becoming self employed or running their own business, nobody is off limits for HMRC. Any additional tax found owing can be backdated and made worse by the addition of compound interest.

    A typical tax investigation lasts for around 17 months and costs around £5000 in accountancy fees to defend. Even without any extra tax to pay this is a hefty sum to pay to prove your innocence.

    Membership of Your Business Community (YBC) includes tax investigation insurance so that if your affairs come under examination your accountancy fees are paid for. It also provides Free Legal advice 24/7 and Free Tax advice during office hours

    We are often asked why isn’t our tax advice available 24/7 too and the answer is simple. If you need tax advice outside of office hours it is almost certain that you need to be speaking to a lawyer!

  • HMRC Vows To Crack Down On Use Of Freelance Jobs
    In relation to staff used for freelance jobs, a specialist HMRC team will target employers suspected of avoiding national insurance.

    HMRC has announced it is to form a specialist team to examine working practices at organisations that use staff for freelance jobs to fill what amount to full-time roles.

    Employers that persistently use office-based freelance workers to cover what would otherwise be full-time positions avoid offering individuals any of the associated benefits of full-time employment, such as sick pay, pensions and maternity leave, as well as avoiding employer national insurance contributions (NICs).

    If an organisation is found by HMRC to be in breach of existing laws, it could be fined up to 100% of the tax owed. The Treasury said it is currently owed more than £300m in lost national insurance contributions.

    It is unclear how widespread the practice is.  The crackdown comes at a time when HMRC is taking a renewed interest in the use of ‘umbrella companies’ to pay staff, and other unusual working arrangements that circumvent NICs and other taxes.

    Taxi-hailing app Uber and food delivery service Deliveroo are also legal cases over the status of their workers, who are currently classed as self-employed, with a tribunal decision on Uber’s case that has just come in as can be seen here:

    Uber's Employment Tribunal, on October 28th, ruled that two drivers who provide services to  Uber are 'workers' within the meaning of the Employment Rights Act 1996.

    This means they will be entitled to a limited number of employment rights .  Amongst other rights, they will be entitled to:-

    • 5.6 weeks' paid annual leave each year
    • a maximum 48 hour average working week, and rest breaks
    • the national minimum wage (and the national living wage)
    • protection of the whistleblowing legislation.

    As they are not employees, they will not be entitled to:-

    • the ability to claim unfair dismissal
    • the right to a statutory redundancy payment
    • the benefit of the implied term of trust and confidence
    • the protection of TUPE, if Uber sells its business

    I’m sure the verdict will be appealed and no doubt it is fact specific but be aware if you are taking on people under similar circumstances.

    Prime minister Theresa May recently announced a review of workers’ rights, amid concerns that almost half a million workers in the UK could be wrongly classed as self-employed. The review will look at whether the national living wage is being undermined, and what changes in legislation may need to be implemented as a result.

  • HMRC Targets Etsy, eBay and Gumtree Sellers
    Whilst this isn't new news (they started a push in 2012), HMRC are now stepping up a gear!

    According to The Telegraph, these websites are being forced to hand over customer account details – including their selling activity – as part of HMRC’s new legal powers that were extended last year.

    Have a read of the Telegraph's article, as it does give some details of how to look at what you are doing on line and whether you might need to declare your earnings.

  • The Myths Of First Year Profits
    Many people starting up in business are under the false impression that they don’t pay tax on their first year's profits. I have heard this more times than I can count from people in the infancy of a business so I thought it would be good to set the record straight.

    As a Sole trader, Partnership, or Limited liability partnership you pay tax through the self-assessment tax regime. Tax payments are required to be made in two equal instalments on 31 January and 31 July each year.

    A tax year runs from 6 April each year and ends on 5 April and income for this period is reported on an individual’s personal income tax return.

    So for the tax year 2015/16, you would ordinarily pay half your tax on 31 January 2016 and then the other half on 31 July 2016.

    How can this be you might ask?

    How can I pay half my tax for 2015/16 on 31 January 2016, as the tax year does not end until after that date – the 2015/16 tax year ends on 5 April 2016!

    Well, HMRC require you to make payments on account of your current year’s tax liability based on your total self-assessment income tax liability for the previous year. So for 2015/16, you would make two equal payments on account of this year’s tax liability but these would be set based on your overall tax liability for the previous year, 2014/15. When you have completed your tax return for the year 2015/16 and determined your actual liability you will be required to pay any balance, or HMRC will issue you with a refund if you have paid too much tax, and this will happen on 31 January 2017.

    All pretty confusing!

    So why do some people think you don’t pay tax on the first year's profits? Well, that is because you may not physically pay the tax until well over a year of starting your business, but you will still pay tax on the first years profits at some point, so be aware.

    To give an example:

    Let’s say Mr Blogs starts his business on 15 April 2015. His first accounts and income tax return will be made up to 5 April 2016, the tax year 2015/16.

    Ordinarily. for the tax year 2015/16, he would make payments on account based on his previous year’s liability on 31 January and 31 July 2016. However, as this is his first year he does not have a previous years self-assessment tax liability and HMRC would have no idea of what level to set the payments on account at. As a result, they do not request that he makes any.

    Instead, Mr Blogs will pay all of his 2015/16 income tax liability on 31 January 2017, when he is required to have filed his personal tax return for the year 2015/16. In addition this liability will trigger payments on account for the next tax year 2016/17 and the first instalment for this year will also be due on 31 January 2017, meaning he will have 18 months of tax to pay on that day!

    So whilst Mr Blogs starts his business on 15 April 2015 he does not pay any tax for almost 21 months. The first tax payment is due on 31 January 2017 but this is going to be a big payment of 18 months of tax in one go.

    So don’t be confused or misled into thinking your first years profits are tax free. They are not and you need to set aside money for your tax from the outset of starting your business.

    Things are simpler in terms of the rules for tax payments for Companies. They pay Corporation tax and the whole amount is paid in one go 9 months after their year-end.

    Rules for tax payments are complicated, so ensure you seek professional advice if you are unsure of what you need to do.

  • To Be Or Not To Be... Flat Rate VAT?
    Usually, how much VAT a business pays or claims back from HMRC is the difference between the VAT they charge their customers and the VAT they pay on their purchases.

    With the flat rate VAT scheme:

    • You pay a fixed rate of VAT based on your gross turnover – all business types are categorised and allocated a rate based on their type of work. You can see the rate applicable to your business by following this link: https://www.gov.uk/vat-flat-rate-scheme/vat-flat-rates
    • You keep the difference between what you charge your customers and what you pay over to HMRC.
    • You can’t reclaim the VAT on your costs any longer – except in certain cases for purchases of capital assets costing over £2,000.

    The scheme was introduced to try and simplify VAT accounting for small businesses. You can only join the scheme if your turnover (excluding VAT) is less than £150,000 and you must leave the scheme if your VAT inclusive turnover exceeds £230,000.

    Whilst introduced to simplify VAT for small businesses there is commercial advantage to be gained here in some cases. If the VAT you incur is less than typical for your business category then you can make money from the scheme. Additionally, if you are not required to register for VAT as your turnover is below the VAT registration threshold  - advantage can be gained with a voluntary registration under this scheme.

    We have clients that save several thousand pounds a year by registering on the flat rate VAT scheme. Could this benefit your business?