Tax investigations

Tough tax goals set by the government is pushing HMRC to go after small businesses that are seen as easy targets, according to research carried out by UHY Hacker Young.

The mid-tier firm has found that the taxman collected £434m in tax and penalties for 2011/12, a 39% rise on its previous year’s figure of £311m.

Roy Maugham, tax partner at UHY Hacker Young, said:

‘Small businesses are more likely to make innocent errors in their tax calculations than larger businesses, meaning the small business community offers plenty of opportunity for HMRC.’

Maughan is concerned that small and medium enterprises (SMEs) are giving in too easily to the pressure applied by HMRC:

‘The other hidden cost to businesses is the amount of time it takes to deal with a tax investigation. An SME is also going to find it hard to afford a full time accountant to deal with or challenge a tax investigation so is more likely to concede, unnecessarily, to demands for extra tax. ’

‘Add this to HMRC’s tactic of sending multiple demands for additional payment for different taxes simultaneously to the same business, and small businesses can very quickly find themselves overwhelmed by the compliance burden.’

Sponsorship - a warning

A recent tax tribunal ruling may make sports sponsorship less financially attractive and harder to arrange, writes Nick Huber.

Sponsorship is usually categorised as advertising and promotion in company accounts. In addition, as long as the sponsorship payments do not also benefit the managing director’s personal hobby, or those of his family, it has been assumed that they should qualify for a deduction for tax.

But a supplementary hearing in the long running Interfish v HMRC [2012] UKFTT 599 (TC02275) sports sponsorship tax case reinforced the sensitivity in this area of the wholly and exclusively test.

Interfish is a successful seafood supplier based in Plymouth that donated over £1m to its local rugby club Plymouth Albion. 

The company gave cash to the club at different times, with the money being used to prop up the club financially and later to buy better players.

Interfish managing director Johannus Colam had shares in the club and was able to assert influence at board level. He told the first-tier tribunal that the payments to Plymouth Albion had benefited Interfish in various ways, and submitted a schedule of estimated benefits it received at the reconvened tribunal hearing.

The managing director said he made useful contacts through the sponsorship of Plymouth including a NatWest bank manager who served on the club's board and who subsequently loaned funds to Interfish, when other banks had already turned the company down. 

But the tribunal judge Nicolas Paines QC rejected Colam’s arguments and ruled that Interfish should not be allowed to deduct its sponsorship payments from its corporation tax bill. The company's intention to help the club buy players did not meet the requirement of “wholly and exclusively... for the purposes of the trade”.

Interfish’s sponsorship of Plymouth had a dual purpose to improve the club’s financial position as well to improve the taxpayer’s business, the tribunal ruled, but payments to have the company’s logo on players' shirts could have tax deductible. This advertising could have been obtained at the club’s published rates for about £10,000. 

In her 17 October AccountingWEB podcast, tax barrister Anna Fairpo contrasted the Interfish verdict with the McClaren case, where the Forumla 1 racing outfit won its appeal against HMRC's runing that its "spygate" penaltywas a business expense.

The cases illustrated the importantce of identifying elements of any sponsorship or sports expenditure that is or isn't wholly and exclusively for the purposes of trade, Fairpo explained. 

For Interfish, "Despite the further submissions, the tribunal has confirmed that the payments are non-deductible because of the dual purpose in making them," she continued. 

"One of the taxpayer's purposes was to improve the club's financial position, not solely for the purpose of the trade of the taxpayer.

"The business Interfish making the payment did have an additional purpose in mind, which was making the business look attractive to other businesses supporting the club, but this wasn't the sole reason," she added. 

Nichola Ross Martin has monitored the case since the original 2010 tribunal decision, which she described as "something of a shocker” for wannabe sponsors. 

“The [tribunal] judge seemed to think that it was necessary to try and cost out the benefits of sponsorship, whereas relationships are built up over time, and often over lunch and from that respect are intangible,” Ross Martin argued.

Double dip

Was there ever really a double dip?
Recent figures show that in the past two years the number of peoplen in employment has risen by 462,000 to a new record of 29.59 million.

Scottish economy

Can an independent Scotland survive?

Recent figures showed that 90% of Scots either work for the Government or receive some kond of State benefit.

It seems the numbers for an independent Scotland don't add up..........

The tax gap

Brought to you by the same people who couldn't work out if Virgin Trains or First Group could run the West Coast line the cheapest! Does make you wonder how they figured out how much tax they didn't get? Also if they could work out the figure with any accuracy, why didn't they go and get it?

HMRC has issued its estimate of the UK tax gap for 2010/11 - a staggering £32bn – some 6.7% of tax due, compared to 7.1% in 2009/10.

Calculated from 30 separate estimates for different taxes, HMRC said the deficit was down to a combination of “tax evasion and avoidance, as well as customer error, the hidden economy, criminal attacks and where tax cannot be collected because businesses have become insolvent”.

Exchequer Secretary David Gauke MP said: ‘These tax gap figures show that the vast majority of people and businesses pay the tax they owe on time. Last year £468.9bn was collected, including £13.9bn brought in through HMRC’s work policing the rules.

‘Every pound of tax that is not collected puts a greater burden on honest taxpayers and public services, so the Government and HMRC will continue to work together to make it harder for individuals and businesses not to pay the taxes that are due.

‘We are determined to reduce the tax gap and have made £917 million available to help HMRC tackle avoidance and evasion.’

HMRC’s tax gap estimates go back to 2004/5 and are regularly revised to factor in improved the latest available information, some of which has long time delays due to lengthy tax settlements. The latest figures include downward revisions by the Office for National Statistics that influence the VAT tax gap. The gaps expressed as a percentage of liabilities has now declined from 8.2% in 2004/5 to 6.7% in 2010/11, it said.

Lin Homer, HMRC’s chief executive, said: ‘Our determination to support the honest majority and to crack down on evasion, avoidance and fraud have kept downward pressure on the tax gap. We are determined to do more and we are devoting increasing resources to pursuing those who do not pay the tax they owe, while making it easier for people and business to comply with their tax obligations.’

New BR

NEW STYLE BUSINESS RECORDS CHECKS

 

You might remember that HMRC started a series of Business Record Checks (“BRC”) last year. These were supposedly not to catch businesses out but were to assist them in meeting their record keeping obligations and to identify ways to improve them where needed. I’m sure that the fact that HMRC could fine you £3,000 if they thought your records were not adequate didn’t enter into it, or the fact that HMRC planned 50,000 such visits and that 50,000 time £3,000 magically came to the £150 million that they announced they planned to raise through the visits!

 

After a trial period, HMRC abandoned the BRC’s. Surprisingly HMRC found that where accountants were involved, they encountered fewer problems with the records.

 

Details are now starting to emerge that HMRC are planning to recommence the Business Record Checks, but with a slight twist. Now the new approach to arranging a BRC is:

 

1.      HMRC will write to you telling you that he wants to visit to check your records

2.      HMRC might call us to tell us

3.      If you do not reply to HMRC’s letter, then HMRC will call you to arrange the visit

 

The cynical amongst us will question how cutting your accountant out of the loop will help HMRC achieve its objectives of helping your business achieve its record keeping obligations!

 

If you do get a letter from HMRC about a BRC, please tell us immediately!!

 

 

Employee shares

The government has published a consultation on controversial plans for its ‘employee owner’ scheme – widely dubbed as a charter to swap employee rights for shares. The consultation will close on 8 November 2012.

The move follows the Chancellor’s announcement about the proposed new scheme on 8 October. It aims to empower companies with the option to increase the flexibility of hiring and firing as their businesses grow.

Under the new type of contract, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax. In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required to provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual eight.

Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires. Companies recruiting owner-employees will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.

Business minister, Jo Swinson, said:

‘We know that engaged employees are more productive and motivated. This scheme increases the options for business and brings greater flexibility to companies and employees in determining their employment relationship.’

‘By responding to the flexible needs of fast growing companies, it will help them take people on, providing a real incentive for employers and employees.’

Legislation to bring in the new employee owner contract was introduced today (18 October) through the Growth and Infrastructure Bill. If approved, companies can offer the new contract from April 2013.

The consultation sets out the proposal in detail and asks for views on how the government can implement it. It is focused on both employment and company law issues. The Treasury will consult on the tax matters separately.

Legislation to bring in the new employee owner contract will be introduced today via the Growth and Infrastructure Bill, with the aim of companies being able to offer the new type of contract from April 2013.