HMRC: the top 10 areas of enquiry
Ben Chaplin points to where HMRC is focusing its efforts on recouping unpaid taxes
As the 2013/14 financial year closes it is once again a good opportunity to look back on the year from an HMRC activity point of view.
This year saw Taxwise deal with over 6,000 new claims from accountancy clients, with almost half being what we regard as ‘simple aspect enquiries’. This represents a 15% increase on the prior year and in the main results from high-level HMRC campaigns driven by data collected from third parties targeting, for example, underpaid tax in respect of investment income, rental properties and/or capital gains on the sale of properties.
Beyond this, enquiries time and time again focus on the same areas, so let’s have a look at the top 10 areas for HMRC enquiries.
Travel expenses
HMRC asking for copies of detailed mileage logs as confirmation of business journeys:
• Ensure clients are maintaining mileage logs (as opposed to being created at the year-end).
• Provide starting/ending odometer reading, confirmation of journey type (business v personal) and corroborating information including client/supplier name, etc.
• Ensure business journeys agree with calendars as HMRC are asking for all back-up information and sources.
Private expenses
Need to ensure that the company is only getting a deduction for costs that are incurred wholly and exclusively for the benefit of the trade.
• The most common expenses that get missed are the preparation of the annual tax returns for staff which may be included within one single accountancy bill.
• ‘Keyman’ insurance costs (usually life policies on the senior members taken out when obtaining company finance) are often mistreated for corporation tax deductions and for personal tax (inclusion on P11D).
• There has been an increase in challenges by HMRC on the use of sponsorship where there is a personal involvement of a director or member of their family (usually racing cars or yachts but also applies to sponsorship of children’s sports teams). These costs are disallowable in the company’s corporation tax return unless it can be demonstrated that there is a direct link between the company incurring these costs and an increase in the company’s turnover/profit levels.
Private proportions
Where a self-employed individual uses their own vehicle, it is important to remember that there are two sides of the expenditure they can claim in their tax computations, the actual expenses incurred and the capital allowances on the use of the asset by the business.
• Ensure that where private use fluctuates year-on-year that the same proportions are claimed in both revenue and capital accounts.
• This will link with the need to keep detailed mileage logs to ensure the correct apportionment.
Use of home charges is now at £4 per week.
• Always use the weekly charge unless an increase in household bills as a result of working at home can be specifically identified and calculated. For example, a graphic design business using multiple computers and servers can likely demonstrate an increase in the electricity bills of the house as opposed to a director of a manufacturing business choosing to work from home one day a week, which will have a minimal effect on the overall household expenditure.
Reimbursement of expenses
For an employee to receive a tax deduction or reimbursement of an expense paid personally, it must be proven to have been incurred wholly, exclusively and necessarily in the performance of their duties. This varies from the business requirement of “wholly and exclusively” only.
• The addition of the word “necessarily” is the biggest obstacle when trying to persuade HMRC that the expense is allowable. HMRC will ask “could the employee do his job without incurring that particular expense?”
• Travel expenses will usually be the most common and as mentioned above, mileage logs are important in justifying this claim.
• Any journeys for ordinary commuting will not be allowable.
• Consider temporary workplace rules for those on secondments and/or those individuals who work through a Personal Service Company.
• For self-employed individuals, it will be necessary to identify the ‘base of operations’. This may not necessarily be the individual’s home.
• Another common error in this area is the claiming of training costs. Courses or training that act as a continuous development of the skills already held by the individual will be deemed to meet the criteria, whereas those which provide the employee or principal (if self-employed) with new skills are not allowable as a deduction both for the individual or the business.
• Payment of expenses that are private to the individual – known as meeting pecuniary liabilities – will give rise to payroll issues. This usually occurs mainly within owner-managed businesses.
• Consider the use of personal credit cards, as it is in the individuals personal name as opposed to the company’s should the company settle the bill the individual is receiving a benefit which is liable to both PAYE and Class 1 National Insurance both employers and employees.
Discovery assessments
The use of section 29 TMA1970 Discovery Assessments are increasing as more information is made available to HMRC from third parties.
• Gives HMRC powers to enquire into years where there may be a loss of tax to the Treasury and the usual enquiry windows are closed.
• Recent campaigns and amnesties have proved successful for HMRC.
• HMRC are now collecting information from lettings agents and estate agents on historic property transactions and rentals so an increase in specific targeting from HMRC should be expected where full information has not been disclosed.
White space disclosures
Should be used to confirm positions on potential disputes with HMRC.
• Allocations on a PPR disposal if more land claimed for ‘reasonable enjoyment’ or if large acreage sold with a property; estimated figures included on returns for both CGT and income tax issues; reason for making claims, etc.
• Use for confirmation of the reasons for fluctuations of business profits in the current year as HMRC are now looking at trends in both specific businesses/self-employments along with general averages for industry sectors.
• Expansion on figures included in boxes where there is no option to provide further information.
• It is a fine line. Ideal use is to give HMRC enough information so that they do not need to ask generic questions into the return but not provide too much information that they can find fault in the return/treatment initially.
Overdrawn loan accounts
HMRC are requesting more information on the source of capital introduced to the company from external sources so records must be maintained in this area.
• Confirmation that funds have been transferred from a personal bank account to the loan account is not sufficient for this purpose and HMRC are asking for the source of the original capital.
• HMRC are also looking at “book entry” dividends. Ideally, they would like to see the money being paid out of the company’s bank account to the Director/Shareholder’s private account and then being reintroduced to the company as opposed to a “paper credit” as this demonstrates an active decision to use the dividends to repay the loan account instead of using the legally entitled funds for a personal use at that time.
• This position also applies to interest “charged” on the loan to avoid a potential benefit in kind. Ideally the interest should be physically paid into the company by the individual.
• Rolling-up interest does not change its status to capital and HMRC can remove the credits if it is found to have been included incorrectly giving rise to historical P11D issues but the company will still be liable to the corporation tax liability on the assumed payments.
• Dividend vouchers confirming the date of the payment should be kept.
Employment status
From April 2014, the rules have changed as HMRC attempts to find a way of challenging “false” self-employment cases and the application of IR35 legislation.
• More importance placed on the overall ‘direction, control and supervision’ of the individual by the end client than there has been historically.
• Intermediaries such as agents or payroll bureaus may now become liable to the relevant PAYE and Employers NIC charges and this issue will need to be addressed.
• Whilst the focus has changed to control, issues such as the use of substitutes are still as important and it will be necessary to ensure that the contract terms agree to the actual working practices.
Termination payments
HMRC’s position on termination payments has not changed in this area. They will still look to review redundancy payments to ensure that, if applicable, the £30,000 exemption is being correctly applied.
• Payments can fall into charge under section 62 ITEPA2003 as employment income or if they are not caught by that will fall into charge under s401 ITEPA2003.
• The £30,000 exemption will only cover payments that are chargeable under s401 and only if the relevant conditions are met.
• The taxable position should be reviewed in advance of the compromise agreement being finalised to ensure that the exposure to income tax and NIC is known and the exemption is correctly applied (where applicable).
Partnerships with corporate members
The recent changes in this area have seen HMRC challenges on the provision of loans or benefits to the partners of the partnership where they are also involved in the limited company. HMRC now take the view that the benefits have actually been made to the individual by virtue of their employment within the company as opposed to by virtue of their partner status.
• Loans made to the partners will now (and should have always been) caught by the loans to participators rules under s455 CTA2010 (previously s419 ICTA88) and the company will be liable to the usual 25% tax charge and a P11D declarable benefit.
The provision of a vehicle through the partnership (which doesn’t give rise to a P11D benefit) was successfully challenged by HMRC in Coopers v HMRC [2012] UKFTT439 (TC) where it was found that the cars provided through the partnership were only made available to partners because of their involvement in the corporate partner company.
• If it can be provided that there is a genuine commercial rationale for the provision of the vehicles to the partners as part of the partnerships daily trading activities then this provision may not apply.
As the 2013/14 financial year closes it is once again a good opportunity to look back on the year from an HMRC activity point of view.
This year saw Taxwise deal with over 6,000 new claims from accountancy clients, with almost half being what we regard as ‘simple aspect enquiries’. This represents a 15% increase on the prior year and in the main results from high-level HMRC campaigns driven by data collected from third parties targeting, for example, underpaid tax in respect of investment income, rental properties and/or capital gains on the sale of properties.
Beyond this, enquiries time and time again focus on the same areas, so let’s have a look at the top 10 areas for HMRC enquiries.
Travel expenses
HMRC asking for copies of detailed mileage logs as confirmation of business journeys:
• Ensure clients are maintaining mileage logs (as opposed to being created at the year-end).
• Provide starting/ending odometer reading, confirmation of journey type (business v personal) and corroborating information including client/supplier name, etc.
• Ensure business journeys agree with calendars as HMRC are asking for all back-up information and sources.
Private expenses
Need to ensure that the company is only getting a deduction for costs that are incurred wholly and exclusively for the benefit of the trade.
• The most common expenses that get missed are the preparation of the annual tax returns for staff which may be included within one single accountancy bill.
• ‘Keyman’ insurance costs (usually life policies on the senior members taken out when obtaining company finance) are often mistreated for corporation tax deductions and for personal tax (inclusion on P11D).
• There has been an increase in challenges by HMRC on the use of sponsorship where there is a personal involvement of a director or member of their family (usually racing cars or yachts but also applies to sponsorship of children’s sports teams). These costs are disallowable in the company’s corporation tax return unless it can be demonstrated that there is a direct link between the company incurring these costs and an increase in the company’s turnover/profit levels.
Private proportions
Where a self-employed individual uses their own vehicle, it is important to remember that there are two sides of the expenditure they can claim in their tax computations, the actual expenses incurred and the capital allowances on the use of the asset by the business.
• Ensure that where private use fluctuates year-on-year that the same proportions are claimed in both revenue and capital accounts.
• This will link with the need to keep detailed mileage logs to ensure the correct apportionment.
Use of home charges is now at £4 per week.
• Always use the weekly charge unless an increase in household bills as a result of working at home can be specifically identified and calculated. For example, a graphic design business using multiple computers and servers can likely demonstrate an increase in the electricity bills of the house as opposed to a director of a manufacturing business choosing to work from home one day a week, which will have a minimal effect on the overall household expenditure.
Reimbursement of expenses
For an employee to receive a tax deduction or reimbursement of an expense paid personally, it must be proven to have been incurred wholly, exclusively and necessarily in the performance of their duties. This varies from the business requirement of “wholly and exclusively” only.
• The addition of the word “necessarily” is the biggest obstacle when trying to persuade HMRC that the expense is allowable. HMRC will ask “could the employee do his job without incurring that particular expense?”
• Travel expenses will usually be the most common and as mentioned above, mileage logs are important in justifying this claim.
• Any journeys for ordinary commuting will not be allowable.
• Consider temporary workplace rules for those on secondments and/or those individuals who work through a Personal Service Company.
• For self-employed individuals, it will be necessary to identify the ‘base of operations’. This may not necessarily be the individual’s home.
• Another common error in this area is the claiming of training costs. Courses or training that act as a continuous development of the skills already held by the individual will be deemed to meet the criteria, whereas those which provide the employee or principal (if self-employed) with new skills are not allowable as a deduction both for the individual or the business.
• Payment of expenses that are private to the individual – known as meeting pecuniary liabilities – will give rise to payroll issues. This usually occurs mainly within owner-managed businesses.
• Consider the use of personal credit cards, as it is in the individuals personal name as opposed to the company’s should the company settle the bill the individual is receiving a benefit which is liable to both PAYE and Class 1 National Insurance both employers and employees.
Discovery assessments
The use of section 29 TMA1970 Discovery Assessments are increasing as more information is made available to HMRC from third parties.
• Gives HMRC powers to enquire into years where there may be a loss of tax to the Treasury and the usual enquiry windows are closed.
• Recent campaigns and amnesties have proved successful for HMRC.
• HMRC are now collecting information from lettings agents and estate agents on historic property transactions and rentals so an increase in specific targeting from HMRC should be expected where full information has not been disclosed.
White space disclosures
Should be used to confirm positions on potential disputes with HMRC.
• Allocations on a PPR disposal if more land claimed for ‘reasonable enjoyment’ or if large acreage sold with a property; estimated figures included on returns for both CGT and income tax issues; reason for making claims, etc.
• Use for confirmation of the reasons for fluctuations of business profits in the current year as HMRC are now looking at trends in both specific businesses/self-employments along with general averages for industry sectors.
• Expansion on figures included in boxes where there is no option to provide further information.
• It is a fine line. Ideal use is to give HMRC enough information so that they do not need to ask generic questions into the return but not provide too much information that they can find fault in the return/treatment initially.
Overdrawn loan accounts
HMRC are requesting more information on the source of capital introduced to the company from external sources so records must be maintained in this area.
• Confirmation that funds have been transferred from a personal bank account to the loan account is not sufficient for this purpose and HMRC are asking for the source of the original capital.
• HMRC are also looking at “book entry” dividends. Ideally, they would like to see the money being paid out of the company’s bank account to the Director/Shareholder’s private account and then being reintroduced to the company as opposed to a “paper credit” as this demonstrates an active decision to use the dividends to repay the loan account instead of using the legally entitled funds for a personal use at that time.
• This position also applies to interest “charged” on the loan to avoid a potential benefit in kind. Ideally the interest should be physically paid into the company by the individual.
• Rolling-up interest does not change its status to capital and HMRC can remove the credits if it is found to have been included incorrectly giving rise to historical P11D issues but the company will still be liable to the corporation tax liability on the assumed payments.
• Dividend vouchers confirming the date of the payment should be kept.
Employment status
From April 2014, the rules have changed as HMRC attempts to find a way of challenging “false” self-employment cases and the application of IR35 legislation.
• More importance placed on the overall ‘direction, control and supervision’ of the individual by the end client than there has been historically.
• Intermediaries such as agents or payroll bureaus may now become liable to the relevant PAYE and Employers NIC charges and this issue will need to be addressed.
• Whilst the focus has changed to control, issues such as the use of substitutes are still as important and it will be necessary to ensure that the contract terms agree to the actual working practices.
Termination payments
HMRC’s position on termination payments has not changed in this area. They will still look to review redundancy payments to ensure that, if applicable, the £30,000 exemption is being correctly applied.
• Payments can fall into charge under section 62 ITEPA2003 as employment income or if they are not caught by that will fall into charge under s401 ITEPA2003.
• The £30,000 exemption will only cover payments that are chargeable under s401 and only if the relevant conditions are met.
• The taxable position should be reviewed in advance of the compromise agreement being finalised to ensure that the exposure to income tax and NIC is known and the exemption is correctly applied (where applicable).
Partnerships with corporate members
The recent changes in this area have seen HMRC challenges on the provision of loans or benefits to the partners of the partnership where they are also involved in the limited company. HMRC now take the view that the benefits have actually been made to the individual by virtue of their employment within the company as opposed to by virtue of their partner status.
• Loans made to the partners will now (and should have always been) caught by the loans to participators rules under s455 CTA2010 (previously s419 ICTA88) and the company will be liable to the usual 25% tax charge and a P11D declarable benefit.
The provision of a vehicle through the partnership (which doesn’t give rise to a P11D benefit) was successfully challenged by HMRC in Coopers v HMRC [2012] UKFTT439 (TC) where it was found that the cars provided through the partnership were only made available to partners because of their involvement in the corporate partner company.
• If it can be provided that there is a genuine commercial rationale for the provision of the vehicles to the partners as part of the partnerships daily trading activities then this provision may not apply.
Ben Chaplin is Finance & Deveopment Director at Taxwise Services Ltd. This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email info@icpa.org.uk or by phone on 0800-074-2896