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?

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 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!

VAT on contract cancellation fees

Some of your clients may be restructuring their businesses in response to Covid-19 pressures. This may involve terminating supplier service contracts for power, telecoms, or security. Early termination of those contracts can trigger a cancellation fee.

In the past such cancellation fees were regarded as outside the scope of VAT as no goods or service were being provided for the consideration. However, two European Court of Justice cases involving telecoms companies have determined that cancellation fees are part of the agreement to supply the services, so they should be subject to VAT in the same manner as the service provided.

HMRC has set out its revised view on cancellation and termination fees in Revenue and Customs Brief 12/2020 published on 2 September. However, this doesn’t just affect cancellation fees paid from that day forward, the change in VAT treatment is retrospective.

Where your client has charged any cancellation fees in the last four years, they need to check whether they accounted for VAT on that fee, and what rate of VAT applied to underlying service. For example, venues frequently charge a cancellation fee if a booking is cancelled within a set period. There are special rules for tour operators who use TOMS, as explained in Revenue & Customs Brief 9/2019.

If VAT should have been charged the supplier needs to issue a corrected VAT invoice to the former customer. The supplier will also have to correct the error which has understated VAT due in earlier returns.

Where the understated VAT is no more than £10,000, or is less than £50,000 and doesn’t exceed more than 1% of net outputs (box 6), that error can be corrected on the current VAT return. Where the understated VAT is more than £50,000 the correction must be made using form VAT652.

Clients who have paid cancellation fees during the last four years, should contact the supplier for a corrected VAT invoice. The supplier should not charge additional VAT on top of what has been paid as the cancellation fee, the VAT should be treated as part of the fee already paid.

Once the corrected invoice has been received, the customer can reclaim the VAT, using the same error correction limits above.

You can get 3 fresh practical, topical and commercial tax tips for accountants, plus links to source material, in your inbox every Thursday. Sign up here >>>>

Adviser insights: Q&A with Liz Zitzow : US taxes expert

How long have you been a tax adviser Liz?
Since 1984!
How did you come to specialise in US taxes?
I became a specialist in US international tax about twenty years ago when I moved to the UK. After three years here I was practically running the entire US division of a boutique dual US/UK company. I started my own practice after five years there.
Where were you working at the time?
US Tax and Financial Services, a practice in London and Zurich.
What are the most common mistakes you see made by non-specialists in your area of tax?
Robbing Peter to pay Paul. What’s the good of getting the lowest tax number in one country only to have a higher tax in the other one? I figure out where it’s lowest and how to get it there.
What are the most valuable issues on which you have given advice?
The disposition of assets before a major life changing event, such as divorces, moving countries, giving up citizenship, aquiring permanent residence status, starting a company, closing a trust, selling a home, etc.
What differences might you expect to see in the coming year that could impact those issues?
We’ve got a lot of people who had arrived in a country for just a few weeks only to have it turn into three months or more from Covid 19. We’re helping make sure their country of residence remains the one it would have been pre-Covid 19.
What has been your worst experience with HMRC?
The threat made to a famous author that if he wanted to object to their findings, it would be in court which would have sullied his reputation. I got them to agree that we would accept their findings only if we could compute the figures rather than use their estimate. Their estimate of how much was owed was £200K. They owed him £30K once I did the maths. Yay!
What has been the most rewarding thing you have done from a tax perspective?
Every person who came to my office crying over the worry that they would owe a lot turned around when I showed them the balance due was much smaller (often zero) and that I could get the IRS to waive all the penalties too.
How would you describe your attitude to tax?
It serves a good purpose; except for the bits that go towards military might.
Which aspect of tax would you nominate for a silliest tax rule award?
Children’s breakfast cereal is sales tax exempt in Canada if the box has a free toy. They go on define what a free toy is; the description specifies that it can’t be beer, liquor, or wine. I don’t know about you, but I’d pay sales tax to get me some of that more grown up cereal.
What is the funniest tax related experience you have had?
I did an advice session with an actor who did the voice of a robot on a sitcom. I couldn’t stop laughing as he peppered our oherwise stressful conversation with quips from the show. I like my comedian clients a lot!
What is your top tax tip for general practitioners?
Ask all-encompassing questions. It’s not, “Did you earn any interest?” It’s, “Do you have any bank or investment accounts?”
If you hadn’t gone into tax what would you like to be doing now?
I was doing day labour, waitressing, and singing in a rock band; so I suppose I’d still be in the rock scene nights with a boring day job.
What do you enjoy doing in your spare time – away from the world of tax?
I’m gardening this year. Most years I travel a lot! This year it was New England and Dublin. Next year it’s to be Washington DC and Las Vegas and the southern coast of Spain.
What other question do you wish I had asked and how would you reply?
What tips would you give an apprentice? Have a perfect resume. It’s not just spelling and grammer that have to be perfect. The fonts, the kerning, the paragraph structure, the bullet points; every teensy detail is critically identical to all the other similar bits on the CV. You don’t know what programme they’re going to be using to open your CV, so check how it looks on Windows, Macs, Android, Google, etc. Everywhere it should be the same: Perfect. You’ve had all the time in the world to get the CV right. If you can’t get something right with all the time in the world, why would a job with high pressure deadlines be interested in your CV?

Trust Registration Service

We summarised the debacle of the Trust Registration Service (TRS) on 7 December 2017, and there have been continuing problems with the TRS ever since.

For example, until April 2020 it was not possible for agents to update the details of the trustees, settlors and beneficiaries on the TRS. However, the trust SA tax return asked, at question 20, to confirm whether the TRS had been updated with any changes.

Agents can now truthfully answer question 20 on the trust’s 2019/20 tax return, but had to ignore that question on the 2017/18 and 2018/19 returns. Any trust changes which occurred in the two years to 5 April 2019 should be reported on the TRS by 31 January 2021.

Note the TRS is not linked to the self-assessment service. A trustee can’t gain access to the TRS by logging into their Business Tax Account.

To allow an agent to access the TRS and update details the trustee and the agent must follow these steps:

  1. Trustee sets up a government gateway ID for the trust asking for an “organisation” account.
  2. Trustee logs into the government gateway for the trust and “claims” the trust. This requires the trustee to answer a number of questions about the trust, such as NI number name of lead trustee.
  3. Agent logs into to their Agent Services Account (ASA)
  4. Agent selects option to be authorised to maintain a trust, and enters the trust’s UTR number. The system generates a link which agent must send to the client.
  5. Trustee clicks on the link received from the agent and signs into the government gateway.
  6. Trustee chooses option to authorise agent to act to maintain the trust.
  7. Agent logs in with their ASA credentials to update the trust.

Will they collect more tax if they again align the rates of CGT and income tax?

“Increases in capital gains tax are inevitable now, despite doubts expressed ten years ago”, says Mark Lee, Chairman of the Tax Advice Network.

On 13 July, the Chancellor asked the independent Office of Tax Simplification (OTS) to undertake a review of Capital Gains Tax (CGT) in relation to individuals and smaller businesses. “The publication of a full scoping document on 14 July, just one day after a formal request was issued, suggests the request was no surprise.” Says Lee. “So, as the Sunday papers predict today, we are likely to see increases in the next Budget”.

The wording of the letter references capital gains as being a type of income. “This is odd language” says Lee, “as the Chancellor must know that CGT doesn’t tax income. By definition CGT taxes capital gains. That’s the increase in the value of your investments – and CGT is only charged when you realise those gains by selling your investments – things like second homes, shares, paintings and so on”.

“No one wants to say it but increasing CGT makes good political sense” says Lee, who was himself a tax adviser for 25 years.  “I remember discussing this very point with Sir Edward Troup at a tax conference in 2010.  Back then he doubted that aligning the rates of CGT and income tax would increase the tax take from CGT. I wonder what has changed?”

There are many exemptions and reliefs from CGT and an annual exemption. This means that the first £12,300 of capital gains anyone makes each year is tax free.  This rule simplifies things for the majority who cannot make significant capital gains.

Notes for editors:

1. Mark Lee is a Fellow of the ICAEW and of the CIOT. He is a former tax partner at the accountancy firm BDO and a former Chairman of the ICAEW Tax Faculty.

2. The Tax Advice Network, launched in 2007, operates the website and has members all over the UK.

3. In May 2010 George Osborne, Chancellor in the new Coalition Government, announced that he would “seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities. In his Budget on 22 June 2010 he raised the top rate of CGT to 28%.

4. Mark Lee’s subsequent conversation with Sir Edward Troup is recorded on the Tax-Buzz blog entry 5/7/2010: “CGT rules unlikely to change again in this Parliament”.

5. In 2010, Troup was Managing Director of the Budget Tax and Welfare directorate at HM Treasury. He later became Executive Chair and First Permanent Secretary of the HM Revenue and Customs (HMRC) in April 2016. He retired in December 2017, and was knighted in the 2018 New Year Honours.

6. On 13 July 2020 The Chancellor of the Exchequer, Rishi Sunak, asked the OTS to carry out a review of Capital Gains Tax to identify simplification opportunities. The scoping document for the review was published on 14 July 2020.

7. The rate of CGT has changed over time since it was first introduced in 1965. Until 1988 it was fixed at 30%. Then for 20 years CGT was payable at income tax rates, as if it was additional income (but with it’s own set of reliefs and exemptions). It was a Labour Chancellor, Alastair Darling, who reduced the top rate of CGT from 40% (when it was aligned with the then top rate of income tax) to 18% in 2008. In recent years the top rate of CGT has been 28% whereas the top rate of income tax is now 45%.

8. Lee questioned the rationale for reducing the rate of CGT in an article on his Tax Buzz blog on 5/2/2009: Why are capital gains taxed at less than  half the main rate of tax?