Late filing penalties

“No fine for late taxes” was the misleading front page headline In The Sunday Times on 10 January 2021.

The report doesn’t include a source but it would seem to be a letter that was sent by Jim Harra, CEO of HMRC, to 6 accounting bodies on 18 December 2020. We featured this is our weekly topical tax tips on 7 January.

That letter includes caveats clearly intended to avoid exactly the type of headline that appears in The Sunday Times. Specifically it says: “We do not want to complicate this message by sending a blanket signal that it’s OK to file late”.

The Sunday Times article also seems to confuse penalties for late filed tax returns and late paid taxes.

Our advice to accountants last week, before the ST article appeared:

The 2019/20 tax return filing deadline remains at midnight on Sunday 31 January, and automatic £100 late filing penalties will be issued by the HMRC computer for any tax returns received after that point.

However, all penalties can be appealed. HMRC has confirmed, in a letter to the professional accounting bodies, that the period in which an appeal will be accepted has been extended to 90 days. That appeal period runs from the date the penalty notice is issued, not from the date it arrives with the taxpayer.

All taxpayers who have accessed their online Personal Tax Account (PTA) will have consented to receiving all communications about self-assessment from HMRC in digital form, so don’t expect a paper penalty notice to always arrive in the post. You will need to prompt your client to look for penalty notices from HMRC on their PTA.

Taxpayers can appeal against a penalty notice using the online service, by logging into their Government gateway, but tax agents need to appeal using the paper form (SA 370).

In order to appeal successfully you need to include a reasonable excuse to why the tax return was late. This reasonable excuse needs to be in place for the period in which return should have been submitted and the delay after the submission deadline. HMRC expect the return to be submitted as soon as the factors that contributed to the delay have dissipated.

HMRC is prepared to accept covid-related personal or business disruption as a reasonable excuse, and this will include disruption to the tax agent’s work as a result of the pandemic.

 


Christmas party exemptions

Office parties will have to be online this year because of the coronavirus restrictions that apply across most of the country. But employers can still say “thank you” to their employees with a physical gift.

HMRC has confirmed that the cost of online staff parties will be an “annual event” for employers qualifying for the tax-free limit of £150 per person. Remember this is an absolute cap not an allowance, and if the cap is breached the whole amount is taxable and subject to NIC.

The £150 per head limit applies to all those attending the event, not just employees. It should cover the cost (including VAT) of food, drink and any entertainment provided. The employer could send a food hamper to every employee to enjoy while attending the online party, and provide a form of entertainment such as a live comedian, music or a quiz, all delivered online of-course.

In addition to, or instead of the online staff party, the employer can give a physical gift worth no more than £50 to any or all of the employees. These trivial benefits must not be provided in return for the employee’s normal service, and must not be a contractual entitlement. Also, the gift must not be cash or a cash voucher.

For employees who are not the company’s directors or their family members, there is no limit to the number of trivial benefits the employer can give during the year. A gift-card that is topped up at intervals with £50 each time would fail this test as the total value given in the year would be counted as one gift.

Directors have an annual cap of £300 for trivial benefits, which also applies to members of their family or household.


Autumn tax announcements

There will be no Autumn Budget this year, but that doesn’t mean tax policy has paused, changes are still being made in the following areas:

MTD for corporation tax
We have been waiting for an indication of when the MTD rules will apply to companies, and now we know those rules won’t be compulsory until 2026 at the earliest.

However, the MTD regime will apply to all organisations that pay corporation tax; there will be no minimum turnover threshold as applies for income tax. There will be quarterly reporting of income and expenses, and a pilot to test the software will commence in 2024. HMRC will not provide free software for filing the corporation tax returns required under MTD.

Capital allowances
The annual investment allowance (AIA) cap is currently £1 million, and was due to reduce to £200,000 on 1 January 2021. This £1 million cap will now be extended to 31 December 2021.

R&D tax credits
There is currently no cap on the amount of R&D payable tax credit a small company can receive if their company has made a loss after deduction of their R&D claim. This will change for claim periods starting on and after 1 April 2021. The payable tax credit will be capped at three times the PAYE and NIC payable for the period plus £20,000. You need to factor this into cash flow forecasts for your clients.

CIS changes
The construction industry is facing a triple whammy of tax changes in 2021: VAT domestic reverse charge on 1 March, off-payroll and CIS reforms on 6 April.

The later changes may affect sub-contractor companies who claim their tax refund through RTI, and large businesses who could be classified as deemed contractors as they undertake more than £3 million of construction expenditure within 12 months.

There will also be new penalties for supplying false information to HMRC when applying for gross payment status or CIS registered status. This penalty will have a wide scope as it can be applied to any person who influences another to provide false information.


How to tell if you’ve paid too much Stamp Duty 

Stamp Duty Land Tax (or SDLT) has been big news lately, with the chancellor’s announcement in July of a ‘holiday’ on the tax for all properties of £500,000 or lower purchase price.

But what if you bought property at any price before July 2020? Can you be certain that you paid the right amount of Stamp Duty on your purchase? Might you be due a Stamp Duty Refund? And if so, how do you even go about getting one? 

There is no easy answer to the question of whether you may have overpaid your SDLT. With over 30 different exceptions and exemptions covering the type of property, its usage, the circumstances of the buyer and the nature of the purchase (to name a few), there is no one-size-fits-all equation that will instantly give the correct answer. 

Examples of factors which may prove relevant in the calculation of Stamp Duty on a property include: 

  • Land – if the property has land attached to it which is more than a simple garden. 
  • Mixed Usage – if the property has commercial buildings, agricultural land 
  • Annexes – many people fail to realise that a ‘granny annexe’ may qualify a property for relief under certain circumstances 
  • Any rights or interest over the land that do not benefit the dwelling itself i.e. commons rights to pass through over nearby parkland 

If your property has any of these elements, it is very possible that you will have overpaid your Stamp Duty Land Tax and may be due a refund. 

One well researched estimate* is that as many as one in five SDLT returns may be being incorrectly completed on property purchases, leading to millions of pounds of overpaid SDLT which HMRC will not proactively check. The only way to secure a refund of these overpaid monies is to approach HMRC with the correct assessment and seek an alteration of the original return based on the facts of the purchase. 

You may think that in order to make sure you didn’t overpay your SDLT, you simply need to call HMRC or your solicitor and double check with them. That’s where things start to get a little tricky. 

There are a number of reasons why solicitors are likely to make errors on many transactions, including relying on the HMRC calculator which doesn’t provide a 100% accurate picture on all properties. But solicitors also often simply don’t realise the actual complexity of SDLT as it stands. Because it shares a partial name with the old Stamp Duty, which was a broadly simple tax on the property itself rather than the individual, many of them assume it is the same.  

Additional problems arise from:

  • the proliferation of avoidance schemes set up in the early 2010s to take advantage of the increasingly labyrinthine legislation surrounding SDLT,; and
  • the aggressive stance taken on these by HMRC and the Solicitors Regulation Authorit.

Many accountants and solicitors are reluctant to make any more than the most cursory examination of the SDLT situation on any purchase, lest it result in unwelcome attention from their regulator. 

Calling HMRC introduces a whole other set of problems. HMRC helplines are not manned by people who are experts in SDLT. Or indeed law in general. Simple errors in basic understanding – such as confusing ‘civil partnerships’ with ‘common law partners’, can lead to disastrous errors. 

One must also remember that in order to assess a purchase for tax, HMRC will have relied on the SDLT return submitted to them, which itself will have been completed by the solicitor. HMRC itself has no knowledge of the property outside of what is provided on this form. Therefore, a purchaser calling them and asking if they are likely to have overpaid the SDLT on the property and be due a refund is only ever going to lead to the answer ‘no’. This is because HMRC will consider the property to have been correctly assessed based on the information they have. 

In order to firmly establish whether or not the SDLT on a purchase has been correctly assessed, you need a real SDLT expert to examine the details of the transaction – the type of property, the circumstances of the purchaser, the method of purchase, everything.  

They will then assess this against the full legislation relevant to the time of purchase, examining each of the various exemptions, exceptions and reliefs and ascertaining which, if any, apply. If any do. Then there must be a full report prepared along with an amended SDLT return, explaining exactly why the original assessment to SDLT was incorrect, what the actual position is, and what the amount of refund due should be.  

How do you tell if you’ve overpaid stamp duty? The same way you’d answer any specialist question – engage an expert and get them to give you the right answer.

David Hannah – SDLT expert. You can contact David via his profile here >>>>

*Research carried out by Cornerstone tax advisers.


Nudging the taxpayer

HMRC uses data from many sources to cross check information reported on self- assessment tax returns. It could open an enquiry every time a mis-match is found, but this is expensive in terms of person-hours, and the time it takes to collect any additional tax.

Instead HMRC is experimenting with sending a standard letter to the taxpayer where a mis-match in data is found. The letter doesn’t state exactly what is missing from the return, but it is designed to nudge the taxpayer to review and correct the return where necessary. HMRC call these “one to many” letters.

This approach is light on manpower as the letter is generated automatically by the computer and the onus is on the taxpayer and their agent to investigate the issue and take any action required.

HMRC is currently comparing the 2018/19 SA tax returns to various data sets and is sending out nudge letters covering the following issues:

  • Deemed domicile
  • Statutory residence
  • Discrepancies with employer reported pay and benefits
  • Disposal of residential property which was not the main home
  • Investment income from financial institutions
  • Deferred consideration on sale of private company shares
  • Income of persons with significant control of a company

It is important to note that the nudge letter does not amount to a formal opening of an enquiry, but it does require action as HMRC may follow-up if the tax return is not amended.


Adviser insights: Q&A with David Kirk – Employment status tax expert

How long have you been a tax adviser David?
18 years.

How did you come to specialise in payroll taxes and employment status issues?
Because, back then, I could see that nobody else knew much about this

Where were you working at the time?
I was already running what was then a more general accountancy practice.

What are the most common mistakes you see made by non-specialists in your area of tax?
Failure to know the law

What are the most valuable issues on which you have given advice?
IR35, expenses payments, CIS, managed service companies

What differences might you expect to see in the coming year that could impact those issues?
Public sector IR35 rules being extended to the private sector

What has been your worst experience with HMRC?
Creating unnecessary trouble by not knowing the law

What has been the most rewarding thing you have done from a tax perspective?
Getting HMRC to back down from making seven-figure claims

How would you describe your attitude to tax?
Pragmatic. I expect to see truth told and the law obeyed but otherwise see no moral issues

Which aspect of tax would you nominate for a silliest tax rule award?
The IR35 rules that mean you cannot offset tax paid under one headline against tax demanded under another.

What is the funniest tax related experience you have had?
My client losing a tax tribunal case but ending up making £75,000 out of it

What is your top tax tip for general practitioners?
With HMRC enquiries: get the strategy right, know your client, and know the inspector

If you hadn’t gone into tax what would you like to be doing now?
Law

What do you enjoy doing in your spare time – away from the world of tax?
Fell walking, opera, theology and talking politics

What have you most enjoyed about your career in tax?
Writing a book. [The 4th edition of David’s book “Employment Status – a tax guide” is published by Claritax]

You can reach David via his profile here >>


Tax deferrals and VAT rate

Income tax and VAT payments due in the summer of 2020 were both deferred automatically until 2021, with no interest or late payment penalties due. In both cases the taxpayer could pay the tax or VAT by the original due date if they wished to.

As a result of this deferral individual taxpayers will have the following amounts of tax due for payment by 31 January 2021:

  • a) Second payment on account 2019/20
  • b) Balancing payment 2019/20
  • c) Capital gains tax 2019/20 (if not paid under 30-day rule)
  • d) First payment on account 2020/21

It appears from the Chancellor’s statement that the taxpayer will be able to apply to defer items a) and d) in this list by spreading the payments over 12 monthly instalments to January 2022.

Where the total tax due doesn’t exceed £30,000 the application to spread these tax payments will be agreed automatically when the taxpayer applies using an online form. If the total tax due exceeds £30,000, or the taxpayer needs longer to pay, the taxpayer will be able to call HMRC to agree a bespoke payment plan.

Where a business deferred VAT due in the period from 20 March to 30 June 2020, that VAT will be payable by 31 March 2021. The business will now be able apply to spread the deferred VAT payment over 11 equal instalments payable between April 2021 and March 2022. This deferred VAT will not be subject to interest if the payments are made as agreed.

Finally, the reduced 5% rate of VAT for the hospitality and tourist sector was due to revert to 20% on 13 January 2021. The Chancellor has decided to extend this period of 5% VAT up to and including 31 March 2021. This will make accounting for the reduced rate far easier as the VAT rate will change at the beginning of a month.


Adviser insights: Q&A with Andrew Jupp : Specialist adviser to fast-growth technology-based businesses

How long have you been a tax adviser Andrew?
30 years

How did you come to specialise in fast-growth technology-based businesses?
Having previously been a PhD research scientist, I’ve always had an interest in fast-growth technology-based businesses. My career has been focused on working with such businesses and advising on the interaction between corporate and shareholder taxation.

As tax law and practice has changes, I’ve specialised in areas such as capital gains tax, IP exploitation, R&D tax credits, overseas expansion, group structuring, M&A and IPOs. I was fortunate (?) enough to be advising during the dot.com era and was involved with many IPOs on NASDAQ at what we now know were crazy valuations.

Where were you working at the time?
I started my career at GT, progressing through KPMG and then a partner at EY and National Head of Tax for a Top 10 firm, before setting up Jupp Consulting 9 years ago.

What are the most common mistakes you see made by non-specialists in your area of tax?
Not understanding the subtle complexities of tax legislation, taking things at face value, not fully understanding the client’s business and not asking the right questions.

What are the most valuable issues on which you have given advice?
R&D tax credits, Patent Box, overseas structuring.

What differences might you expect to see in the coming year that could impact those issues?
Closer alignment of income tax and CGT rates and changes to cross-border taxation.

What has been your worst experience with HMRC?
In the early days of R&D tax credits, a so-called software expert asking me what an algorithm was!

What has been the most rewarding thing you have done from a tax perspective?
Won a long-standing battle with competing tax jurisdictions over a Competent Authority claim.

How would you describe your attitude to tax?
Treat it as any other business expense; pay and claim what is fair and just and don’t be aggressive in tax planning.

Which aspect of tax would you nominate for a silliest tax rule award?
Top slicing relief (remember it?). I still to this day come out in a cold sweat when I think about it.

What is your top tax tip for general practitioners?
If in doubt, seek specialist advice. It’s a sign of strength, not a weakness.

If you hadn’t gone into tax what would you like to be doing now?
Farmer or vet.

What do you enjoy doing in your spare time – away from the world of tax?
Cooking, playing musical instruments, gardening, walking the dogs, sailing.

What other question do you wish I had asked and how would you reply?
What about you would someone never guess? Answer would be “I play a very unusual musical instrument – the piano accordion”.


Costs of paused R&D projects

Research and development (R&D) projects have been paused during the COVID-19 crisis alongside other business activities. However, the employer may still incur costs such as the top-up of wages for furloughed staff, and more recently employer’s NI and pension contributions for those employees.

HMRC has now clarified which costs relating to furloughed staff can be considered to be directly related to the R&D project, and thus can form part of an R&D tax relief claim.

The good news is that holiday pay and sick pay paid to employees who normally work on R&D projects may be counted as relevant costs, even if that holiday or sick leave is taken while the R&D project is paused. The bad news is that redundancy costs, and payments in lieu of notice (PILON) can never be treated as relevant R&D expenditure.

Where the employee has been fully furloughed, none of the employment costs can be allocated to the R&D project, as the employee won’t have worked during that period. Where employee has been flexi-furloughed from 1 July onwards the cost of their time spent working can be treated as qualifying R&D costs, but not the costs associated with furloughed hours.

For any part of the employment costs to be allocated to the R&D project, the particular employee has to be directly involved in the R&D activities. It is not permissible to include in the R&D claim a proportion of costs of a wider pool of employees who are not involved at all in the R&D project.

It is also essential to correctly identify the R&D project using the guidelines on the meaning of R&D, and to accurately record the costs that directly relate to the project.

A number of specialist firms will approach companies asserting that they can get a tax refund for the company on the basis that R&D is carried out. The specialist adviser will take a significant proportion of the tax saved as their fee, and in some cases continue to charge a fee for some years after the R&D project has finished.

If your client is approached by such a specialist R&D adviser, tell them about the AHK Recruitment Ltd case. A claim was submitted on behalf of the company but when challenged by HMRC the company couldn’t produce any evidence to support that claim. The case report doesn’t mention penalties for an incorrect return, but they were certainly applied.


Adviser insights: Q&A with Alun Oliver : Capital Allowances expert

How long have you been a tax adviser Alun?
Since April 1994 when I joined Crosher & James Quantity Surveyimg practice and about a third of my work was property tax related.

How did you come to specialise in property tax and specifically capital allowances?
I trained and qualified as a Chartered Quantity Surveyor (QS) with WS Atkins and moved to Crosher & James. At the time they were one of only a handful of QS firms specialising in Capital Allowances.

In my last QS role I spent six month negotiating with the contractor over £50K, yet only four weeks or so after starting in capital allowances I sent out my first claim report for a property investor client – saving them £3.5m… I was hooked at the opportunity to really impact clients!

What are the most common mistakes you see made by non-specialists in capital allowances?
Generally non-specialists Accountants fall into two camps

  1. Those who overclaim
  2. Those who underclaim.

Both types of mistake can have a seriously negative impact on the client and their projects.

Too often we hear and see accountants claiming too much as plant & machinery and providing only a fairly rudimentary analysis of the project expenditure. Also high levels of expenditure get categorised as Repairs (100% deduction) when actually they are improvements and should be capital – whether of not eligible for capital allowances (SBAs, PMAs, IFAs or other).

Claiming too little, is to me worse, as the client ends up paying too much tax! The reasons range from lack of awareness, apathy, to old school (and inaccurate) views that Capital Allowances are only a timing difference!

Solicitors also make mistakes here, particularly when acting on commercial property transactions. They often have a poor understanding of the New Fixtures Rules (ss.187A/B CAA2001) and too often default to a s198 election and accepting at face value the responses from the other party. Failure to properly deal with the CAs during a second-hand property transaction can result in NIL capital allowances!

What are the most valuable issues on which you have given advice?
The biggest capital allowances claim was a £600m power station where some 96% was accepted (after scrutiny & negotiation) by HMRC as Plant & Machinery with the balance as then, Industrial Buildings Allowances (IBAs).

What differences might you expect to see in the coming year that could impact those issues?
After the impact of Covid-19 there are certain sectors that will have been impacted more negatively as others. Leisure & Hospitality for example may have lower trading and thus may see losses increase and thus less requirement to seek out tax saving advice – until trade levels improve and growing profitability.

Other sectors – Logistics for example – are seeing strong demand and growth. in the medium term I feel taxes will increase as the Government has to rebuild the country’s finances after the JRS and wider C-19 support measures – but the time frame for that is not at all clear!

What has been your worst experience with HMRC?
Generally HMRC has, in my experience, been relatively fair and reasonable; although on the odd occasion there are some more pedantic enquiries.

One annoying one was a query as to why we were claiming capital allowances on air conditioning units. I simply replied asking the Tax Officer to reference the legislative or case precedent whereby they felt HVAC was disallowed; after which the claim was accepted. On balance I have had more positive feedback from HMRC than negative experiences – we regularly get compliments on the comprehensive nature and transparency of our claim reports!

How would you describe your attitude to tax?
I consider that tax is an essential part of life that enables Government to do so much. Equally tax can successfully be used to encourage or modify behaviour. There is a balance and it is important that Government sets out clear tax legislation and then applies those rules fairly and consistently so tax-payers can make commercial decisions with confidence of the tax consequences.

Which aspect of tax would you nominate for a silliest tax rule award?
Not so much a rule but the reaction of certain politicians as to WHO uses/benefits the tax reliefs – when they are working exactly as planned.

To illustrate Enterprise Zone Allowances (EZAs) or Business Premises Renovation Allowances (PBRAs) gave 100% relief to encourage deprived areas to be regenerated and be brought back into economic use – yet if these regeneration projects are funded by footballers or musicians some politicians focus on them gaining 100% tax relief on their high incomes – criticising them as tax dodgers – when they have facilitated the essential regeneration of thousands of these projects and areas across the country – as the tax relief was designed to do!

What is your top tax tip for general practitioners?
I have two tips:

  1. To recognise that few people are ‘Jack of All Trades’ and thus an independent Property Tax Specialist can add considerable value, saving time, effort, anxiety, reducing risk and saving money!
  2. Beware false economy – good advice is worth paying for – as robust, comprehensive and cost effective.

If you hadn’t gone into tax what would you like to be doing now?
Farming or an artist… but one or both of these may still feature in my next career move?!

What do you enjoy doing in your spare time – away from the world of tax?
Spending time with family and friends – often cooking (and then eating) – from cakes and biscuits through to full multi-course dinner parties!