Benchmarking of profits, Clients’ expense records, Directors’ loans

Back in the day the Inland Revenue trained their officers to understand that different taxpayers required different approaches, and to use their discretion to smooth out the difficulties which real life throws up. Nowadays their approach is: one penalty fits all, and business profits are compared to standard benchmarks as we explain below. We also question how deeply you should delve into a client’s expenses, and have news on how to reclaim s 455 tax paid on directors’ loans. 
Benchmarking of profits
In our newsletter on 17 April 2014 we explained how the HMRC “transparent benchmarking team” was writing to sole-trader businesses in selected trade sectors to nudge them into reviewing their reported net profit ratios. The trades targeted were: painters and decorators, driving instructors, taxi drivers and pharmacists.
The HMRC benchmarking team has now turned its attention to car mechanics and furniture shops. However, this time it is looking at the VAT returns of up to 7500 businesses, rather than the gross profit figures reported on the SA tax returns. 
The HMRC letter asks the trader to work out its VAT mark-up ratio by comparing the difference between sales and purchases (ie gross profit), as a percentage of all purchases as reported on the VAT return. It provides a range of mark-up ratios which HMRC say are standard for the trade.
HMRC ask the business to compare its VAT mark-up ratio for the last 12 months of VAT returns to the standard mark-up ratios. If it’s mark-up ratio falls outside the standard range, it should review the figures to be included in boxes 6 and 7 on its next VAT return.  
This is where you come in. In spite of asking some fairly complicated questions about profits and mark-up, HMRC has decided not to copy the letter to the tax agents of the businesses they have selected for this experiment. Fortunately the HMRC letter does not require a reply, so it can be safely ignored if you are confident that your client’s VAT returns are correct. 
However, the HMRC letter will certainly generate some alarm the business owners who receive it, so be prepared for some panicky phone calls – just what you need at this busy time of year.


This is an
extract from our tax tips newsletter dated 15 January 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>

Fit for work, More MOSS guidance, SA twitter, chat and bugs

Judging from the pressure on hospital A&E departments many people are not “fit for work” this month. At least employers can now use the Government funded fit for work service to help their employees get back to work, as we explain below. We also have news of further changes to the VAT-MOSS guidance including a new concession. Finally HMRC have turned to social media to answer taxpayers’ SA questions – is this a help or hindrance? 

Fit for work
From 6 April 2014 employers have been unable to reclaim statutory sick pay (SSP) paid to their employees. The Government promised to reinvest the money saved by withdrawing this refund scheme (mostly used by smaller employers) into a new health and work service to support employees to return to work. This was promised to be available from April 2014, then Autumn 2014…
Finally on 15 December 2014 the new health and work service was launched as a website called “Fit for Work”. There is a different website for workers in Scotland, but it is accessed from the same place. In fact the key part of the Fit for Work service – referral of the worker to an occupational health professional – is not operating yet.
When the referral service is working employees will be offered an occupational health assessment when they have been, or expect to be, absent from work due to sickness for four weeks or more. Employers can pay for medical treatments for their employees as recommended by such an assessment provided through Fit for Work, or by any other occupational health professional.  
From 1 January 2015 the first £500 of such medical costs paid for by the employer, is a tax and NI-free benefit for the employee (ITEPA 2003, s 320C). The medical treatment must meet a number of requirements to qualify for this tax exemption as set out in regulations (SI 2014/3228). There is some useful guidance in the consultation document for those regulations on the circumstances in which treatments will qualify for the tax exemption or not.

This is an
extract from our tax tips newsletter dated 8 January 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>

Official recognition of Tax Advice Network as a “trusted organisation”

I received a letter at the weekend from Stephen Banyard, Director Business Customer Unit at HMRC. Please share my excitement at the implications of this letter – especially in the light of the clarification I have just received.

It includes this line by reference to the Tax Advice Network:

“As a trusted organisation, small businesses already look to you for advice. We would like to ask for your help in sharing this important tax guidance with your members. It could save them, and you, time and money.”

The Tax Advice Network is a ‘trusted organisation’. Well, that’s nice. But how many other such organisations are there?

I telephoned the contact number on the letter and was told that Stephen/HMRC had only sent out about 20 copies of the letter. Now I’m feeling quite chuffed.

VAT Office tells caller to ring the Tax Advice Network

When people call our switchboard they are normally put through to whichever of the tax advisers they have chosen from our website.

Around 4.30 today a caller (Tina) was put through to me as my assistant was unable to determine what she required. Tina offered to quote her enquiry number to me. I thought maybe she had called us by mistake. Perhaps our number is very similar to an HMRC office. But no, she had called the number she’d been given by the local VAT office!

(Given the rate at which HMRC are shedding staff at the moment I wonder if the day will come when there are more tax advisers within the Tax Advice Network than left in HMRC?!)

Once we had established what had happened, Tina was equally confused as to why HMRC had given her our number. She thought it was because no one at HMRC was able to resolve her enquiry and they wanted to get rid of her.

This seems unlikely to me. Tina is a bookkeeper for a client in the catering industry and wanted clearance as to whether certain supplies were zero registered. She’d been told to go to a specific page of HMRC website but had been unable to find the relevant contact details thereon. It took me less than a minute to do so. Why had the person she spoke with at HMRC been unable to assist her? Maybe they don’t have access to a computer?

I also questioned whether the clearance facility was really what Tina wanted. I suggested that if she wanted help with a formal letter or anything that involved more than a few minutes on the phone, she should speak to one of the VAT specialist members of the Tax Advice Network.

I’m not complaining – indeed I’m thrilled – that HMRC are directing people with complex tax problems to the Tax Advice Network. Thank you to whoever it was and by all means do it again.