Fix for SA filing problems, Exempt or zero rated, Tax credits renewal

Last week we offered an update on the online filing issues for self-assessment tax returns. We also looked at a case where the taxpayer was confused about zero rating and exempt goods for VAT, and took advice from his suppliers. Finally, don’t forget the tax credits renewal deadline is 31 July; your clients may need you to provide some estimated figures of profit for 2016/17.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Exempt or zero rated

Do your clients and your staff understand the difference between goods which are zero rated for VAT, and goods which are exempt? Sales which are zero rated must be included within the turnover which counts towards the test for compulsory VAT registration, exempt sales are not included.

This distinction is particularly important for e-bay traders whose turnover may quickly exceed the VAT threshold (now £85,000). This happened to Nathaniel Hendrickson who sold motorbike protective clothing online, including helmets. He didn’t think he had to register for VAT as his supplier had assured him that the protective clothing was exempt from VAT. In fact, VAT notice 701/23 make it clear that motorcycle helmets and certain safety boots are zero rated (not exempt), but all other clothing for adults is standard rated.

Hendrickson claimed his accountant had told him in 2015 that all the clothing he supplied would not be subject to VAT. He took this as meaning that he wouldn’t have to register for VAT. However, the accountant changed her advice, and apologised for her oversight, once HMRC started to enquire into Hendrickson’s tax affairs.

Hendrickson had to pay VAT of £23,962 in respect of sales made in the period for which he should have been VAT registered, plus a penalty of £4,792, which was the minimum penalty chargeable at 20% of the late paid VAT. The tax tribunal did not accept that his ignorance of the law, or his reliance on advice from his accountant was a reasonable excuse.

Making Tax Digital, PAYE codes and P800s, IHT and holiday cottages

Just as we published last week’s tax tips the Government made the stunning announcement that MTD is to be delayed; we have more details below. HMRC’s PAYE computer appears to be programmed with the wrong tax law, so there will be errors in PAYE codes and P800s computations to look out for. Finally, a recent case busts the myth that you can get IHT relief on the value of furnished holiday accommodation.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

IHT and holiday cottages

Years ago, tax advisers would say that an active holiday lettings business should qualify for IHT business property relief (BPR), if the owner died whilst running the business. This would allow the value of the holiday accommodation to be covered by the 100% BPR exemption.

However, HMRC changed their view on the availability of BPR in late 2008, and have been challenging estates where BPR is claimed for holiday lettings ever since. The first notable case since this change of approach was Pawson, which the taxpayer won at the First-tier Tribunal, but was defeated at the Upper Tribunal. Leave to appeal to a higher court was refused.

The Pawson case concerned just one let property, and although it was actively managed, the Upper Tribunal decided that the property was held mainly as an investment, so it didn’t qualify for BPR.

The latest case of Marjorie Rose, concerned 11 properties owned by a partnership, of which the deceased held a two-thirds share, valued at over £1m. Significant services were provided to the guests in the holiday cottages, by the nearby hotel (owned by the same family) such as internet, parking, administration, personal guest services, food services, ordering milk and newspapers. However, the tribunal decided that all 11 properties were held mainly to obtain rental income, and hence they were investments that do not qualify for BPR.

Where your clients run holiday lettings businesses it would be prudent to review their IHT planning in light of this case.

Trust tax returns and registration, Winding-up a company, Advising clients with overseas interests

Last week we warned you about problems with filing SA returns online, this week an additional problem has come to light concerning trust tax returns. We look at the new HMRC guidance on anti-avoidance rules which may apply to distributions made on the winding-up of a close company. We also have a reminder of your obligations to write to clients about offshore accounts and investments.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Winding-up a company

From 6 April 2016 distributions made to individuals on the winding-up of a close company can be subject to a targeted anti-avoidance rule (TAAR). This TAAR seeks to charge income tax rather than CGT on the distribution if four conditions are met, as we outlined in our newsletter on 25 August 2016.

The four conditions are briefly:

A. The individual holds at least a 5% interest in the ordinary share capital and voting rights of the company;

B. The company is close company or has been within the last two years before the winding-up;

C. The individual who receives the distribution is directly or indirectly involved in the same or similar trade or activity as the company, within two years after the distribution; and

D. The main purpose of the winding-up, or one of the main purposes, is to reduce income tax payable.

The difficulties in applying the TAAR lie with identifying in Condition C what constitutes; “directly or indirectly involved with” and “same or similar trade or activity”.

HMRC has just published guidance on this TAAR in its Company Taxation Manual at CTM36300 – CTM36350, but the examples given do not clearly define the scope of the phrases in Condition C.

HMRC say that “similar trade or activity” is deliberately wide, and provide an example of a landscape gardener who switches to providing gardening services, which is a similar activity.The guidance on the meaning of “involved with” is even less helpful, as the activities of people connected with the person who receives the distribution must also be considered.

In all cases condition D (the tax-saving motive) must also be met for the distribution to becaught by the TAAR, so if you can show there was no intention to reduce income tax, the TAAR doesn’t bite. Our corporate tax experts can help you advise your clients on this point.

Problems with SA filing, What are the facts?, Money laundering regulations

The P11D and P11D(b) forms should be completed by now as the deadline was the end of June, so you can turn your attention to the SA tax returns. But before you plough ahead read our update on the latest software issues, and how to avoid them. We also have a tale of what can go wrong where your client doesn’t provide all the facts about the land he has sold. Finally, you need to be aware of new anti-money laundering regulations.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Problems with SA filing

Personal tax is now so complicated that it can require a complex algorithm to work out the most beneficial off-set of allowancesagainst classes of income for an individual taxpayer. We explained the problems this is causing in our newsletters on 30 March and 27 April 2017.

HMRC’s current work-around is to issue a list of SA exclusions for online filing. If the taxpayer’s circumstances fall within one of those exclusions, the SA tax return for 2016/17 should be filed in paper form, not online. HMRC has recently issued version 4 of this list (see below).

The list of exclusions covers much more than incorrect allocations ofreliefs and allowances. For example, averaging for farmers and artists (exclusion no.61), and trade or property losses broughtforward into 2016/17 (exclusion no. 58) may cause problems. If your client has any unusual circumstances to report on their 2016/17 tax return, check the exclusions list before attempting to file online.

All software providers should have incorporated HMRC’s exclusionslist into their 2016/17 tax return software, but as version 4 of this list was published on 19 June, it will take sometime for all tax return software to be updated. In the meantime, the advice from the professional bodies is to wait a few weeks before filing in paper form, as an electronic solution may become available.

HMRC has some other problems with its online SA service.Taxpayers who access the service through the GOV.UK Verify (identity checking service), can’t request reductions to payments on account or set up a direct debit to pay their tax. A work-around is to set up a one-off tax payment through the taxpayer’s bank account, and used the paper form SA303 submitted by post to reduce a payment on account.

When is a tax return needed?, How to make a tax claim, How to get a CIS repayment

We examined three basic tax compliance tasks last week: who needs to submit a self-assessment tax return, how to make a tax claim, and how to apply for a CIS tax repayment. HMRC’s guidance on the first question is not in line with tax law. The second question has a surprising answer derived from a recent tax case, and a new procedure for obtaining CIS repayments has just been announced.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

When is a tax return needed?

Accountants are often asked whether a SA tax return is really necessary, particularly where all the taxpayer’s income is fully taxed under PAYE. The correct answer is that a tax returnshould not be necessary for such a taxpayer, unless he also has capital gains or child benefit to declare, or his income is over £100,000.

However, HMRC insist that all company directors should register for self assessment and submit a SA tax return every year. An exception is specified for directors of charities who don’t receive pay or benefits. This reasoning is based on the guidance on under directors’ responsibilities, but a recent tax tribunal case has shown that this guidance is does not accurate reflect what the law says.

Mr Kadhem was appointed as a director in May 2014, and HMRC apparently sent him a notice to file a SA return on April 2015. Kadhem insisted that he didn’t receive this notice, and was not aware that he was required to submit a return as all his income was taxed under PAYE. Only after a late filing penalty was issued did he submit a tax return, but he appealed against the penalty.

The tribunal squashed all the late penalties as HMRC could not prove that the notice to file was sent to the correct address. If a person does receive a notice to file a SA return, that tax return must be submitted, unless the notice to file is withdrawn. The taxpayer (or you on their behalf) can ask HMRC to withdraw a notice to file, but the call-centre operative may not agree to this request, as they can only see HMRC’s incorrect guidance on the issue.

The list of who must file a tax return has been updated for 2016/17 to include individuals who have either:

· dividends from shares of £10,000 or more;

· interest from savings or investments of £10,000 or more.

This arbitrary £10,000 threshold is odd, as someone whose personal allowance has been covered by earned income would have to pay tax on dividend income exceeding £5,000. The same taxpayer would have a tax liability in respect of interest over £6,000, if the savings rate band was available, and he was a basic rate taxpayer.

Where the taxpayer has untaxed income, you can report this to HMRC using the agent’s dedicated line, or on the general HMRC contact number: 0300 200 3300.

Employment allowance, VAT and disbursements, Problems with online CT service

Last week we examined circumstances in which the employment allowance can be claimed for earlier years, and when an expense is treated as a disbursement. We also had warning about problems with HMRC’s online corporation tax service.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

VAT and disbursements

Lots of people get confused about the VAT treatment of expenses which are recharged to customers. The rule to remember is; all recharged expenses carry VAT, unless the item is a disbursement.

You must not charge VAT on the value of the disbursement and neither can you reclaim any VAT which forms part of the cost of the disbursement.

An expense is a disbursement if it belongs to the customer and business has paid the expense on behalf of its customer. For example, a solicitor may pay the land registry fees on behalf of his client, but those fees “belong to” the client who bought the property. It is the client who is ultimately responsible for paying the land registry fee in respect of his property.

Conversely the solicitor may incur a courier fee to send documents to his client for signature. The courier fee belongs to the solicitor, as he engaged the courier, so where the cost is recharged to the solicitor’s client the courier fee must carry VAT.

It is important that recharged expenses and disbursements are clearly distinguished on the VAT invoice. Ellon Car Clinic got into trouble with HMRC, as it recharged MoT fees to its customers but did not separately show those fees as disbursements, although it correctly excluded the MoT fees from the amount charged to VAT. The Ellon Car Clinic won its case at the First-tier tribunal, but it would have saved a lot of trouble if its VAT invoices had been clearly set out.

IHT planning, VAT payments and surcharges, Dangers for online filing

We have something to thank the politicians for; their talk about dementia tax has encouraged people to think about the value of their homes and how much they may need to pay for long-term care. This provides a good opportunity to discuss IHT planning, as we explain below. We also have tips on avoiding VAT surcharges, and a warning about cyber-attacks on your firm’s systems.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

IHT planning

People don’t want to think about their death, or the IHT potentially payable, but they will consider the cost of the care they may need, as that is an issue that many have addressed for an older relative. The talk of “dementia tax” to pay for social care may also prompt people to think about their net wealth.

The retired population is comprised of two distinct groups; those who are active and healthy, who may be caring for an older relative, and those who have difficulties undertaking daily tasks and who need some form of care or assistance. The ageUK briefing (see below) provides an excellent summary of the issues to consider.

The dilemma for the fit and active group is that they know they may need care in the future, but they don’t know when, and for how long. They may wish to undertake IHT planning, but they also need to retain access to sufficient investments which could be used to pay for care.

The solution for this group can be to make investments which qualify for an IHT exemption using business or agricultural relief (HMRC have dropped “property” when referring to BPR and APR). Shares quoted on the AIM and shares issued under the EIS or SEIS will qualify for IHT business relief. There are a number of companies which market investments in these areas as IHT shelters.

Take the opportunity to talk to your clients about “dementia tax” (not a real tax), and introduce facts about IHT (a real tax), including planning strategies to cope with both IHT and potential care needs. You need to be registered with the FCA to recommend the purchase of any particular investment product, so be careful how you frame advice in this area.

LISA planning, Information notices, Share scheme returns

The lifetime ISA could be a useful tool to transfer wealth to younger generations as part of an IHT plan, but there are traps to be aware of as we explain below. We also examine a case where HMRC exceeded their powers to request information, – it’s a useful lesson in where the legal boundaries lie. Finally, we report problems with the share scheme annual return system.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Information notices

HMRC have extensive powers to request information from taxpayers, but the law is designed to ensure the taxpayer understands what he must supply and when. This structure is necessary because the taxpayer can suffer a penalty if he does not comply with an information notice from HMRC.

HMRC need to understand a taxpayer’s tax position, so they ask questions and request that certain documents be provided. That is fair enough, but the taxpayer needs to be clear about what information is requested, and it must be information which is within his power to produce.

Fergus Anstock received a shocking letter from HMRC dated 1 April 2014, which said “we have reason to suspect that you have committed tax fraud”. A number of meetings were held between Anstock and HMRC over the next two years, and information was also provided by letter. It is not clear whether Anstock was professional represented during this enquiry process.

On 5 July 2016 HMRC issued a formal information notice to Anstock, but he claimed he didn’t receive it. On 16 August 2016 HMRC issued Anstock with a penalty of £300 for not complying with the information notice, which he appealed to the tax tribunal.

The tribunal judge ruled that the information notice was invalid for the following reasons:

  • HMRC could not prove that the notice was sent, or received by the taxpayer;
  • The notice requested third-party documents which were not within the taxpayer’s power to supply;
  • The information request was made in such general terms that it was impossible to understand exactly what had to be provided; and
  • Some of the documents requested were subject to legal professional privilege.

In squashing the penalty the judge concluded: “the notice offends just about every tenet for the proper drafting of a document which is intended to have legal effect”.

This case illustrates how HMRC officers may ignore the strict legal requirements relating to information notices. If you client receives such a notice, check it against the criteria set down by the judge in this case, and if it fails, submit an appeal. Our tax investigation experts are happy to help you draft such an appeal.

NLW and NMW, Averaging for authors, Agent authorisation

Last week, following the news that the John Lewis Partnership has fallen foul of the National Minimum Wage rules, we explained how to check that your clients are paying their workers enough. We also took a look at the averaging rules for authors and literary artists. Finally, we explored the agent authorisation process and the different authorisation routes available.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

NLW and NMW – employer beware

The John Lewis Partnership has a reputation as an excellent employer, but the news has recently come to light that after adopting `pay averaging’ arrangements they have unintentionally fallen foul of the National Minimum Wage regulations as the payments for some `pay reference periods’ had fallen below the minimum wage.

So what is a `pay reference’ period and what do clients need to be aware of in order to comply with the rules?

Briefly, employers are required to pay `workers’ aged 25 and over the National Living Wage (NLW), set at £7.50 per hour from 1 April 2017. Younger workers must be paid the National Minimum Wage (NMW) appropriate to their age. The worker must be paid at least the minimum wage, on average, for the time worked in the pay reference period. The pay reference period is normally determined by the frequency by which the employee is paid, so weekly for weekly paid employees or monthly for monthly-paid employees. Crucially, the pay reference period cannot be more than 31 days.

The NLW and NMW are worked out as an hourly rate, even if the worker is not paid by the hour. Different checking procedures apply depending whether the worker is paid by the hour, paid an annual salary, paid by what they produce (piece or output work) or paid in other ways (unmeasured work).

Where the worker is paid hourly, it is simply a case of checking what the worker is paid in the reference period against what he would be paid at the NLW/NMW for that period.


In May 2017, Susan (aged 43) works 140 hours. She must be paid at least £1,050 (140 hours at the NLW of £7.50 per hour).

Where a worker is paid an annual salary, the basic annual hours in the worker’s contract are divided by the number of times the worker is paid each year (so by 12 where the worker is paid monthly). The minimum pay for each pay period is found by multiplying the average hours for the pay period by the minimum wage appropriate to the employee’s age. So a monthly paid worker age 27 contracted to work 1980 hours a year must be paid at least £1,237.50 a month (1980/12 x £7.50).

It is important that clients understand how to work out the minimum wage for the type of work that their workers do and have checks in place to check that this is being paid for each and every pay reference period.

Employee expenses, Tax deducted by banks, Donations by a company

Some clients may have already sent you their tax papers for 2016/17, so last week we examined two issues that crop up on relatively simple tax returns; employee expenses and tax deducted by banks. We also had a quick reminder of what donations a company is permitted to make and whether they are tax deductible.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Tax deducted by banks

Since 6 April 2016 interest paid by most deposit takers: banks, building societies and NS&I, should be have been paid without tax deducted. This doesn’t mean you can ignore the interest certificates issued by deposit takers, as the interest must be declared on the taxpayer’s SA return.

The interest is taxable, if it is not paid out of an ISA account, but in most cases the tax rate will be 0%. This zero rate applies where the interest is covered by the taxpayer’s personal savings allowance of £1,000 (£500 for higher rate taxpayers), or their savings rate band of £5,000. Additional rate taxpayers are not entitled to a savings allowance.

It’s worth noting that many PAYE codes for 2016/17 and 2017/18 have not taken account of the available personal savings allowance or savings rate band, and have incorrectly set the taxpayer’s personal allowance against estimated amounts of interest received. Such taxpayers should be due a tax repayment if the personal allowance could have been set against taxed employment income.

Look closely at the bank interest certificates, as those issued in respect of payments into “reward” current accounts may have basic rate tax deducted for 2016/17. The “reward” paid by the bank is not interest, so it can’t be paid gross, and it is not covered by the personal savings allowance or the savings rate band. The reward is an annual payment and it should be declared on the tax return under “other income”, with the tax deducted also reported. A higher rate or additional rate taxpayer will have more tax to pay on such a “reward”.

Confusingly cash-back payments are not “rewards” and are not interest either. They do not have to be reported on the tax return if the cash-back is paid in respect of a personal account. However, if the cash-back is received on a business bank account (which is unlikely), it should be declared as part of the trading receipts (see BIM100210). The bank concerned should issue guidance as to the tax treatment of its current account rewards or cash-backs.