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Director/shareholder reward packages: The dynamics have changed

Introduction

The introduction of the Employment Allowance (“EA”) allows employers a discount of up to £2,000 off their liability to Employers’ NIC. This has added another factor into the salary vs dividend debate.

There is one other complicating factor as well. The level of other taxable, non-dividend, income enjoyed by the director/shareholder.

If there’s no other income

A salary equivalent to the director’s personal allowance is most efficient. The additional NIC paid by the director (at 12% on the excess over £8,060) is more than compensated by the additional corporation tax saving at 20%.

With no other employees, this works for companies with up to 5 directors/ shareholders.

What if the director has other income?

Many directors own the company premises, and enjoy a rent from that. Where rent (or indeed any other taxable income) is enjoyed by the director, a little more care is needed. The optimal position would be to create total taxable income (excluding dividends) of exactly £10,600 (for 2015/16). So if the director was receiving rent of £3,000 a year, the ideal salary would be £7,600.

What about pensions?

There are two aspects to this.

Contributions to a private pension scheme
Dividends do not count as pensionable income, and so tax relief on personal contributions would be limited to the amount of taxable salary. (Rent doesn’t count either).

The simplest way around this is to get the company to make an employer contribution, but you may need a different kind of pension scheme, and this may need to be negotiated/agreed with fellow directors.

I had just such a case where one of three directors wanted to top up his pension. Unfortunately, the wider savings from the low salary route meant his tax relief was limited to just £5,000, as he already had two smaller schemes running, and the company did not have sufficient profits to get full tax relief on even that small amount.

State pension entitlement
Employees are credited with a year’s worth of contributions if their weekly earnings exceed £112.00 (2015/16 rates). Therefore, the director will need a salary of at least £5,824 to add another year to their state pension accrual. In the example above, a salary of £7,000 meets the criteria, but what if the rental income was £6,000?

Voting a salary of £5,824 would take the director into income tax, as total income would exceed the personal allowance.

At 2015/16 rates, this would impose an income tax bill of £244.80 on the director, but would add a year to the pension entitlement. The cost-benefit decision is personal to each individual; is an extra year’s pension worth paying that tax?

The factors to consider are:

  • how many years before you can take your pension,
  • how long you think you’ll be around to enjoy it, and
  • how much more could you generate in income by saving that tax over the years before you retire/

among others.

Creating alternative income

If the circumstances allow, it may be more efficient to draw one’s income as rent or interest from your own company, rather than by way of salary.

Rent

Any rent charged must be at a market rate. We would suggest that a written agreement is drawn up, making it clear who is responsible for repairs etc., as well as covering the amount of the rent.

Interest

A director can only charge interest to his company if he has a loan account in credit, and there is an obligation on the company to pay interest. Any “interest” paid on a loan which was intended to be interest-free could be challenged and treated as remuneration. In order to avoid any uncertainty, we would suggest a written agreement, which makes clear the terms of the loan. The agreement does not need to be onerous, but a clear statement can help to avoid later disputes.

Action

The start of a new tax year is a good time to review your financial position, as many rates and allowances change. Thankfully, for directors’ salaries, the annual earnings period means you haven’t lost out if your review has not yet been completed.

Contact your adviser, or drop us a line if you’d like a review done of your personal situation.

Numbers (UK) Limited

5 May 2015

Budget 2014

With many forecasters predicting a quiet budget, you would think there’s not much to report. Think again. There is a vast amount of change incorporated. This blog sets out the main changes, and some of the points for action that SMEs may want to consider….

  1. General taxation

1.1 Tax thresholds

The tax free threshold rises to £10,000, with a further increase to £10,500 in April 2015. The NIC threshold for both employee and employer contributions increases to £153 per week (£663 per month or £7,956 per annum)

Action: If you have adopted the traditional low salary/ dividend reward structure you’ll need to adjust the amounts to keep to the most efficient split.

1.2 Savings rate

From 2015, the Chancellor has abolished the 10% rate for the first £2,880 of savings income, has made it tax free. He has also extended the band to £5,000.

From April 2015, company owners may be able to take up to £15,500 a year tax free, by careful planning of their reward between interest on a DLA, salary and/or rent. This would save over £3,000 a year at current corporation tax rates.

1.3 Transferable allowances

Also in April 2015, it will be possible to transfer up to £1,050 of allowance from a non-taxpaying spouse or civil partner. The maximum amount is set at 10% of the basic personal allowance, so should rise each year.

Action: It becomes easier to maximise tax free income, but a fully transferable allowance would have addressed the current unfairness for families where one partner stays at home and doesn’t earn an income. Now would be a good time to review the current structure of a business to see if it facilitates the tax minimisation offered.

  1. Employment taxes

2.1 Employment allowance

The new employment allowance is worth up to £2,000 per year. It is limited to the amount of employer NICs payable by an employer, and has several conditions attached but will be a valuable boost to cashflow.

Action: Employers must claim the allowance on their first EPS under RTI. It will then be deducted automatically by HMRC from the amount due.

Failure to do this could lead to a delay or even total loss in getting the relief. As someone who has spent a large part of the last year correcting errors made by HMRC under the new RTI system, I face this change with more than a little dread

2.2 Low interest/ interest free loans

The limit is being doubled to £10,000 from April. Essentially to help South East commuters with the cost of their season tickets, there’s no reason why the rest of us cannot look to motivate staff by offering this as part of their deal.

Funding a new car for them may be one idea, but remember, they have to pay it back from taxed income, and you should ensure you can get the loan back should they leave your employment.

And if they have personal debts, on which they are paying interest, you could save them money in their household budget, in lieu of a pay rise.

Action: Review remuneration packages for all staff to see if this could be a tax free way of boosting their personal finances.

2.3 New child care scheme

This has received a lot of press, although it doesn’t start until April 2015. Employees are going to be able to claim tax relief on up to £10,000 of child care costs, but only if both spouses are working. If one stays at home, then you won’t qualify.

Action: Employers should review the new scheme and advise employees of the forthcoming changes. Employees should work out if they are going to better off, and if not, perhaps look to enter a scheme now before the changes are implemented.

2.4 NIC for under 21s

April 2015 will see the abolition of NICs on wages paid to under 21s, provided they don’t earn above the Upper Earnings Limit (£805 for 2014/15). While this may be welcome, it may make over 21s too expensive by comparison. For example, a 21 year old on minimum wage will cost over £273 per week from April 2015. A younger person would cost only £205 for the same working week.

Mind you, there is a 33% increase in cost on that person’s 21 birthday, so it may not be “Many Happy Returns” from employers.

Action: Employers will need to cost very carefully to ensure that the extra maturity/experience of older staff outweigh the considerable increase in costs.

2.5 Employee share schemes

The value of “free shares” that can be acquired under the Share Incentive Plan (“SIP”) is to double to £3,600. There is a similar increase in the value of partnership shares that can be bought under the scheme.

Action: review the available share schemes as part of a wider reward package review ahead of auto-enrolment. With the right product, you can actually secure savings for both employer and employee. Contact us for details.

2.6 Benefits in kind

Car and van fuel benefits are to increase in line with inflation for the next few years. Car benefit scale rates are increasing substantially, and could be as much as 37% of the car’s list price by 2016/17. Tax could be over £3,000 per year for each vehicle.

Action: review all company vehicles and work out whether you and/or your employee might be better off with a privately owned vehicle, particularly if the employer can lend up to £10,000 towards the purchase price. (See para 2.2 above).

  1. Pension taxation

Perhaps the biggest surprise in this year’s budget were the changes to pension funds. The cut in limits had been announced in advance, but the extra flexibility on taking the pension was a welcome surprise.

3.1 Contribution and fund limits

The annual amount of tax relieved contributions is cut from £50,000 to £40,000 from April 2014. The lifetime limit is also cut, by 1/6th, from £1.5M to £1.25M. The cut in annual limit might affect those who have a final salary scheme and who receive a big pay rise or a promotion to a higher paid post. A pay rise of as little as £2,500 could result in a tax charge that takes away some of the pleasure of getting it in the first place.

If you have a final salary pension scheme, ask your employer to find out if you’ll have to pay the tax on the deemed annual increase in fund value, when offered any significant pay rise.

3.2 Taking your pension

The Chancellor made so many proposals today (19 March 2014), that he needs a separate Act of parliament to legislate it all. On the whole, it is very good news. You will no longer have to take an annuity on or before the age of 75. Neither will you face the penal tax charge of 55% if you choose to take more than the tax free lump sum. You’ll be taxed at your marginal rate, which will be much lower for most people.

3.3 Small pension posts

If your pension savings total less than £30,000, you will be able to take the whole amount tax free. The current limit is about £18,000. If your total funds are worth more than £30,000, you’ll still be able to take up to three in total if individually, they are worth less than £10,000 each. The previous limit was £2,000.

3.4 Income drawdown

The limits have been improved here as well, with a reduction in the income needed to qualify (to £12,000 from £20,000) and an increase in the amount you can take (from 125% of the equivalent annuity to 150%).

Action: Although the changes take effect from 27 March 2014, legislation is required. In any event, it is even more important to take independent advice, as the breadth of options has increased significantly.

We can recommend a good financial adviser from our panel.

4 Business taxation

4.1 Capital allowances

Up to £500,000 of qualifying capital investment can be written off against profits in the year in which it is incurred. The increase (from £250,000) takes effect from April 2014. Previously, we were expecting the limit to drop back down to £25,000, but this is not enough to make major investments.

Action: Review your investment plans, and if tax relief is a vital factor in affordability, consider making the investment before April 2015, when the relief may be cut. 

4.2 R&D tax credits

Most businesses invest in R&D, most without realising it. The amount of expenditure that can be offset against profits (current or future) is 200% of the actual amount that qualifies. This can be surrendered for a cash payment. In the 2014 budget, the percentage cash refund is increased from 11% to 14.5%, for expenditure incurred on or after 1 April 2014.

Action: Review your business to see what, if any, expenditure qualifies, or ask us to conduct the review for you.

4.3 Corporate tax rates

The “main” rate of Corporation Tax drops from 23% to 21% from 1 April 2014. Having an inefficient group structure, or a series of associated companies has thus become less expensive. The marginal rate of tax will fall from 23.75% to 21.25%.

Action: There is now very little “damage” in terms of extra tax in setting up numerous companies all controlled by the same individual or group. A review of business strategy should be done to identify whether the “hiving off” of activities into separate companies may be of benefit.

4.4 Other changes

Improvements to various investment schemes (e.g. SEIS) have been made.

Action: Review these schemes as part of your overall investment/tax mitigation strategy. We hold joint meeting for clients with an IFA to cover the broadest possible spectrum of options, so call if this is of interest.

4.5 Partnership taxation

Although this is termed as anti-avoidance, the imposition of employment taxes on salaries partners in LLPs, and the cancellation of tax motivated profit share allocations in all partnerships, may hit innocent partnerships. Where profits have been allocated on a commercial basis, perhaps in line with a partnership agreement, HMRC should hold back from imposing a tax charge.

Action: review your partnership profit sharing arrangements and structure to ensure it is commercially defensible. Review the new legislation when it is published and make amendments if you feel vulnerable.

4.6 VAT registration limits

These are increased to £81,000 (from £79,000), with the deregistration limit increasing by £2,000 as well, to £79,000.

Action: Review your business transactions to see if you still need to be VAT-registered, or if you can gain an advantage by using one of the Vat schemes available (e.g. flat rate scheme, cash accounting or annual accounting).

  1. Future changes

There’s a lot of changes already planned in for 2015 and 2016, so watch our social media output for details!

Numbers (UK) Limited

19 March 2014

George’s Marvellous (?) Medicine

Introduction

George Osborne has just delivered his last Budget speech before the election. As it stands, the election is too close to call, so who knows if he’ll get another opportunity.

This was a highly political budget, but included a huge number of changes. I’ll attempt to summarise those changes, and list some action points.

Overview

The budget has been delivered against a background of higher growth, and lower inflation. This has given the Chancellor a large degree of room for manoeuvre. He has used this to announce a wide range of changes, while continuing to reduce the expected deficit.

He now expects to return to a surplus in 2018/19, meaning the national debt will eventually start to fall then. These figures have been based on reasonable growth forecasts of an average of 2.4% per annum over the next Parliament.

Changes affecting individuals

Income tax

The increase in the personal allowance is welcomed, if you earn over £10,000 per year. This will save around £10 per month for a basic rate taxpayer.

The higher rate threshold will increase to £42,385 from next month, then £42,700 and £43,300 over the next two years.

The amount of Marriage Allowance that can be transferred is increased to £1,100, meaning the saving increases from £212 to £220.

National Insurance

The rates already announced in December 2014 have not been adjusted. The change will save someone on the average Plymouth salary about £1 per month.

Tax credits

There are small increases to the amounts, and the income thresholds beyond which they are withdrawn.

Savings and pensions

There’s a big increase in the amount of savings income that you can earn tax free, if your other income is less than £15,600 next year. If you fit the criteria, you may be able to earn up to £15,600 a year free of tax, even without the use of ISAs.

For every basic rate taxpayer, the first £1,000 of savings income will be exempt from tax.

ISAs are to be far more flexible. You will be able to take money out, and put it back in later, without the repayment counting towards your annual limit.

Pensioners are to have even more flexibility, including the ability to “sell” their annuities in return for a lump sum. Care must be taken as the “Red Book” contains a forecast of £0.5 billion of tax on these transactions, implying

The lifetime limit for pension saving will be cut to £1 million. Last time the limit was cut, there was an election that could be made to protect the tax free status of funds already accumulated in excess of the reduced limit, so we must expect a similar situation. A visit to your friendly IFA is definitely a good idea! Please contact us if you need a referral.

Using an ISA to buy a home

First time buyers will be given an incentive to help them raise a deposit. For every £200 saved, the Government will contribute £50, up to a limit of £12,000 of savings. You can read full details of the scheme here. The scheme is due to open in Autumn 2015.

The Death of the Tax Return

Mark Twain once said “The reports of my death have been greatly exaggerated.” It is a similar situation with the tax return. While the annual rush to meet the January deadline should go, you will be able (required?) to complete your online tax account throughout the year. It should make life a lot easier for people who have tax deducted at source, but will still require those in receipt of untaxed income to advise HMRC of the amounts.

It is worth pointing out that there will have to be a deadline, to ensure that information is uploaded on a reasonably timely basis. In the old days, before Self-Assessment, a lot of time and money was wasted in unnecessary legal action by HMRC, trying to get accurate figures from taxpayers.

Changes affecting businesses

Class 2 NIC

The £2.80 weekly levy will be abolished. For many years, it has been used simply as a device to ensure the self-employed register for income tax, so its abolition will not change the dynamics a great deal. It will make it slightly less attractive to run as a limited company. Profits will have to be in excess of £8,060 per annum before the savings start, rather than around £5,500.

Employment Allowance

Employers will continue to receive up to £2,000 per annum of discount on their employer NICs. Unfortunately, it is not transferable if you would otherwise pay less than that.

Employers’ NIC is abolished for under 21 year olds from April 2015, and for young apprentices from April 2016.

Small business rates relief

The doubling of relief continues for another year, meaning any business with a single premises of rateable value of less than £12,000 will still not pay business rates. There are other rules for businesses with multiple premises or whose only location exceeds that limit.

Improvements to tax relief schemes

The Chancellor announced improvements to the Film, High End TV Relief schemes.

Tax avoidance

There was the usual announcement on raising tax from attacking tax avoidance and evasion. The amount targeted this time is £3.1 billion.

Other changes

Money for South West transport schemes

There is £7 billion for investment in transport schemes in the South West. This should make Plymouth an even more attractive place to live and work.

New Enterprise Zone

A new zone based on Plymouth Dockyard was announced. Typically, there are business rate, capital allowances, and planning advantages for businesses located in Enterprise Zones.

A word of warning

The Budget includes a massive reduction in the deficit in 2016/17, which has to be paid for from higher taxes or expenditure cuts. We need to assume this is coming, and use the next 12 months to adjust our own budget so we are prepared for their budget changes.

Action to take

Families should rework their budgets and see if they can put aside some savings ready for the (even) leaner years to come.

Savers should contact an IFA to review the potential savings products and plans available, as they have become much more flexible, and will have greater flexibility still by Autumn 2015.

Small businesses should look at their chosen structure and consider whether a change to a limited company would be beneficial, or whether they should relocate to the new Enterprise Zone (when it’s et up).

All businesses should look at the detail of the enhanced tax relief schemes and see whether they can fit the criteria. It is particularly important for business in the new technology sectors (energy saving, online activities etc.)

Similarly, all businesses should be considering their plans to increase staffing over the next two years, and cost in both the increase in National Minimum Wage, and the cuts in NIC for employing young people.

Conclusion

Although it was trailed as “not a giveaway budget, there was a huge amount of new opportunities announced. While the detail has yet to be unveiled, it is well worth reading a good summary of the proposals, and asking your tax adviser to research those changes which may be of benefit to you, our family or your business.

Work ON, not IN!

[Originally a guest post on www.owenjonesdesign.com]

 Introduction

It is a real problem when you are doing something you love isn’t it?

You set up your business because you are good at something, or you are passionate about it, or both, but you never seem to make progress. You are busy doing what you love, but somehow it’s not as rewarding as you’d thought it would be.

Very often, that is because you are working IN, and not ON your business.

What’s the difference?

If you are going to reap the rewards of your hard work, then you’ll need to balance these two aspects. Before you can do that, you need to understand what they are.

Working in the business

This is basically doing the stuff for clients/customers that the business was set up to do. For Owen, this is producing high quality design ideas, and implementing them as part of the branding strategy. It involves meeting with the clients, getting to understand both what the client does, and the ethos underpinning that work. Similarly, we follow the same process of understanding the client and their objectives, whether we are preparing a succession plan and managing the process, preparing an Inheritance Tax planning report or discussing a business issue with a client as part of our PMI program (“The Numbers”).

Working on the business is different

This aspect makes the business, or more accurately its owner, the client. It may seem odd, but businesses are merely means to achieve the ends of their owners. If not, the owners become employees of their business, and will often earn more, with less stress, by finding employment with someone else!

Working ON the business involves taking a step away from the day-to-day tasks, and asking yourself strategic questions, like:

What things are important to me?

What does my life need to look like in five years’ time if I can count them a success?

What kind of work/clients do I want for my business?

What things do I need to change to get to those goals?

So, if it’s so important, why doesn’t it get done?

There are several reasons why not, and each requires a different remedy. Here’s a few ideas to get started. (But contact Owen and give him your own ideas!)

1.   The tyranny of the urgent.

So, you have a client deadline fast approaching, and it’s not going too well. The client is demanding a proposal/finished product/sample/presentation…….. and you’re running out of time. This happens to us all, but if you find it happens more than three times a year, ask yourself these questions.

  •  Am I overpromising?

Most clients will be relaxed about an extended deadline if they know about it early enough. Estimate a completion date, and then add an extra week/fortnight to give yourself time to do a quality job.

  •  Is this client worth busting a gut for?

If they are always hassling you, slow in responding, and unreasonable in demanding late changes to your brief, then the answer may well be “no”.

  •  Is the fee worthwhile?

Remember, a large fee is not always a good thing. Think about the time commitment, (including the initial marketing time) and work out an effective hourly rate. You will earn more by taking on two smaller jobs with a higher effective rate.

2.  It can wait.

Of course, long term planning is exactly that, long term, but what will you say in five years’ time? Can it still wait? There’s an old Chinese proverb that states “The best time to plant a tree was twenty years ago; the second best time is now.”

The problem is, every year you delay it puts you back another year in achieving your goals.

3. It’s not what I set up my business to do.

This goes back to my introduction. We get excited about the work the business does, and most of us do not run strategic planning businesses. Therefore, it doesn’t give us that same “buzz” as a well-executed project.

How to make it happen

  1. Schedule your “blue sky” thinking time.

I have a fixed Friday morning appointment in my diary. This 3 hour slot is split between working ON my business, and doing a specific marketing task, such as recording a video for our YouTube channel, or writing a blog. (That doesn’t mean that I don’t do marketing at any other time of the week).

Studies have shown that scheduling a task makes it 20 times more likely to happen. It is much easier to say to a client that you have a commitment if it’s in your diary, than being caught unprepared when the phone rings.

2.  Appoint a business coach or financially literate outsider to work with you.

In this way, you have an accountability partner, and you will make more effort to avoid letting them down. You are far more likely to get out of bed and go for that morning run, if you are meeting a friend, than if you plan to go alone.

A good business coach will earn you far more than their cost, by helping you achieve your goals.

3.  Tell as many people as you can that you are going to do this.

While you are not as accountable under idea 2 above, it is very embarrassing to tell a lot of people that you haven’t done what you promised yourself you would do!

4.  If you cannot afford a business coach, find a fellow business owner, (not a competitor), with whom you can share ideas, problems and your thoughts.

Again, scheduling a regular meeting will benefit both of you. You’ll be surprised how clearly you see solutions to problems that are not your own. Conclusion

Working ON your business is crucial to achieving your goals, but it is not easy to create the sense of urgency or the time to do it. Finding people to help is almost as essential.

If you’d like further advice or ideas, or want Owen or I to help you achieve your goals, get in touch. We’d be delighted to help.

A Government give-away (with conditions)

Introduction

One of the goods things to come out of recent budgets is the new holiday for Employer National Insurance Contributions (“NIC”). The Employment Allowance allows small and medium enterprises (“SME”) to deduct up to £2,000 from their employer NIC payments.

The details

The holiday is worth up to £2,000 per annum. This starts on April 6th 2014, and must be claimed by qualifying employers. HMRC are expecting employers to take the deduction as early as possible, so many will see the benefit on 19 May 2014 (when the first payment is NOT made.

You can only claim it once, even if you run more than one PAYE scheme. If you are part of a group, only one company can claim the allowance.

Who cannot claim?

The main exclusions are companies and organisations that provide “public sector” services. These include:

  • NHS services
  • General Practitioner services
  • the managing of housing stock owned by or for a local council
  • providing a meals on wheels service for a local council
  • refuse collection for a local council
  • prison services
  • collecting debt for a government department

but also includes those;

  • who employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • already claim the allowance through a connected company or charity
  • are a public authority, this includes; local, district, town and parish councils

How do we claim it?

The claim is made using your own payroll software, or by using HMRC’s own Basic PAYE Tools. You can check how much of the allowance you have claimed by logging on to HMRC’s online service and “Viewing PAYE Liabilities and Payments’.

Arrangements have been made for those employers who are exempt from online filing, and more detailed guidance is available on HMRC’s website.

Other issues

If you have more than one payroll, you can only claim against one of them. At the end of the tax year, if you have not claimed the whole £2,000, you can apply to HMRC to have the balance refunded on the second PAYE scheme.

If you do not apply for a refund, and have an unused balance (i.e. you have paid Employer NIC that you haven’t covered with the EA), you can set the balance off against future PAYE liabilities. Please note, you cannot generate an unused balance in any other way. Neither can employer NIC in excess of £2,000 per annum cannot be used to generate an unused balance.

You can claim EA up to four years after the tax year has closed, but HMRC will set off the refund arising against future or existing PAYE liabilities, unless you specifically ask for a refund.

So what will you do with the extra cash?

A maximum saving of £166.66 per month is not life-changing, but it can be put to good use.

You could give a pay rise to a lower paid worker. Passing on part of that could mean a significant increase (in percentage terms) for that employee. It can also help to head off any discontent. Pre-empting the rise in the National Minimum Wage (“NMW”) can present you as a caring employer, rather than one who has to be forced into giving pay rises.

However, you should consider taking the opportunity to remind them of the difficulties faced by small businesses, and their critical part in making you’re a success.

Alternatively, you could just bank the savings. Cash is king, and particularly when the banks are still not providing enough finance to the SME sector. £2,000 a year may not sound like much, but it can help as a source of free funding.

Perhaps a better alternative would be to use it to invest in updated equipment. If your credit rating is good enough, there are sources of cheap funding around. Replacing older computers, perhaps on a lease or HP contract, will increase productivity, and boost morale. It will also address the need to move on from Windows XP machines, following Microsoft’s withdrawal of support for that operating system.

Words of warning

It is unlikely, but you could lose eligibility part way through a tax year. If that happens, you have to make the appropriate change to your payroll software, and repay the Employment Allowance previously given!

If you use an outside payroll agency, you will need to advise them if you qualify, and of you cease to qualify. Some payroll agencies do not know enough about your business to determine whether you qualify.

If you change payroll software, you may need to file another EPS, to activate the Employment Allowance within the software, although HMRC will roll forward the entitlement each year.

Some employers run a separate payroll for paying senior staff, to maintain confidentiality. If you have more than one payroll, perhaps run by different providers, YOU will have to decide which one gets the EA, and advise all providers accordingly.

You can only deduct the EA from the Employer NIC, not the employee NIC and/or PAYE deducted. Make sure your payroll staff or provider know this, as there are now penalties for late payment of PAYE/NIC.

You will need to maintain records proving entitlement and the amounts claimed, for three years after the end of the tax year to which they relate. You cannot rely on HMRC to record the amounts claimed, and proof of entitlement.

What should we do next?

So there are a few thoughts for consideration. If we can help in your decision-making, please let us know.

Can I avoid a tax investigation?

Introduction

So the return is in, and we can breathe a sigh of relief, but is it all over?

We are often being asked this question “What chance is there that I get investigated by HMRC?” The truth is that you cannot entirely eliminate the risk of getting investigated, but you can minimise it.

Some clarification

First we need to tidy up the terminology! The word “investigation” is emotive. It suggests that the person selected is guilty of some misdemeanour, or even a crime!

HMRC use various words on their website, and in their literature to describe the same thing. You might have a “check”, an “enquiry” or a “review”. All of these simply mean HMRC want to check that you are paying the correct amount of tax, and at the correct time.

Time limits

Generally, HMRC have 12 months from the date the return is filed to open an investigation into your return. The deadline can be extended if you file your return late, amend a previous return, or they can prove that you have deliberately misled them.

So I could get a random check, but how do I minimise the risk?

Submit your returns on time

Some people may be tempted to submit returns late, particularly if they have liabilities that they cannot afford to pay. It is much better to submit the return on time, and ask for time to pay. While the response can vary, you are much less likely to get a positive response if you have a history of filing later returns. This applies not only to tax returns, but VAT, PAYE and corporation tax returns as well.

Use the “white space” or attach additional documents (where possible)

Many investigations are raised simply so HMRC can understand figures that fall outside the “norm” expected. Using the white space to explain significant variations from previous years, or from industry averages, can help HMRC to accept the figures without opening an enquiry. If they still open an enquiry, it can help to minimise any penalties if you can show “that we have already told you about….”

Don’t fall out with your staff, spouse or lover!

Many investigations start with a simple tip off to HMRC, usually from someone with a grudge against the taxpayer. The people closest to you often know more than you care to think, and know “where the skeletons are”. While HMRC don’t always take up these leads, they can tip the balance. The worst case we handled was where a landlord fell out with his girlfriend who happened to be his boss’s daughter! He lost his relationship, his job and got a tax investigation all in one week!

Use a good accountant

HMRC will never admit it, but they do know which accountants are professional, and which ones are, shall we say, less than competent.  Using a reputable firm should ensure that your return is correct (assuming you’ve told the accountant everything). Even if it’s not, you may not have to pay a penalty, as using a good accountant demonstrated that you took “reasonable care” over the return, which is one of the main grounds for appealing against a penalty.

Fee protection

Most accountants also offer insurance against their fees if your return is selected for a “check”. Like most policies, they are always conditions, but generally claims are met.

Some accountant’s policies also give them access to free advice lines, so they can clear any difficult or contentious points before your return is submitted.

The policies are not expensive, and can often be part of a membership (e.g. FSB) or as part of your general business insurance.

It helps avoid that irritating position where you have to accept HMRC’s opinion, even though it’s wrong, because “it’s cheaper to pay the tax.”

In summary

You cannot eliminate the risk, but using a good accountant, and paying a small insurance premium, can put you in the best position to defend yourself.

Don’t be frightened by the prospect of an HMRC investigation, be prepared!