Tribunal criticises HMRC for delay in issuing penalties

In a recent case, HMRC have been criticised for deliberately issuing penalties for late forms P35 (Payroll end of year forms) several months late, generating higher penalties than were necessary. A summary of the case is reported below.

This case has potentially wide ranging implications for other employers. Please do get in touch if you would like further guidance in this area.

The case (TC01286: Hok Ltd) concerned an appeal against a penalty of £400 for late filing of the 2009/10 P35. The penalty was calculated at £100 per month for four months. In October 2010 a further penalty of £100 was issued, given that the filing had taken place on the 15 October 2010 once the company had been alerted to its default.

The company argued that it thought it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledged that it was wrong and that HMRC was entitled to levy a penalty. However, the company argued that, if HMRC had notified it of its default, it would have been remedied it a far earlier time, thus avoiding ongoing penalties.

During the Tribunal HMRC stated that it runs a:

‘…structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return.’

The Tribunal was amazed by this and stated that:

‘….HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.’

‘There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing.’

‘In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice was sent out immediately after the 19 May in any year, instead of some four months later. That might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC).’

‘As, in our judgement, HMRC has neither acted fairly nor in good conscience, in the manner described above, we do not consider that any penalty is recoverable over and above the £100 penalty for the first month unless HMRC proves (the onus being upon it) that even if such a penalty notice, which would have acted as a reminder, had been issued, the default would nonetheless have continued. It has proved no such thing.’

Tax administration is the biggest burden for small businesses say FPB

Administering tax has become the top regulatory burden for small business owners, according to research conducted by the Forum of Private Business.

‘Tax-related regulation was deemed to be the most costly area of red tape, leaving smaller employers with a bill of £5.1 billion per year,’ the FPB said.

‘Employment law was second at £4.2 billion, followed by health and safety law at £3.8 billion. These results were quite different compared to the 2009 Cost of Compliance survey, which put employment law in first place, followed by health and safety in second and tax third.’

Forum members estimated that ‘they have missed out on business opportunities worth £29.8 billion due to the time and resources they spend on dealing with regulation’.

The total annual cost of compliance with legislation for the UK’s ‘smaller employer’ is estimated at £16.8 billion or £14,200 per firm, the FPB said.

‘While this is a rise of just 1% compared to two years ago, the increase is greater in real terms because economic activity, which drives the need for compliance, has shrunk significantly since the 2009 survey was carried out,’ said Jane Bennett, Head of Campaigns at the FPB.

HMRC announce VAT disclosure opportunity

H M Revenue & Customs (HMRC) is launching a new disclosure opportunity, this time aimed specifically at businesses evading VAT.

The initiative is aimed at businesses not registered for VAT but who are in fact been trading above the turnover threshold, currently £73,000 in a 12 month period.

In a similar vain to previous facilities, beneficial terms are on offer. HMRC states that most (but interestingly, not all) businesses making a full disclosure of under-declared VAT will pay a lower than normal penalty rate of 10% in addition to the tax and interest. Businesses must notify their intention to disclose by 30 September 2011 and then actually make a full disclosure and pay the additional liabilities, including the penalty, by 31 December 2011.

HMRC, in time-honoured fashion, has promised to begin investigating those who fail to come forward after the initial deadline passes on 30 September 2011, where it suspects evasion.

The announcement also promises to look favourably on the disclosure of other taxes associated with the trade, citing lower than normal, albeit unspecified, levels of penalties.

Putting your kids on the property ladder

Many people worry that their children will never be able to afford to buy a home, not without some help from Mum and Dad.

So, what are the tax implications of giving them a helping hand?

If they are aged 18 and above, the simple option is to make a gift of the deposit. You can provide a guarantee to the mortgage company. The gift of the deposit will be brought into the inheritance tax computation, but only if you die within seven years of making the gift.

If the children are under 18 the easiest option is to buy the property yourself (or yourselves, husband and wife together) and to gift it to the child when they become 18. There will be capital gains tax (CGT) to pay, if the property has gone up in value since you bought it. CGT is charged currently at up to 28%. The first £10,600 of gain per parent is exempt, and it is possible to give away a proportion of the house over a number of years. Although bear in mind the value of the property could go up, as you wait for another year to go by!

Perhaps a better option is to purchase the property in the first place with the child as beneficial owner, and the parent(s) as legal owner. This can be done with a simple declaration of a bare trust (held in the parent(s) name on behalf of the child. It is wise to get a solicitor to draw up the paperwork for this. This might make it more difficult to obtain a mortgage, a good broker should be able to help.

If the property is let, the income will be assessed on the parent(s). There is a way around this, if someone other than the parent(s) can provide the deposit, for example perhaps grandparents. Warning, do not think you can ‘give’ the deposit to someone, who can then give it to your child, this would be fraud!

Another option would be to set up a trust for your child or children, which could buy property. This is a complicated area, and professional advice is required.

When does a hobby become a business?

Image representing eBay as depicted in CrunchBase

Image via CrunchBase

HMRC are actively searching the internet for evidence of eBay traders that are consistently selling goods on eBay. They are known to be exploring the use of ‘internet robots’ to scour cyberspace!

And this activity is not necessarily restricted to eBay traders. What about car boot sales, sales via classified ads? Which raises an interesting question – when does a hobby become a trade, and more importantly, when do any surplus funds become subject to tax?

Generally speaking if you are selling your own private possessions you will not be trading. However you may be considered ‘in business’ if you habitually buy and sell goods on eBay and/or at car boot events. The list that follows is the published ‘badges of trade’ that HMRC use when considering this matter.

1. An intention to make a profit supports trading.
2. The number of transactions involved – systematic and repeated transactions support trade.
3. The nature of the goods sold – are the goods only capable of being turned to advantage by being sold? Or do they yield income, or give enjoyment through pride of ownership?
4. Existence of similar trading transactions – was this a one-off transaction or part of a pattern that suggests trading?
5. Changes to the goods – were the goods repaired, modified or improved to sell them more easily?
6. The way the sale was carried out – were the goods sold in a way that indicates trading, or to raise cash in an emergency?
7. The source of finance – was money borrowed to buy the goods? Were any profits to be used to repay the loan?
8. Interval of time between purchase and sale – goods being traded are usually bought then sold quickly
9. Method of acquisition of the goods – goods acquired by an inheritance, or as a gift, are less likely to be the subject of trade

As you can see one or more of these cases could apply to most hobbies.

The current penalty regimen adopted by HMRC precludes sticking your head in the sand. Don’t wait for the brown envelope to appear. If you are uncertain about the tax status of your money-making hobby call us now.

Enhanced by Zemanta

Capital Allowances on Plant

At present purchases of qualifying plant and other equipment can be written off against your taxable profits.

Tax relief is obtained by utilising the Annual Investment Allowance. For the current tax year, 2011-12, this amounts to a 100% write off with a limit of £100,000.

As with most opportunities all good things come to an end! From April 2012 the annual limit is being reduced to £25,000.

So if your plans over the next year or so include substantial investment in replacing worn out, or buying new, qualifying equipment, timing is absolutely critical.

Call us if you would like more information about these changes.

VAT on hot food

14 April 2006 German food is a teeeeeny bit he...

Image via Wikipedia

At present the more you prepare food for consumption, the more likely the supply will be considered a standard rated supply for VAT purposes.

HMRC turned their nose up when an EU case recently came to a different conclusion. A German trader succeeded in having the supply of a hot sausage treated as a supply at a reduced rate rather than a catered supply which would have been subject to the standard rate in Germany.

HMRC continues to view food sold on a takeout basis as a standard rated supply. However a recent UK case has drawn a further distinction:
•    Food sold and delivered hot, to be consumed hot, was held to be a standard rated supply, for instance a curry.
•    Food sold and delivered hot as part of its preparation, but it is not necessary that they be consumed whilst hot, were considered to be a zero rated supply. For example naan breads, salads etc.

So affected traders could now consider that they are making a split supply, some standard rated, some zero rated.

Now may be a good time to check and make sure that you are not including VAT for the supply of takeaway goods that can now be treated as zero rated. These could also include:

•    Cold sandwiches
•    Cakes
•    Biscuits (without chocolate covering)
•    Milkshakes
•    Frozen meals
•    Yoghurt

At present the more you prepare food for consumption, the more likely the supply will be considered a standard rated supply for VAT purposes.

Enhanced by Zemanta

P11d Dispensations

A dispensation is a notice from HM Revenue & Customs (HMRC) that removes the requirement to report certain expenses to them at the end of the year on forms P11D or P9D. There is also no need to pay any tax or National Insurance contributions to HMRC on items covered by a dispensation.
Once granted, dispensations last indefinitely. However, HMRC reviews them regularly – usually at intervals of five years or less – to make sure that the conditions under which they were issued still apply.
Expenses generally covered by a dispensation are:
• travel, including subsistence costs associated with business travel
• fuel for company cars
• hire car costs
• telephones
• business entertainment expenses
• credit cards used for business
• fees and subscriptions
HMRC strictly apply the dispensation from the date they accept an application, although in most cases they will agree to retrospective cover to the beginning of the current tax year.
The application process is fairly straight forward, complete and submit form P11DX. Do take care in completing the form. If you are at all unsure of the answers to the various questions, or would like us to apply for you, please contact us.

Capital allowances and property

Series of air conditioners at UNC-CH.

Image via Wikipedia

Landlords of residential property are at a disadvantage when it comes to claiming capital allowances on plant and machinery. Plant in a ‘dwelling house’ does not qualify for capital allowances. It is, however, still possible to claim capital allowances on plant installed in common areas.

Common areas, for example, in a block of flats.

Commercial property landlords suffer from no such restrictions and can claim capital allowances on the cost of any plant and machinery they install.

The rates of capital allowances vary according to thetype of the plant. Most items of  plant qualifies for a ‘writing down allowance’ at a rate of 20% per year – which will reduce to 18% from April 2012, but certain items which are ‘integral’ to a building only qualify for a lower rate of 10% – reducing to 8% from April 2012.

‘Integral’ plant includes:

  • Electrical systems
  • Cold water systems
  • Systems for heating, ventilation, hot water, and air conditioning
  • Lifts, escalators, and mechanical walkways
  • External solar shading

Annual Investment Allowance (AIA)

Any of the above types of plant, qualify for the Annual Investment Allowance (AIA), which gives tax relief for 100% of expenditure on plant and machinery up to a limit of £100,000 for the year. This limit is also being reduced in April 2012, to a mere £25,000, so if you were thinking of spending substantial amounts of money on plant in your building, now is the time.

A word of warning to limited companies – if your accounting period does not end on 31 March, the allowances are time apportioned. The details are complicated and you might want to take advice on this, particularly if it going to affect your decision on spending.

Most plant installed in a building is likely to be ’integral‘ as defined above, but with the AIA allowance, in many cases the expenditure will be covered by the AIA and will never be subject to the lower rate of writing down allowance.

Additional costs to claim!

The costs of transporting the plant to your building, and of installing it, are considered part of the cost of the plant, and can thus qualify for the AIA.

Also included is the cost of alterations to an existing building which are done for the purpose of installing plant and machinery. For example, if  installing a lift in a building, the cost of the lift shaft – including the bricks and mortar – can be treated as part of the cost of the lift itself, and thus will qualify for the AIA.

Note that this only applies when altering an existing building, not constructing a new one. If installing plant and machinery involves an extension to an existing building, you might be able to show that the alterations were ‘incidental’ to the installation of the plant and machinery. ‘Incidental’ has been defined asbeing required in order to install the plant. Liaise with your architect, builder, and quantity surveyor to ensure that all relevant expenditure is identified, the plans and the invoices should indicate those works that were ‘incidental’ to the installation. An appropriate proportion of these professionals’ fees can also be treated as part of the cost of the plant.

Act now, it may soon be too late!

If you purchased a building, together with plant, and have never claimed for the plant, you can still make a claim. However, the government started a consultation process in May 2011 on whether to continue to allow capital allowances claims on purchases of commercial property regardless of the purchase date. As the legislation stands at the moment a claim may be made for qualifying “plant and machinery” within the property with no time limitations applied as to the date of purchase.

It would seem that the government have realised, if the current regime continues, it will potentially be vulnerable to the loss of millions of pounds through tax rebates and reduced tax income. Given the  state of the public finances,  the UK the government wants to retain as much money in HMRC’s tax take as possible.

If the Government does manage to reduce how far one can go back in making a capital allowances claim then many owners will have lost out without ever realising it. Many landlords of homes in multiple occupation (HMO’s) have already lost out, to a great extent, due to changes that HMRC introduced in October 2010 as will many owners of furnished holiday lets (FHL’s) if they do not review how recent changes have affected their rights to make a capital allowances claim.

Enhanced by Zemanta