Adjusting income tax computations

One of the fundamental principles of self-assessment is that the taxpayer should get “finality” within a set period of submitting his tax return and tax computation.

This period is normally 12 months from the filing deadline, during which the taxpayer can amend the return, and HMRC can open an enquiry. HMRC can also raise discovery assessments within a much longer period.

Where there is an obvious error or omission, or anything else that the officer has reason to believe is incorrect in the return, HMRC can correct it. They have used this procedure to adjust for the omission of the HICBC (see our newsletter 12 February 2015). The taxpayer has 30 days to reject the HMRC correction, otherwise it will stand.

HMRC should make any such corrections within nine months of the submission date on the return (TMA 1970 s 9ZB(3)), but they are now using this correction power for tax returns for 2016/17 and 2017/18 which were affected by the online filing exclusions.

Since April 2017 the number of exclusions for online filing has escalated (see our newsletter 27 April 2017), and HMRC has recalculated the tax due for up to 40,000 returns for 2016/17, and for least 15,000 returns for 2017/18, so far. Where the HMRC adjustment reduces the tax payable for the year, the taxpayer will be quite happy. But what if it generates a tax underpayment?

Where the 2016/17 return was filed by the due date of 31 January 2018, any tax demanded following the recovery performed in November 2018 is not due because the correction was made more than nine months after the return was filed. If your client paid the extra tax on request of HMRC, they can ask for it back.

The recalculation exercise for the 2017/18 returns was performed on 28 October 2019, so that will also be out of time for all 2017/18 returns except those filed on or after 29 January 2019. So for those taxpayers should not have to pay any further tax demanded.

Loan charge

We outlined the changes for those affected by the loan charge in our newsletter on 9 January 2020. Since then HMRC has updated its guidance and published draft legislation to bring those changes into effect from 5 April 2019.

To help your clients make the correct disclosures, and pay the right amount of tax in respect of the loan charge you need to know exactly when each loan was advanced to them and if it was repaid by 5 April 2019.

The following loans are now not subject to the loan charge:

  • those repaid before 5 April 2019
  • advanced before 9 December 2010
  • advanced before 6 April 2016 and fully disclosed to HMRC, and HMRC did not take action to demand tax due in respect of the loan before 5 April 2019 – this is then an “unprotected year”.

Where the taxpayer received regular loans in the tax year 2010/11, HMRC will permit you to apportion the total amount lent in the year as 2/3 prior to 9 December 2010 (escapes loan charge), and 1/3 post 9 December 2010 (subject to loan charge).

HMRC has clarified that the disclosure requirement will be met where the DOTAS number for the tax avoidance scheme used was provided on the relevant tax return, or if there was no DOTAS number to declare, the loan arrangement was described elsewhere on the return. That description must have contained sufficient information to show that a tax liability may have arisen from the loan. You may need to review the 2010/11 tax return very carefully.

Taxpayers can now spread the declaration of their outstanding loans which are subject to the loan charge over the tax returns for: 2018/19 to 2020/21, which spreads the tax due under the loan charge over those years.

To do this the taxpayer must elect on the “additional information form” before 30 September 2020, but that form won’t be available from HMRC until April 2020. If it makes sense for the taxpayer to spread the loan charge (and it won’t in every case), you should complete the 2018/19 tax return on the basis that this election has been made.

Where the 2018/19 tax return has already been submitted it may need to be amended to the reflect the above changes to the loan charge liability.

If the 2018/19 tax return has not been filed you can either include estimated figures of the tax due, or file and pay by 30 September 2020, in which case the late filing and late payment penalties will be waived.

Pay CGT in 30 days

Capital Gains Tax due on sales of residential property completed on and after 6 April 2020 will have to be paid within 30 days of the completion date. Non-resident owners already have to pay the CGT within 30 days, but from April 2020 this short payment period will also apply to all UK-based sellers.

This is going to come as a shock to many landlords and their accountants, who have been used to paying CGT on property sales up to 22 months after the transaction, ie by 31 January following the tax year end.

The taxpayer, or their agent, will also have to complete a new online return to report the CGT due within 30 days. This new online system is currently being tested by HMRC, who are looking for agents and their clients to take part in that trial, see link below.

It appears that this new online reporting system is not the same as the real time transaction return, which we outlined on 19 April 2018. That real time CGT reporting system is only open to taxpayers to use, and not their agents.

The new online CGT reporting system will be open to agents to use, but you will need a separate agent authorisation to use the service on behalf of your client, as the authorisation to act for income tax will not be sufficient.

Amended SA returns

The HMRC Agent Update for self-assessment contains an odd warning about submitting a tax return as an amendment, when the original return has not been submitted. When this happens the “amended return” cannot be processed, which may result in a late filing penalty.

HMRC says is it receiving large numbers of “amended” returns filed online this season, which indicates there is a common trap that many accountants are falling into. You would think that tax software would be intelligent enough to prevent this from happening, but not all software products have this fail-safe mechanism.

For example, it is quite easy to click the “amended” box in the Taxcalc or Taxfiler software when completing a tax return, in which case the return will be submitted as an amended return, even if no original version of that return has been filed.

It is sensible that the HMRC computer system should not accept amended returns if an original version of that tax return has not been logged as received. There is a real risk of hackers submitting amended returns and diverting tax repayments to their own bank accounts, so HMRC has to be particularly careful about accepting any amendments to returns.

MTD issues

Tuesday 7 January was the deadline for submitting VAT returns for periods to 30 November 2019, and at around 10.30am the MTD system which receives VAT returns went down for number of hours. This problem also affected the agent services account (ASA). The MTD system had a further “incident” on 8 January.

There is clearly an underlying problem as HMRC has announced that the MTD system will be taken down for maintenance from 11.59pm on Saturday 11 January to 2am on Sunday 12 January.

Two other persistent problems that may be fixed over the weekend concern VAT payments and repayments.

Where VAT is paid by direct debit some taxpayers have received a “VAT overdue” message before the amount due is collected by HMRC. Some direct debit instructions have not been carried over from the old system to the MTD system. Where a repayment is due the VAT repayment tracker for certain taxpayers shows the wrong amount of repayment.

The CIOT and ATT are trying to collect evidence from a wide range of accountants and tax advisers about MTD, in order to supply feedback to the government before a decision is taken on extending the scope of MTD. The further roll-out of MTD, or delay, is likely to be announced in the Budget on 11 March 2020.

If you have views on whether MTD is “working well” and therefore if the system is robust enough to be rolled out to other taxes, please complete the CIOT/ ATT survey (see link below). It only takes around 8 minutes and the answers are anonymous so can’t be traced back to individual respondents. The survey closes on Monday 13 January.

Paying VAT on time, Paying the NMW correctly, and Paying to settle tax on loans

The headline above is taken from our latest tax tips email for accountants in which we said:

It often feels like this time of year is all about spending money, so it’s crucial to remind clients to hold some funds in reserve in order to pay tax liabilities due in the New Year. This week we look at why paying VAT on time is so important, and which reasonable excuses may be accepted. We also have a timely warning about paying the correct NMW, and news of a small change in HMRC’s approach to settling tax due on loans.

Below is just an extract from our latest 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 most taxes are paid late by 30 days or more there is a statutory penalty of 5% of the unpaid amount, which increases to 10% for a delay of 6 months, and to 15% for a delay of 12 months or more. Interest on the late paid amount may also be charged.

The penalty is calculatedly separately for each tax liability, so if the taxpayer regularly pays his self-assessed income tax late by a few days no penalty is due. This is not how it works for late paid PAYE or VAT. For those taxes the penalty builds up according the number of late payments within the tax year (PAYE) or surcharge period (VAT), and every day late is counted as a default.

For late paid VAT it is not easy to spot that a 12-month surcharge period has started, as its triggered, and extended, by each late payment or late return filed. The taxpayer should be notified by letter, but no penalty will be payable for up to four defaults, if the amount due is less than £400.

When the business pays VAT late on the fifth occasion, even by one day, the penalty will be 10% of the amount due, or 15% where the annual turnover of the business is £150,000 or more. This can come as a nasty surprise to the business especially where the late payment was due to a failure of the banking system.

The Tribunal judge may be sympathetic if the failure of the bank to transfer funds was unforeseen, as in case of Stylographics Ltd. However, key staff not having access to the internet to operate online banking while on holiday was not regarded as a reasonable excuse for Galaxy Decorators Ltd.

Reciprocal Ltd claimed it had agreed a time to pay (TTP) arrangement with HMRC, but neither the company or HMRC could produce any documentary evidence of the detail of this TTP agreement. So when VAT payments were not correctly allocated by HMRC, or repaid as the taxpayer expected, it was apparently the taxpayer’s fault for not spotting the missed payments. The penalty was upheld.

Trust registration service, SDLT on divorce and recovery, and Phone scams

The headline above is taken from our latest tax tips email for accountants in which we said:

This week we have some good news about the Trust Registration Service, which has been a thorn in the side of all advisers who have trusts as clients. The new SDLT exemption for first-time buyers received a lot of coverage after the Budget, but there are also important changes to SDLT for divorcing couples. Finally, we have a warning about telephone scammers who pretend to be calling from HMRC.

Below is just an extract from our latest 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)

We covered the debacle of the trust registration service (TRS) in our newsletters on; 15 June, 19 October, and 9 November 2017. Throughout that time the professional bodies have been working closely with HMRC to achieve a more workable solution, and we can report that both the process of accessing the TRS, and the data required to be submitted, have been simplified.

You can now access the TRS directly and set up an Agent Services account (ASA) at the same time. You should not have to wait for HMRC to approve your application by email. Also the 2-step verification process is not mandatory to operate the ASA.

You can save the submission of data to the TRS after sending, which will provide you with proof of the data submitted. You can also use dummy information where certain data could not be ascertained, such as the NI number of a deceased settlor.

Where a beneficiary is named, the trustee, or you its agent, will still need to provide the relevant details. However, named beneficiaries whose benefit is contingent on an event occurring do not need to be reported until the contingent event occurs.

Where a beneficiary is not named, as they are part of a class of persons, a trustee only has to identify individuals when they receive a financial or non-financial benefit from the trust after 26 June 2017. The class of beneficiaries should be reported as described in the trust document.

HMRC has updated its guidance on the TRS – see link to draft below – which includes more examples. The ATT has also produced some excellent guidance on the TRS which is freely available to anyone.

All existing trusts need to be registered on TRS by 31 January 2018, and HMRC has indicated that it currently has no intention of moving this deadline although it will be kept under review. There will be a penalty regime for late or incorrect returns; however, we are still awaiting confirmation of what the penalties will be.

Remember that this is just an extract from  our weekly email for accountants. 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)

Marriage allowance, Indexation allowance, and Business rates

The headline above is taken from our latest tax tips email for accountants in which we said:

The Budget contained little meat for small businesses, as there were few major tax changes. However, there are three important issues which you should discuss with your clients. These are; a change to the marriage allowance rules; freezing of the indexation allowance for companies, and correcting an unfortunate Supreme Court decision regarding business rates, aka the “staircase tax”.

Below is just an extract from our latest 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)

The capital gains indexation allowance adjusts the base value of an asset by general inflation, as measured by the retail price index (RPI), over the period of ownership, or since 31 March 1982 if the asset was acquired earlier. The effect is to reduce the taxable amount of the capital gain on disposal of the asset.

Indexation allowance was frozen for individuals and trustees from 6 April 1998, and was removed completely from the CGT computations of those taxpayers from 6 April 2008. The Budget announced that indexation allowance will be frozen for companies from 1 January 2018, so the last month for which indexation will be calculated on the disposal of an asset is December 2017.

It is telling that the policy paper on this issue talks about “removal” of the indexation allowance, not the freezing of the allowance, so this Budget change could be the first step to removing indexation allowance from capital gains calculations completely.

Indexation allowance can mean a company pays much less tax on a gain than an individual would pay on the same disposal.

For example, when disposing of a residential property a company would pay tax at 19% on the gain after indexation, and an individual would pay tax at 28% on the unindexed gain. If the individual is a basic rate taxpayer he would pay CGT at 18% on the portion of the gain which sits within his available basic rate band, but a significant property gain is likely to quickly use up the basic rate band. The individual can set their annual exempt amount (£11,700 for 2018/19) against the unindexed gain, which is not available to the company.

Where your client is planning to sell properties, or any other assets, out of their company it may be better to sell sooner rather than later, to take advantage of the indexation allowance while it is still available. However, transferring the ownership of a property purely to crystallise the indexation allowance may not be worthwhile, as the legal costs and SDLT (LBTT in Scotland) will eat into any tax saving.

Remember that this is just an extract from  our weekly email for accountants. 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)

Welsh taxes, Disguised remuneration settlements, and Interest rates

In our latest tax tips email for accountants we said:

Every week we endeavour to bring you three nuggets of new tax knowledge, or at least a timely reminder. This week we have details of two new taxes to be imposed in Wales from 1 April 2018, and new guidance from HMRC about settling disputes relating to disguised remuneration. We also have a reminder that the interest rates HMRC charges on late paid tax are increasing.

Below is just an extract from that 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)

Disguised remuneration settlements

For years thousands of taxpayers took income in the form of loans from their employer, or through a less direct route such as an employee benefit trust (EBT). Many of those individuals did not understand the full implications of being taxed on the benefit of a loan, and were told the tax saving was totally legal.

Now the world is a different place, and HMRC views any “loan in place of salary” arrangement as disguised remuneration, and will seek to tax it as salary, whenever it was provided.

For arrangements entered into in 2011/12 and later years, taxpayers (or their employers) are encouraged to settle with HMRC to pay tax, NIC and interest, under ITEPA 2003, pt 7A. Where the employer has already settled the tax arising due the operation of an EBT scheme there should be no further tax or NI due from the employee.

In other cases where the loan remains outstanding at 5 April 2019, HMRC will impose a loan charge, as specified in schedules 11 and 12 of F(no.2) A 2017 (due to be passed today). This tax charge may well bankrupt some individuals, as the total of the outstanding loans will be treated as income in 2018/19. This means the majority of the loan will be taxed at higher rates than would have applied than if the loan had been taxed as salary at the time it was provided. There is no top-slicing relief mechanism. The amount of loan outstanding will be estimated by HMRC, which could be much higher than the actual amounts provided as loans.

To avoid the loan charge in 2019 the taxpayer (individual or employer) needs to settle with HMRC before 30 September 2018. HMRC has produced guidance notes for taxpayers, and separate guidance for tax agents, which explain how a settlement can be arrived at, including a payment plan.

The first step is to talk to your clients about this problem before they receive a nasty bill from HMRC. The next stage is to seek specialist advice, and our tax investigation experts will be happy to help. This is a very complex area, and the amounts of tax involved, even for one individual taxpayer, can be very large.

NIC continues, Tax repayments, and Trust registration service

In our latest tax tips email for accountants we said:

This week we have news about two matters which may be particularly relevant for your lower-earning clients: payment of class 2 NIC and tax refunds, although all self-employed clients will be affected by the national insurance developments. We also have an update concerning access to the trusts registration service.

Below is just an extract from that 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)

Tax repayments

The first tax returns to be submitted in the tax return season are normally those which are likely to generate tax refunds for taxpayers who really need to money. However, the tax may not be repaid in the manner requested, due to HMRC’s policy regarding credit and debit cards.

Where the most recent tax payment was made by a credit card, the tax refund will be made to the same card, even if that card is not held in the taxpayer’s name. This is in line with banking industry standards for making refunds, for example when returning purchased goods to a shop.

The tax refund will be directed to the card only if tax has been paid using that card within the last nine months. Also, the total value of the tax refunds (if more than one) cannot exceed the amount of tax paid with the card.

Where the taxpayer has requested that the tax is refunded into his bank account, that request will be ignored by HMRC if the conditions for a repayment to a credit or debit card are met. This means that where the taxpayer has an outstanding debt on their credit card the tax refund will be set against the amount outstanding, and won’t be available to be spent on other things.

You need to advise your client of HMRC’s tax refund procedure, as the cash may not be available to pay your fees where the repayment goes directly to a credit card.