With effect from 9th October 2007 spouses and civil partners will now be able to make full use of the nil rate band belonging to each spouse. This is retrospective and applies to anyone with a spouse or civil partner previously deceased. That gives a total inheritance tax exemption for a married couple of £650,000 (for 2010/11). The new rules allow any unused part of the nil rate band on the death of the first spouse or civil partner to be passed to the surviving spouse or civil partner for use on their death.

Say Fred dies on 1 October 2010 with an estate worth £650,000 and his wife did not use her nil rate band when she died previously, he now has the benefit of two nil rate bands totalling £650,000. Now Fred’s executors will pay no IHT at all.

The amount of the nil rate band that can be transferred is the proportion of the nil rate band that was unused on the death of the first spouse or civil partner. For example if on the first death, 50% of a 325K nil rate band was unused, if on the second death the nil rate band is 350K at that time, then 50% x £350K = £175K is available for use in addition to their own nil rate band.

There is a maximum of an amount equal to the nil rate band in force at the time of the second death that can be used in addition. Therefore, it doesn’t matter how many ex-spouses or civil partners there are, it is not possible to have a total nil rate band of over 650K in 2010/11.

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If a gift is made but there is some reservation on it, such as gifting your house with the understanding you can still live there until you die, this will not count as a PET and will still form part of your estate that is subject to IHT on at death. However, the gift will be effective for capital gains tax, which can create a double tax charge for the person a that inherits the house.

If you give away cash that is used to purchase your house, you can be liable to income tax on the benefit of living in the house. This is called the pre-owned asset charge.

There is a sliding for scale for the amount of IHT payable for death within the 7 years.

Of course if your estate is worth less than £325,000, no IHT is ever payable.

Other Gifts That Are Always Free Of Inheritance Tax

The following will always be free on IHT, whenever they are made…

• Small gifts to the same person of not more than £250 in a year.

• Gifts in consideration of marriage of £5,000 from parents, £2,500 from grandparents and £1,000 from anyone else.

• Normal expenditure out of income where the amounts given are part of your normal expenditure taking one year with another.

• Amounts up to £3,000, with any unused amount being allowed to be carried forward to the following tax year.

• Any gifts between spouses/civil partners, where the person who receives the gift is domiciled in the UK.

• Any gifts to charities or political parties.

Please contact us for your Inheritance Tax planning needs.

It is very important to get any legal tax saving schemes right from the start. Otherwise it may mean paying thousands of pounds to the taxman.

This is another step Southside Accountants has taken to exceed client expectations. To see what our clients think about us, please click here.

Please feel free to contact us to help you with your tax savings.

The VAT flat rate scheme is designed to make it simpler and quicker for small businesses to complete their VAT return.

This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not.

How will it help you?

The aim of the scheme is to simplify the way small businesses account for VAT so that you will spend less time and money keeping VAT records and calculating the VAT payable to HMRC. 

Might you pay more VAT by using the flat rate scheme?

Some businesses will pay more and some will pay less VAT by using the scheme. This is because the flat rates are averages. You can estimate the effect on your business by using our calculator. Please click here for the calculator.

Who can join the scheme?

The scheme is open to small businesses whose annual taxable turnover (not including VAT) does not exceed £150,000.

Who cannot join the scheme?

There are some exclusions. You cannot use the scheme if you:

• already use any of the schemes for second-hand goods, tour operators or capital goods;

• have been guilty of a VAT offence or dishonesty in the last 12 months;

• have been ‘associated’ with another business or have registered as part of a VAT group or in VAT divisions in the last 24 months.

How does the scheme differ from normal VAT rules?

Under the normal VAT rules you have to identify the VAT on each sale you make, record the value and VAT separately and pay the VAT to us as output tax. Similarly you have to identify the VAT included in the things your business buys, record the value and the VAT separately and claim the VAT back from HMRC as input tax.

Under the flat rate scheme you do not have to identify, or separately record, the VAT on your sales and purchases to calculate the VAT you owe. You simply record all the sales your business makes, including exempt sales, and apply the appropriate flat rate percentage for your trade sector to the total in each period. The result is the VAT you owe to HMRC.

How are the flat rates calculated?

The flat rate percentages are calculated from the net tax paid by all the businesses that are currently registered for VAT and eligible for the scheme. The net tax paid varies with different trade sectors and so there are a variety of flat rate percentages. You can find the flat rate perentage for your business here. The net tax calculated using the flat rate percentage allows for the fact that businesses can usually recover the tax paid on their purchases. Under the flat rate scheme you normally cannot claim input tax with some exceptions.

How do you calculate my flat rate turnover?

To calculate your turnover, you record the sales you make either at the time you invoice your customers or at the time you receive payment.

How do you calculate the VAT due?

At the end of each VAT period, take the VAT inclusive turnover of your business and multiply this by the flat rate percentage for your trade sector. For example, if your business is the repair of motor vehicles and your VAT inclusive turnover for the VAT period is £20,000 the calculation is: £20,000 x 6.5% = £1,350. So your tax due is £1,350.

What is the 1% reduction for new VAT registrations?

Newly VAT registered businesses use the flat rate for their sector minus 1%. So, if the rate for your sector is 9%, you apply a flat rate of 8% in your first year of VAT registration.

How do you recover VAT?

If you use the scheme you do not make a separate claim for input tax (VAT on your purchases) or for VAT on imports or acquisitions. The flat rate percentage includes an allowance for these items. Two exceptions follow.

What if you buy an expensive capital asset?

If you buy a single capital asset with an invoice value, including VAT, of £2,000 or more you can claim the the VAT on your VAT return in the normal way.

If you do recover VAT on an expensive capital asset, any subsequent disposal of that asset has to be accounted for using the normal VAT accounting rules. Add the VAT calculated to your flat rate calculation of VAT due.

Should you  issue VAT invoices?

If your customers are registered for VAT, follow the normal rules and issue a VAT invoice. The flat rate scheme affects the way you calculate the VAT you owe to us but does not change the VAT rate applicable to your sales. This means that when you issue a VAT invoice, you show VAT on it at the normal rate for that type of supply (not the flat rate percentage)

Who can join the scheme?

You can apply to use the scheme if there are reasonable grounds for believing that the following turnover test is met:

• Your taxable turnover (not including VAT) in the next year will be £150,000 or less.

How do I calculate my taxable turnover for the first turnover test to join the scheme?

The flat rate scheme is for small businesses. The first turnover test is the value of your taxable supplies  (ie your sales) excluding VAT. For the first test, exclude any anticipated sales of capital assets but always include all of the following:

• the VAT exclusive value of standard rate, zero rate and reduced rate supplies (ie Sales);

• the VAT exclusive turnover from the sale of second hand goods sold outside the margin scheme; and

• any sales of investment gold that are covered by the VAT Act

How do I calculate my total income for the second turnover test to join the scheme?

The second turnover test is the value (excluding VAT) of all your business supplies (ie sales) except anticipated sales of capital assets. This includes, in addition to your taxable supplies (sales), both of the  following:

• the value of any exempt supplies, such as rent or lottery commission; and

• any other income received or receivable by your business. This includes any non-business income such as that from charitable or educational activities.

Note: non-business income is included in the joining test because the scheme is for small businesses. When you use the scheme, non-business income is not included in the VAT inclusive turnover to which the flat rate applies.

How do I know what my future turnover is going to be?

You may forecast your future turnover in any reasonable way. If you have been registered for VAT for 12 months or more, the turnover declared on your returns may be a reasonable guide but take into account any proposed or expected changes. If you are not VAT registered when you apply for the scheme, you may forecast your turnover by looking at:

• any period of trading before you join the scheme or registered for VAT;

• the turnover of the previous business owner; or

• information on business plans or loan applications.

What if my future turnover rises over my forecast?

However you estimate your future turnover, HMRC will not penalise you provided there were reasonable grounds for what you forecast. It is sensible, therefore, to keep a record of what figures you used to calculate your future turnover. If your forecast of turnover had no reasonable basis, you may be excluded from the scheme immediately or even from the date your ineligible use began..

What if my turnover rises once I have joined the scheme?

You may stay in the scheme provided your total VAT inclusive turnover for the year just gone does not exceed £225,000. Make this check on each anniversary of your business joining the flat rate scheme. Additionally, you must leave the scheme if your income increases so that there are grounds for believing it will exceed £225,000 in the next 30 days alone.

How can I apply?

Call the National Advice Service on 0845 010 9000. They can take your application over the phone.

Please contact us to help you with your VAT needs.

• incurred wholly and exclusively for business  (rental) purposes; and

• are not of a capital nature.

It is not possible to set out all the expenses that are allowable for tax purposes in all circumstances but some idea of the main types of expenses that are likely to arise in a rental business and also some idea of what can or cannot usually be claimed as a deduction in calculating rental business profits are covered in this post.

For an expense to qualify the business purpose must be the sole purpose. A non-business or private purpose prevents any deduction from business profits where there is no objective yardstick by which any business element can be distinguished from the non-business element.

Examples of deductible expenses include:

• Repairs and maintenance;

• Interest paid;

• Capital allowances;

• Wear and tear or renewals allowance;

• Travelling expenses;

• Legal and professional fees;

• Managing agent’s fees;

• Insurance;

• Rents and ground rents paid;

• Lighting, heating, cleaning, gardening, security, caretaking etc.;

• Advertising;

• Accountancy fees for preparing the accounts and agreeing taxation liabilities;

• Council tax, business rates and water rates – if paid by the landlord;

• Bad debts and the cost of pursuing debts;

• Staff costs, including statutory redundancy pay and training.

Repairs and maintenance

• Expenditure on repairs is deductible, including ordinary repairs and decorating before the building is first let;

• Expenditure is not deductible for the cost of alterations and improvements, or the cost of bringing a newly bought building into a fit state for letting. These are capital expenses;

• Expenditure reimbursed by insurance is not deductible.

Interest

Interest payable for the purpose of the property letting business can be deducted in the accounts. This includes interest on a loan to buy or improve the property or to fund repairs.

Travelling expenses

• Travelling expenses are allowed if they satisfy the ‘wholly and exclusively’ rule. For example, the costs of travelling, solely for the purpose of the business, are allowed between let properties, or to a let property from the place where the rental business is administered;

• Travelling expenses are not allowed if private purposes are included in the travel, such as personal shopping or family visits;

• Where the business is administered from the landlord’s home, the cost of travelling from there to the properties is unlikely to be allowed if the home is far away from the properties, as the need for the journey is considered to be dictated by the personal preference of the landlord to live in a particular place, rather than the needs of the property business.

Legal and professional fees

• Fees on the purchase of a property or for the first letting agreement are treated as capital expenses and are not tax-deductible, if they are for a period of more than a year;

• Fees for a letting agreement of less than a year, or for renewing a lease for less than 50 years, are deductible;

• Other professional fees, which are normally allowed, are those for insurance valuations, and for evicting an unsatisfactory tenant in order to re-let the property.

Income from property is affected by a large number of tax rules - the reasons for this are the variety of uses to which property can be put, and the different ways in which income and profits arising from property can be taxed. Substantial profits can be made on single transactions, making tax planning important. The large volume of tax legislation affecting property means that the precise way in which a transaction is structured can significantly affect the tax payable.

Please contact us to help you with your tax planning and for completing your tax returns.

If you’re in business or receive income from property renting, you’ll have to keep the back-up records for five years and ten months (in other words, 70 months) after the end of the tax year when the income was received.

If you don’t have business or rental income, the period of record-retention is reduced to 22 months.

From April 1996:

• the law requires you to keep records of information received from your employer and other records so that you can complete a tax return fully and accurately if you are asked to do so;

• employers must provide their employees with certain information that they need to help them fill in their tax returns (if they get one).

You should keep the following information you receive from your employer:

• P45 which contains details about your pay and tax. If you leave your job during the tax year, your employer will give you form P45. You should keep part 1A of this form.

• P60 containing details about your pay and tax. Your employer should give you this by 31 May after the end of the tax year (if you were in your job at 5 April).

• Details of your taxable expenses and benefits in kind (sometimes known as ‘P11D details’). Your employer should give you these by 6 July after the end of the tax year (if you were in your job at 5 April).

• Your employer may also give you information about expenses and benefits in kind you received which were included in a ‘dispensation’ or ‘PAYE Settlement Agreement’. These do not need to be included on your tax return.

Please click here for our core taxation service.

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• To keep a mileage record on the use of your van

• Sign an agreement with your employer saying that the van is only to be used for business and insignificant private use and for travelling between your home and the main place of work.

Where the company van is available for private use and you use it for private journeys, this will raise a taxable benefit in kind of £3,000 per annum. For a basic rate tax payer, this would result in £600 tax bill per year. Further, if you are also allowed free or subsidised fuel, this will result in additional benefit in kind of £500 per annum, resulting in a further tax bill of £100 per year if you are a basic rate tax payer.

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The taxman  may issue  form 810 every three years. on some ocassions he may issue it more frequently. If you are issued this form, there is no penalty for not filling the form.  However, if more tax is due to the Taxman you may end up with interset to pay plus penalties for late payment. By not completing the form you could lose tax refund that may be due to you.  So it is good practice to keep HMRC informed of change in your income.  Where you do not complete the annual Self Assement  form, form 810 is a good way to keep the taxman informed.

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Tax Centre for tax help sheets.

If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as wage, they would pay no tax on it and your business profits could be reduced.

Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict their working hours further.

If you pay just 20% income tax and 8% Class 4 National Insurance this would save you £1600 every year on each salary. And how many children do you have?

STOP! It’s not quite that simple. To pay wages like this you need to follow the following rules:

• It must be for work actually done. Now it’s going to be tough to argue your 2-year-old son is working for you but many wives/husbands do work and mature children may also help out.

  May be they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn’t count, as valuable as it may be. Draw up a list of their responsibilities to help your case.

• At present they do it for free because it’s a family business but they should and can be paid for it. If you make your spouse a director, all the responsibilities of this imposed by Company Law must be worth something.

• You can also do this where you have property that you rent out and the spouse manages the properties.

• If this is the case, it’s reasonable to pay them a salary commensurate with what they actually do. How much would it cost to get someone in to do that job? The minimum wage level is at least a good place to start but more if you can justify it.

• The amount must actually be paid. It’s no good the accountant just putting it through the accounts at the end of the year.

  Pay it, ideally through the bank rather than cash so that it’s easy to prove it’s been paid and record it in your accounting records.

• Comply with any PAYE procedures such as getting a P46 signed, completing an end of year PAYE forms as you would do for normal staff. Remember, it may also help keep up their National Insurance contribution record even if they don’t pay any National Insurance on the salary.

Helpful publications

H M Revenue & Customs publish various booklets relating to how PAYE is operated and the legislation that you have to comply with.  Not only do you collect and remit PAYE to the Collector of Taxes on behalf of H M Revenue & Customs, you also operate the sick pay scheme and maternity pay scheme.  You should run the PAYE scheme in accordance with the legislation and should you fail to comply then H M Revenue & Customs will look to you for the tax or NIC you failed to deduct.  This can be costly if you are unable to recover the tax and NIC from the employee.

Do you have employees?

Whether an individual is an employee or not in a particular situation is a question of fact depending on the terms on which he works.  The question of whether an individual is employed or self-employed is very important for the business “employing” him or her, as that business has to comply with the reporting requirements.

In certain areas H M Revenue & Customs has placed emphasis on reclassifying individuals claiming to be self employed and has issued leaflet IR56 entitled “Tax: employed or self employed”.  This booklet sets out the questions that should be answered to determine the problem.  If you have treated someone as self employed and subsequently after a routine visit from H M Revenue & Customs it is clear that they were employees, then the tax and NIC which should have been paid will be assessed on you.  Therefore it is important to ensure when using the services of self employed people, that they are in fact self-employed. If doubt exists as to the status of an individual, the situation can be clarified with H M Revenue & Customs.

The Operation of a PAYE Scheme

Upon registration H M Revenue & Customs will send to you guidelines on operating PAYE, National Insurance, Statutory Sick Pay and Statutory Maternity Pay (employer’s pack). Included will be a number of forms with which to operate the PAYE and NIC system.  You should familiarise yourself with and have supplies of these forms, which are as follows:-

In order to calculate the amount of tax and national insurance due by an employee, H M Revenue & Customs will supply you with sets of tables.  By reference to the “tax free” tables and an employee’s tax code you will be able to calculate the amount of salary that is not subject to tax.  The difference between this figure and the gross amount is the employee’s taxable pay.  This can then be calculated by reference to another set of tables.  The employer’s and employee’s national insurance is calculated by reference to the gross pay with a third set of tables.  Special rules exist for the calculation of national insurance for directors.

The tax and national insurance should be paid to H M Revenue & Customs by the 19th of the month following that in which the salaries were paid.

In most businesses, the directors, and often the employees, have benefits that are not immediately taxed through the PAYE system, the most usual being the provision of a car and possibly fuel.  Class 1A national insurance contributions are due on the taxable value of these benefits in kind and are due on the 19 July following the fiscal year in which the benefits are made available.  In addition, H M Revenue & Customs requires on an annual basis, a form P11D (Return of expenses payments and benefits) for all directors irrespective of income and all employees receiving remuneration including the benefit in excess of £8,500.  For those employees earning less than £8,500 but who receive expense payments and benefits, a form P9D is required.

A form P46(Car) needs to be completed quarterly on 5 July, 5 October, 5 January and 5 April if any employees have been provided with or have changed their company car.  Further details are given on the taxation of company cars in Inland Revenue leaflets IR132 and IR133.  H M Revenue & Customs will still require form P11D to be submitted annually in addition to the P46 (car) forms.

Please contact us for further help.

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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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 11%) and Employers NI (mainly at 12.8%). 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 21% 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 21% tax for basic rate taxpayers and 43.5% 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.

Please contact us for further help.

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 around £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. More on this below.

• 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.

Please contact us for further help

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

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.

Please contact us for further help

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.”