The pictures below I thought are well worth a look. The van looks great but a death trip I think – it would burn very easily. It was redesigned in Malawi (Africa).

The flat rate scheme for small businesses is designed to simplify the completion of VAT returns for small businesses but it can also save you money. Do not confuse this scheme with the flat rate scheme for farmers, which is completely different.

What happens is that rather than calculate the output and input VAT due every quarter, you simply apply a set percentage to your gross turnover (including the VAT charged to your customers) on a quarterly basis and this is the VAT due to HMRC.

To use the scheme your annual taxable supplies (excluding VAT) must be less than £150,000. Total income includes all income falling within UK VAT, which includes zero rated and exempt supplies such as letting a residential building, but not services supplied to customers outside the UK.  If you want to exclude certain income from the Flat rate VAT scheme, such as let property income, you must ensure that income is received by a different legal person than that which is applying for the scheme. . You must also not already use another special VAT scheme such as the second hand goods or tour operators scheme.

The fixed percentage that you apply depends on the particular trade sector that the majority of your business falls into. The percentages vary from 5% to 14.5%. The turnover to apply the percentage to includes all zero rated and exempt income.

To use the scheme you need to apply to HMRC.

If you buy any capital assets such as computers costing over £2000 each, you can apply to get the VAT back on these separately.

The scheme is designed to save on the administration costs of completing VAT returns, although you do still need to raise VAT invoices for your sales applying VAT at the normal VAT rate.

However it is also worth calculating how much VAT you would pay on this scheme compared to what you pay without the scheme to see if there is a VAT saving to be made by switching to this scheme. There is often a saving where you have a low value of purchases for your business sector, or make sales that fall into more than one trade sector.

So go check it out.

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What’s the argument? In the vast majority of situations with a small

Limited company, dividends are the answer and yet it’s still amazing the number of companies that don’t use them to their full effect.

Let’s go through the argument based on the normal small businesses Situation, not all the more complicated scenarios only relevant to very high earners already taking large salaries and deciding to whether to take their bonus as salary or dividend or where the company is making more than £300,000 per year.

We’re interested in how you get your basic money out of the company.

Let’s keep it simple because it’s not complicated…

• If you pay a salary, it attracts both employees National Insurance (mainly at 12%) and Employers NI (mainly at 13.8%). Dividends have no NI. It’s that simple!

• The corporation tax situation is that by using dividends, the company doesn’t get any deduction from its profits so it is paying 20% corporation tax. As an individual in the 40% rate tax band you will pay a further 22.5% on the amount of the gross dividend paid out by the company. If you are paying basic rate tax you will pay nothing more on the dividend you receive.

• For simplicity, we will add the tax paid by the company to the tax you pay personally and call the total tax paid either 20% tax for basic rate taxpayers and 42.5% for the 40% band taxpayers.

• If you pay a salary, you are largely paying either 20% basic rate tax or 40% rate tax so we can see the tax differences are small compared to the National Insurance benefits.

How much money are we talking about?

Take a straightforward situation of a small Limited Company where the choice is between taking £40,000 salary or £40,000 dividend. If we just look at the National Insurance savings, these come to over £8000 per year. It’s obvious which to go for and yet often small businesses are not doing this. It’s the one of the biggest sins in tax planning not to have considered it.

Are there any reasons why they wouldn’t be using dividends? Occasionally there are:

• If your company hasn’t made enough profits since it started to cover the dividends that you want to pay, then Company Law prevents dividends being paid.

• If you want to pay a lot into pensions you used to need a salary high enough to justify the contribution, but that is no longer is a restriction for most pension schemes.

• You believe you can only have a dividend once a year and you need your money every month. This isn’t true. There is no set interval for dividend payments prescribed by law. Quarterly payments are recommended but if you need monthly cash that can be done.

• You may not want to pay dividends because you have other shareholders that would need paying as well. You can look to get around this by using different classes of shares for different shareholders.

• Paying dividends may increase the value of the company for Capital Gains or Inheritance Tax consequences in the future. In the author’s experience, this rarely applies in practice with small companies.

• You’re worried about the minimum wage legislation and believe you have to pay a salary to cover this. However, minimum wage legislation doesn’t apply to people living in a family and working in the family business. This doesn’t include Limited Companies but as far as working directors are concerned who don’t have an explicit contract of employment, they are not subject to minimum wage legislation, so don’t give them one.

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You will not get compensation for everyday mistakes, at most an apology. Examples of this include errors in inputting tax return information, incorrect calculations, wrong penalty notices etc.

To get compensation you need serious or persistent errors. A serious error is something that no responsible person acting in good faith and with proper care could reasonably have done. Perhaps wrong advice from the Taxman that you relied upon.

A persistent error is one where the Taxman continued with the mistake after it had been pointed out to him or keeps making the same mistake or made several unconnected mistakes in the any twelve-month period.

The compensation you will get will cover putting the tax position back to where it should have been, reimbursement of expenses or financial loss and a consolatory payment

This is the final blog on a series of blogs on tax investigation. It covers penalties following a tax investigation. The other blogs covered Understand the Type of Tax Enquiry You Have, what triggers a tax inspection and tax inspection of your accounting records

Dealing With The Penalties

At the end of an enquiry or investigation, there may well be penalties to deal with.

Firstly, there is interest to pay but HMRC see this as just financial compensation for them not having use of the money from when it should have been payable and so is largely fair and at a reasonable interest rate.

However, penalties are also due. There is a new penalty regime for return periods starting on or after 1 April 2009 or where the due filing date is on or after 1 April 2009. In fact the new penalty system replaces all penalties for incorrect returns which lead to an underpayment of tax for income tax, corporation tax, PAYE, National Insurance and VAT.

Penalties under the new legislation are based on the potential lost revenue. The starting point for the maximum penalty depends on the behaviour that gave rise to the inaccuracy.

For unintentional errors…

• Mistakes made despite taking reasonable care – no penalty.
• Mistakes made where there is a lack of reasonable care (i.e. carelessness) – maximum penalty is 30% of the potential lost revenue.

For deliberate inaccuracies….

• For deliberate mis-statements – maximum penalty is 70% of the potential lost revenue.
• For deliberate mis-statements which are then concealed – maximum penalty of 100% of the potential lost revenue.

So the starting point involves an assessment of the behaviour that gave rise to the penalty. And what is reasonable care will vary from taxpayer to taxpayer and is judged on the circumstances and abilities of the individual.

The maximum penalties can be reduced based on the disclosure made by the taxpayer to the taxman. Where a disclosure is unprompted in that it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy, the minimum penalties can be as follows…

• For careless errors – 0% (as opposed to 30%)
• For deliberate mis-statements – 20% (as opposed to 70%)
• For deliberate mis-statements which are then concealed – 30% (as opposed to 100%)

However where a disclosure is prompted as opposed to unprompted the minimum penalties are as follows…

• For careless errors – 15% (as opposed to 30%)
• For deliberate mis-statements – 35% (as opposed to 70%)
• For deliberate mis-statements which are then concealed – 50% (as opposed to 100%)

Please note that once an enquiry starts, it would be very rare for a disclosure to be unprompted if it is about something related to the enquiry.

How much the penalty is reduced from the maximum penalty to the minimum penalty is then based on the quality of the disclosure. The quality factors to consider are…

• Telling HMRC about it – up to 30% reduction
• Helping HMRC to quantify the inaccuracy – up to 40% reduction
• Giving HMRC access to the records to ensure inaccuracy is fully corrected – up to 30% reduction

So for example, someone with a prompted disclosure of a deliberate mis-statement with concealment can have the penalty reduced from 100% to 50%. If you score 25%, 15% and 30% on the above 3 items, this will give a 70% reduction of the 50% reduction which is 35%. i.e. the penalty will be 100% less 35% = 65%!

If the penalty arose because you failed to take reasonable care, HMRC can suspend the penalty for a period of time, a bit like a suspended sentence. As long as you behave during that time, the penalty will not then be payable.

The Old Penalties

Although the new regime is coming in based on return dates, there will still be penalties around under the old rules for some time. So these are summarised here.

The starting point is 100% of the tax underpaid. That’s an awful lot and another good reason to get your Tax Return right in the first place.

However, the penalties will be mitigated downwards according to certain factors as follows:

• Up to 40% discount relating to the amount of tax at stake.
• Up to 40% discount for the degree of co-operation of the taxpayer.
• Up to 20% discount for voluntary disclosure at an early stage.

In theory the penalty can go down to zero but this is rare. Something like a 10% to 30% penalty is more normal. If you disagree on the penalty, you can again make an appeal.

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The previous blogs on tax enquiry covered what triggers a tax inspection and tax inspection of your accounting records . This blog  takes this further by explaining  the type of tax enquiry you have.  Please remember you can sign up for our monthly tax tips news letter to receive equally helpful information straight into your inbox. Just  click here to sign up,

Technically HMRC  now start with enquiries rather than investigations into your Tax Return. Let’s start with the basic facts…

• The enquiry may be an aspect enquiry into one aspect of your tax return or a general enquiry into the whole return.

• Over 250,000 enquires are carried out every year and most are innocent enough affairs but if it leads to a full-blown investigation, it’s not nice.

• The change to the self-assessment system has allowed HMRC to spend more time on enquiries and they have also put more and more resources into it.

• Interestingly, most enquiries are into the affairs of men, rather than women.

• HMRC are also becoming more business like, targeting the businesses where they are most likely to get a result.

• Whether they admit it or not, HMRC do have internal targets for the number of investigations to be carried out that are there to be met.

• HMRC may select you for enquiry for a reason or you may be chosen at random for a full enquiry.

• The problem is, they don’t tell you whether you have been picked randomly or not, and they don’t tell you what they already know. They often indicate they know something to make you confess to perhaps more than they know about.

• It all starts with a standard letter saying they are going to make an enquiry into your return and assuming you have an accountant, they will send a separate letter to them with the details of what their enquiries are. From this you can normally tell whether it is an aspect or general enquiry into the whole return.

• Aspect enquiries do have the potential to turn into full enquiries. A full enquiry will turn into an investigation when it spreads over into looking into your affairs for more than one year.

• With effect from 2007/08 onwards HMRC have one year after the date you file your tax return to enquire into it.
• After that you are safe unless they make a discovery of fraudulent or negligent behaviour. In these cases they can go back up to 20 years, although 6 years is the norm. It therefore helps to give them all relevant information when submitting your return to help ensure finality.

• Even your death isn’t the end of the matter as the enquiry can still continue through your representatives. In war, your death is the end, but not so with tax.

As an example, let us say the Taxman finds just £1000 of income that hasn’t been declared on a return, the tax on this could be £400.

If they can show this was likely (not proven) to have occurred for 6 years, that tax bill becomes £2400. Interest will now be due on this, which could perhaps be another £1000.

In addition, there can be a penalty that can be as much as the tax. And in some situations from 1 April 2011 this can be up to 200% of the tax for those with financial interests outside the UK who have failed to declare the full extent of their offshore liabilities.

You are now looking at a tax bill of up to £5800, just because they found £1000 of income missing in one year.

Imagine how much you’re looking at if £20,000 was missing from your accounts in a year.

Aspect enquiries often tend not to lead to fines and penalties but general enquiries are more likely to. Jail is always an option but very rare amongst small businesses and is reserved for cases of serious fraud.

Accountants are more likely to go to jail for tax evasion and no doubt lists of dodgy agents exist at local tax offices whose clients are therefore more prone to enquiry.

The problem with investigations is that the Inspector seems to have all the time in the world to go through your affairs with a fine tooth comb, to the extent of identifying what restaurants you eat in, where you go on holiday, etc. They do this to try to prove the income declared in your accounts cannot support your lifestyle. They may want detailed information going back years.

Can you…

• Remember why you didn’t have any cash takings on the 3^rd November 2001?

• Identify where a banking in your private bank account 6 years ago for £123.18 came from?

• Remember how much a week you spent on milk in 2002?

It’s not out of the question that some tax inspectors will want to know the answers and be suspicious if you can’t answer.

The taxpayer on the other hand has to pay an accountant and so time is often limited by cost constraints and even when you’ve done nothing wrong. It can end up being easier for some taxpayers to just give up the fight, particularly when the investigation has been going on for a couple of years.

Please note a full investigation can take years, not months to conclude.

Both the financial pressure and the pressure of just dealing with the investigation enquiries can be an enormous strain to taxpayers if they let it get on top of them. It’s important not to panic or be pressurised into surrendering.

Also, did you know accountancy expenses in dealing with a tax investigation are not usually deductible as an expense against tax.

Sometimes it doesn’t pay to own your own home, have savings, etc. There are some clients that just don’t worry about a Tax Investigation and are happy to concede whatever the Taxman wants. Often, these are clients with few assets who know that whatever the Inspectors finds, they can’t pay. If you haven’t got the assets to pay, HMRC aren’t going to be able to take anything from you. If this is the case with you, it helps to point this out at an early stage.

Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”

My previous blog posting covered the points on the triggers of tax inspection. This blog posting covers  inspection of your accounting records if the taxman decides to see all your accounting records. This includes bank statements, invoices, cheque stubs, paying in books, etc. It may also extend to items such as your work diary.

The issues revolving around this request are…

• You may prefer not to send them to the Inspector as this allows them to go through them at their leisure but ask for the to be inspected at your accountant’s office. It’s not normally recommended to have inspections at your own premises due to the opportunity offered to raise even more questions based on what the Inspector sees there.

• They are entitled to take copies of any documents and even take the originals away but you can argue you need them to run your business.  The more they have to copy perhaps the less likely they are to take as many.

• Never, give them your records on computer disc as they have the technology to interrogate your computer records to raise even more questions. Always provide printouts.

• Never, make up false invoices or records retrospectively as they have the technology to date the ink.

• Many investigations arise when the Taxman doesn’t fully understand your business and perhaps why you make the profit margins you do. As a result the Taxman may start an investigation and start with asking to see all of your business records. If you give them to him you give control to the Taxman.

You could instead start by offering to explain to him your business and how it works which may reduce the necessity for him to widen the investigation into looking at your records.

• They can only ask for information that is reasonable (fair & sensible) so don’t let them overstep the mark. Sometimes, a request for private bank statements is reasonable and sometimes not, especially on the first request for records

The reasons the inspector wants the private bank statements are:

• He is looking for bankings that haven’t been taxed, particularly undeclared business takings. He is also on the look out for  sales of assets he wasn’t aware of and may want to know where you got the money from in the first place to buy them.

• He may ask you to prove that all the income on your tax return, such as dividends is banked in your personal account. If not, this may mean there is a second undisclosed account around he would like to see!

• He will also use your private bank statements to build a picture of the regular payments that go out of your account to get an idea of your lifestyle and see if you can afford it on the income you have declared. This information will then be used to catch you off guard at a meeting with him.

• If he sees no cash withdrawals out of the account he may be suspicious as he may take the view no one can live without cash. However, you can get cashback in many shops these days on debit cards, state benefits could be paid to you in cash, or perhaps older children with jobs or your spouse have their own accounts that cash is got from for family use.

It is normally best to let the Inspector see the records first before meeting them otherwise you often end up with the Inspector wanting another meeting after they have gone through the records. Better to get it all sorted in one meeting if possible. That’s if you are going to have a meeting at all…

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