Vixen Consulting

The head of the union representing senior civil servants has said that pay deals for officials that could reduce their tax liability need to stop and are widespread across Whitehall, especially in commercially orientated wings of government departments.

He was speaking in the wake of a Guardian story revealing that 25 senior members of staff at the Department of Health have had their salaries paid to limited companies. The practice is also understood to occur in primary care trusts.

The department has apologised after documents sent to the Guardian showed that contrary to assurances given to parliament, more than 25 senior staff employed by the department are paid salaries direct to limited companies, with the likely effect of reducing their tax bills. In some cases, the documents show the named individuals are being paid more than £250,000 a year, as well as additional expenses. The payments amount to almost £4.2m in one year.

Full article here

How you too can pay only 20% tax on £100,000 income (and keep your child benefit)

Over the past few years the landscape has changed significantly with regards to how the HMRC undertake their tax investigations, and what penalties apply. Under the current regime, a compliance visit is the first step of a tax investigation, however, in May of this year the HMRC announced the commencement of a new trial called the Single Compliance Process to “…improve customer experience and reduce costs…”. Essentially the changes relate to the way the compliance check is carried out (by using a uniform procedure for dealing with a compliance case for all types of tax), though the indicators that the HMRC use to determine whether or not to investigate remain unchanged.

If you get it wrong

For most contractors, when considering the risks of a tax investigation there are four main tax areas that could be targeted by the HMRC; (a) PAYE, (b) VAT, (c) Company tax, (d) Personal tax. A compliance check may involve one, or several of these types of taxes.  If you are selected for a compliance visit, and are found to have made errors in your tax return(s) the HMRC will apply a tax-geared penalty where your actions have caused a loss of tax. The tax-geared penalty will be somewhere between 0% to 100% depending on whether the error was innocent (0%) to deliberately concealed (100%). A fixed sum penalty may also apply for various reasons. Further, if the HMRC believe the error was due to not taking ‘reasonable care’ they can go back and review your previous 6 years of returns (and if they think you have deliberately evaded tax, they can go back 20 years).

Avoiding a visit in the first place

While a minority of compliance visits are purely random, most are undertaken because the HMRC think there will be something to find. Greater analysis is now possible due to electronic filing of most tax returns, and because annual accounts are also filed in iXBRL. This format means accounts can be easily processed by the HMRC looking for unusual or irregular transactions. Here are my top tips to ensure you fly low across the HMRC radar;

1. File your returns on time. It might sound simple, but its very important. Ensure you know your VAT quarterly filing deadlines, your company tax filing deadline, the PAYE filing deadline (19^th May each year), and get your personal tax return filed each year by 31 January.
2. Pay your tax on time. Just as important as item (1) above, make sure the HMRC receive their money on time. Direct debits work great with VAT, and remember tax bills can be paid by credit card. Regardless of improvements in transaction speed between banks, always allow 3 working days for your tax payment to reach the HMRC;
3. Keep impeccable records – Excellent record keeping is imperative. It shows you are professional in your approach to running your business, and will help answer any queries the HMRC may have regarding any tax or accounting transactions. This includes keeping copies (hard copies or electronic are acceptable) of all your invoices, all your receipts, all your business bank account statements, and any other relevant company documents like share certificates, directors loan agreements, and dividend vouchers.
4. Take the time to review your accounts. Avoid the temptation to simply rubber stamp what your accountant has prepared for you. If a figure looks unusual contact your accountant and ask them to explain. At the end of the day it’s your company, your tax, and your responsibility. You should explain any large variations in the notes on the return.
5. Get specialist advice from the outset. I would never suggest a contractor meet the HMRC one-to-one – always have your accountant on hand, or if the compliance visit turns into an IR35 investigation, engage the services of an IR35 specialist;
6. Don’t cover your tracks. Never conceal anything from the HMRC, and don’t think you can tell half-truths.

Summary

In most cases if your business is selected for a compliance visit it will be because the HMRC suspect you may be doing things incorrectly. If you file your returns on time, pay your tax on time, and explain any large variations to current year figures compared to previous year figures, then you will be sending a strong message that you know what you are doing, that you understand your responsibilities, and that you are running your business in a compliant fashion.

More Information

• The new single compliance process
• HMRC Compliance Check factsheets

HMR&C has apologised to half a million taxpayers for failing to issue self-assessment (SA) statements that are due to paid by Sunday because the tax authority ran out of paper.

The mistake is believed to be thanks to tax officials neglecting to account for a four–fold rise in the number of second payments on account, normally payable by July 31st.

Although it said the majority went out on time, HMR&C conceded that some statements will be issued later – “soon,” though not before the relevant SA reminder letters, which some taxpayers are also yet to receive.

“No one needs to worry about this,” HMRC said of the delays online, before pointing out that taxpayers can check the amount they owe on its website, and settle up electronically.

Still addressing affected taxpayers, the Revenue said they would be afforded 30 days from receipt of their statement to pay, during which time no interest will follow.

Origin

It is a general principle of English law is that there is freedom of contract. There are some exceptions to that, particularly where one party is a consumer, but that is the general principle so whatever the parties agree, the court, if called upon to do so, will enforce it by requiring the party in breach to pay compensation to the other party. So it is important to get a solicitor or barrister to draft the contract – if you are in the fortunate position of being able to put forward your own contract wording – or to check the contract if, as often happens, the starting point is a draft contract put forward by the other side.

The form of the contract

The basic deal between the parties – how much one party will pay and what the other party will do in return – is negotiated in principle between the parties. After that, with legal advice, the parties negotiate the detailed terms which make up the contract, before it is signed by both parties and becomes legally binding.

Certain contracts, such as contracts for the sale of land, have to be in writing, signed by the parties, but it is possible (though often not desirable) for most other contracts, including commercial contracts, to be made by word of mouth or by email. If the intention is that there is to be a formal detailed contract signed by the parties, is important when negotiating the basic deal to make clear that it is not intended to be binding unless and until a formal contract is signed. Otherwise you may end up bound by an oral contract which does not contain all the detailed terms you  intended.

Names of Parties

The contract will commence by naming the parties: “This Agreement is made between…”. Particularly where the parties are limited companies, it is important to use the exactly correct legal name of each party. 

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Shropshire Star front page tonight reports local start-up company plans to open an upmarket pizza parlour offering restaurant and takeaway – sounds like a nice idea Keith!

Question: If I adopt a sole trader status for my plan B project would I be able to claim expenses for the associated use of my home, as I will be running the business from my private residence? What other costs might I incur that I could offset because I can recoup them, partially or wholly?

Answer: A deduction may be available for reasonable use of home as your office. The deduction must be based on a reasonable basis. For example if you use one of the four rooms in your house as an office for a full normal working week, you could claim a deduction of 25% of eligible and relevant home costs.

Eligible costs would include a proportion of:
Rent or Mortgage interest;
Gas, electricity, metered water rates, Council Tax, Insurance;
Repairs, decorating, cleaning;
Telephone;
Internet/broadband;
Computer items e.g. printer cartridges, stationery etc

Note: a claim for use of home for business purposes may have possible implications on the capital gains tax main residence exemption when you come to sell your property.

Education

Manuals and text books

A reasonable amount may be claimed for the cost of manuals and text books required for business purposes – receipts required.

Professional subscriptions

Costs for certain subscriptions may be eligible for deduction. These include:
Subscriptions to appropriate professional bodies
Professional journals, books etc
Professional indemnity insurance

See HMRC’s website for further details of allowable subscriptions

Office Costs

Telephone

Business calls from home or a mobile are fully claimable. However these must be itemised and line rental costs and internet cost are not recoverable unless you have a specific separate line for business purposes only. You must retain a copy of your itemised telephone bill.

Postage

Any business related post can be claimed for, original receipts must be provided.

Office stationery

A deduction can be claimed for any stationery such as paper, pens, printer ink you use for business.

Claims must be for a reasonable amount (in line with the business you run) and you’ll need original receipts to validate claims.

The expert was Paul Spindler, a technology partner at Kingston Smith LLP, the chartered accountancy firm.

As a contractor, the agreement with your client (or agent) is more than just a legal document. It forms the whole basis of your relationship and should (if drawn up correctly) prevent the scope of a project from growing out of control, prevent disputes from escalating and, most importantly, make sure that you get paid, on time and with as little aggravation as possible.

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IT contractor Elaine Richardson, trading as ECR Consulting, emerged victorious last week from an IR35 case that could have cost her £50,000.

In their ruling, the tribunal judges concluded, “It is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation.”

After it decided Richardson was a disguised employee through an engagement with Vertex Data Science, HMRC handed her a £50,000 tax assessment in November 2005.

The tribunal applied three status tests – mutuality of obligation, substitution and control – to determine the nature of her working relationship with Vertex and concluded: “ECR operates from a dedicated business area at her home. It has a company domain and website. ECR advertises its services and is a member of the PCG. It has retained reserves and invested in development and has over the years taken on fixed price work for a variety of clients.”

In a press release on the case, the PCG argued that the tribunal’s focus on Richardson being in business on her own account could signal a shift of thinking by tax tribunals. “The classic tests of employment and IR35 status – control, substitution and mutuality of obligation – are increasingly irrelevant in today’s knowledge economy, and can no longer reflect modern flexible working patterns,” the group said.

Self-employed find VAT loophole

The ‘flat-rate scheme’ could save sole traders, the self-employed and those with a second source of earned income thousands of pounds in VAT

James Charles – 9 January 2011 Sunday Times

A little-known loophole could save sole traders, the self-employed and those with a second source of earned income thousands of pounds in VAT.

For the past eight years, they have had the option of signing up to the “flat-rate scheme”, and this allows them to charge their customers the new 20% rate but pay the taxman at a much lower rate — and pocket the difference.

The government increased VAT last Tuesday, hitting consumers with higher prices on everything from televisions to gym membership. However, the self-employed and any business owner with a turnover of less than £150,000, such as builders, solicitors and consultants, can partly avoid the increase and pocket thousands of pounds by signing up to the flat-rate scheme.

It allows them to charge clients the new VAT levy but pay the tax man at lower rates — 9.5% for builders, 12% for estate agents and 14.5% for solicitors and 14% for management consultants, for example.

A guest house owner paying 10.5% under the scheme, with a turnover of £120,000 a year, would save an annual £7,600 compared with paying the tax under normal rules.

The rates vary depending on the profession and were adjusted last week when the higher rate of VAT was introduced. However, while the tax rose by 2.5 percentage points, the lower flat rates increased by only 0.5 to 1.5 points, making the scheme even more attractive.

Also, for new businesses the rate is reduced by one percentage point for the first year.

If you are a sole trader or a very small business, you could certainly benefit from this scheme. Certain professionals will be able to pocket thousands of pounds by signing up.

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