A payroll services boss has been banned for orchestrating a multi-million-pound tax avoidance scheme.

The case puts a spotlight on company owners and should serve as a reminder that they are subject to strict conditions over keeping records.

The High Court issued a disqualification order lasting 11 years to the sole director of Magnetic Push Ltd.

The company was purportedly operating as a payroll services company and entered voluntary liquidation within a year of being formed.

However, the liquidator found the director completely uncooperative when requesting the company’s statutory records.

This was reported to the Insolvency Service, which investigated and found that the company was acting as an umbrella company in part of a tax avoidance scheme.

He had declared a VAT liability of just £609 but the tax authorities claimed more than £4 million from Magnetic Push in the liquidation.

Failure to keep accounting records can lead to a £3,000 fine and/or disqualification from acting as a director, as this case indicates.

If you haven’t reviewed your record keeping in a while, now is a great opportunity to do so.

Key points for company and accounting records

You must keep:

• Records about the company itself
• Financial and accounting records
• HM Revenue & Customs (HMRC) may check your records to make sure you are paying the right amount of tax.

You must also keep details of:

• Directors, shareholders and company secretaries
• The results of any shareholder votes and resolutions
• Promises for the company to repay loans at a specific date
• Promises for payments if something goes wrong and it is the company’s fault
• Transactions when someone buys shares in the company
• Loans or mortgages secured against the company’s assets.

Limited companies have to keep a register of ‘people with significant control’ (PSC), which must include details of anyone who:

• Has more than 25 per cent shares or voting rights in your company
• Can appoint or remove a majority of directors
• Can influence or control your company or trust.

When it comes to accounting records you must be able to evidence:

• All money received and spent by the company, including grants and payments from Coronavirus support schemes
• Details of assets owned by the company
• Debts the company owes or is owed
• Stock the company owns at the end of the financial year
• The stocktaking you used to work out the stock figure
• All goods bought and sold
• Who you bought and sold them to and from (unless you run a retail business).

Link: Running a limited company – Company and accounting records

Payments on account are advance payments towards your tax liability for the year, if you complete a UK Self-Assessment tax return and is a way of settling tax owed.

The two deadlines for the self-employed to pay their tax bills are 31 January and 31 July of each year.

These two payments are made during the year, calculated on the previous year’s tax bill and are designed to avoid building up debt to the taxman.

If the tax liability is greater than the previous year, a further balancing payment may also be required.

Normally this is not a problem, as you are only ever expected to make a half-payment.

However, if this is your first year filing a return then you may be required to pay tax for the year plus an additional 50 per cent of what is owed.

That can catch people out unless they have put sufficient money aside to pay the tax that they owe.

Given the challenges of the last year, many taxpayers may also find that the estimates for tax owed are inaccurate as their income has been smaller than predicted.

How do payments on account work?

Your bill for the 2019 to 2020 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2021 is £2,700. This includes:

• Your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)
• The first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill
• You then make a second payment on account of £1,500 on 31 July 2021.

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your two payments on account), you will need to make a ‘balancing payment’ by 31 January 2022.

Payments on account do not include anything you owe for capital gains or student loans (if you are self-employed) – you will pay those in your ‘balancing payment’.

You have to make a payment on account if your tax during the previous financial year was more than £1,000.

However, that is not the case if more than 80 per cent of that year’s tax was taken off at source, for example, through PAYE.

Link: Understand your Self-Assessment tax bill – payments on account

Penalties for late submission and late tax payments will be determined by a new points system to make them fairer and more consistent, HM Revenue & Customs (HMRC) has announced.

Under the new system, penalties will be points-based rather than automatic. This means that those who consistently miss deadlines will accrue more points – and pay a larger fine than the penalty currently in force.

It is designed to penalise only the small minority of businesses and taxpayers who persistently miss their submission obligations rather than those who make occasional mistakes. The changes only initially apply to VAT and Income Tax Self-Assessment (ITSA).

The changes apply to VAT for accounting periods beginning on or after 1 April 2022 and to ITSA taxpayers with business or property income over £10,000 per year (who will be required to submit digital quarterly updates through Making Tax Digital (MTD) for Income Tax) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after for 6 April 2024.

Instead of getting an automatic fine, under the new system, you will get a penalty point.

The more deadlines you miss, the more points you get until you reach your penalty threshold. Then you get a £200 fine (and another £200 fine for every subsequent deadline you miss).

Your penalty threshold depends on how often you have to submit tax information:

• annually – two points
• quarterly (e.g., VAT and Making Tax Digital for Self-Assessment) – four points
• monthly – five points

There are separate points totals for each obligation you have. This means that if you fail to meet one obligation but successfully meet others, you will only accrue one set of points.

But if you fail to meet multiple obligations, points will accrue for each – even if they have the same submission frequency. This could result in heavy fines if you consistently miss deadlines across all of your responsibilities.

HMRC has a time limit to apply points, for example, it cannot apply a point after 48 weeks from the day of a missed annual submission. It also has discretionary powers not to issue points and penalties under particular circumstances.

You can appeal an HMRC point or penalty as long as you have a reasonable excuse. If you have concerns about the new system, you should seek professional advice to avoid financial penalties.

Link: New points-based penalties for late tax reporting submissions

The next big step in the Government’s Making Tax Digital (MTD) initiative is rapidly approaching.

From 6 April 2023, MTD is expanding to include businesses and landlords with a combined total gross income over £10,000 per annum, from the following sources:

• self-employment
• partnerships
• UK property
• overseas property.

The changes mean affected taxpayers will have to keep digital business records of all their business income and expenses, including their earnings from self-employment or property.

They must then use MTD compatible software to send updates to HMRC every quarter. This will mean that there will now effectively be five tax updates a year sent to the tax authority, instead of just one self-assessment tax return.

The deadline for this quarterly summary information is one month following the quarter-end.

At the end of the tax year, there will then be a final declaration made to HMRC to include details of all other income and any accounting adjustments.

Taxpayers will still be required to submit their final declaration by 31 January.

There are some exemptions to this next key stage of MTD, including:

• Trusts, estates, trustees of registered pension schemes and non-resident companies; and
• Partnerships that have corporate partners and Limited Liability Partnerships are not required to join MTD for Income Tax in April 2023 but will be required to join MTD at a future date.

As with the existing MTD for VAT rules, taxpayers will need to use HMRC compliant online accounting software to make these regular submissions.

It is important that those affected by these new rules take action sooner rather than later to get the correct systems and processes in place by seeking professional guidance and support.

Link: Follow the rules for Making Tax Digital for Income Tax

From April 2023, the Corporation Tax rate will rise for companies with profits of more than £50,000, following the Chancellor’s announcement at his Spring 2021 Budget.

However, the new higher rate of Corporation Tax will not be the same for all companies and will instead be tied to their profits.

Companies generating profits of £250,000 or more will see their Corporation Tax rates rise from the current 19 per cent to 25 per cent.

Meanwhile, those with profits between the £50,000 and £250,000 thresholds will receive marginal relief, which means that their effective rate of Corporation Tax will increase with their profits to a maximum of 25 per cent.

The marginal relief fraction is set at 3/200. The amount of marginal relief is found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000.

For example, if a company has taxable profits of £100,000, they would be entitled to marginal relief of £2,250 (3/200 x (£250,000 – £100,000)). This means that in this example, marginal relief gives an effective rate of Corporation Tax of 22.75 per cent.

The new Corporation Tax thresholds are adjusted for companies with accounting periods that are shorter than 12 months and where a company has associated companies.

Companies with profits of less than £50,000 will continue to pay Corporation Tax at 19 per cent under the new small profits rate (SPR).

The reforms are complex and require careful calculations based on various criteria.

Given that the rate of tax a business pays will be based on their profits, there may be new opportunities to minimise liabilities through careful tax planning, but it is important that strategies are put in place well in advance of the new rates being launched.

Link: Corporation Tax charge and rates from 1 April 2022 and Small Profits Rate and Marginal Relief from 1 April 2023

Both the Bank of England and the UK’s leading business members’ organisation believe the economy is set to take off after the vaccine bump.Continue reading →

Putting together an efficient tax strategy should be a no-brainer for buy-to-let landlords seeking to maximise their income.

It may not be quite as glamorous as hunting down the perfect property, but when it comes to saving cash, it can make a huge difference to your bottom line.

There are several ways you can reduce your tax bill, so you could:

Set up a limited company: This can be a great way to reduce your tax bill as a landlord in some circumstances. Not only will you be able to buy a property through the company, which will allow you to offset costs against profits, but you will also be able to employ yourself or someone else to manage the properties held within your portfolio.

On top of this, limited companies continue to be exempt from the rules change to Mortgage Interest Relief, meaning that they can continue to reduce their tax bill.

Extend to reduce: Putting money into your existing properties will help you avoid hefty stamp duty charges and should see the value of your portfolio rise at the same time.

Use all available tax bands: Another way to potentially cut your tax bill as a landlord is to transfer your assets to your spouse. Capital Gains Tax is generally not paid when assets are transferred between spouses, so you could effectively make use of their lower tax bands.

There is also the possibility that you will be able to pay less tax on your rental income too if their tax bracket is lower than yours. If the property in question doesn’t have a mortgage associated with it and you are not taking any financial gain from the transfer, you will not have to pay any stamp duty either.

Get the most from your property: Having a more accurate assessment of how much your rental property is worth will strengthen your hand against lenders and get them to re-evaluate your loan to value.

Should your rental property price increase, your loan to value will go down and that could mean more choice and a better mortgage interest rate for your buy-to-let business.

Claim your legitimate expenses: Claim everything you are entitled to if you want to become a tax-efficient landlord.

Keep every receipt and speak to your tax advisor or accountant about exactly what you can and cannot claim for – you will likely be surprised by how quickly these landlord expenses mount up.

Consider short-term lets: If you are in-between tenants, there are ways in which you can lower your tax bill.

Sometimes it can be worth considering the option of taking on a short-term let during a void period to get some money coming in.

Choose the right time to sell: Too often, landlords lose money when they sell a rental property simply because they do not take full advantage of the available tax relief on offer to them.

This is especially true of landlords with multiple properties, as they can reap the benefits of the zero per cent Capital Gains Tax band every year should they decide to sell one of their homes. Currently, the tax-free figure stands at £12,300.

Link: Working out your rental income: https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

The second part of a sweeping review of Capital Gains Tax (CGT) has been published with 14 key recommendations.

In July 2020, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review, to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.

Given the wide scope of the review, the OTS has produced two reports. The first report ‘Simplifying by Design’ was published in November 2020 and considered the policy design and principles underpinning the tax.

This second report covers a wide range of areas – from moving home to getting divorced, running or investing in a business and issues affecting land transactions.

It also highlights a broader concern about the low level of public awareness of the tax and the extent to which the administrative systems could do much more to support taxpayers.

The report makes 14 recommendations, including in the following areas.

Integrating Capital Gains Tax into the Single Customer Account

There are three main ways of reporting a capital gain – through Self-Assessment, the UK Property tax return for disposals of UK residential property and the ‘real time’ Capital Gains Tax service.

The OTS recommends that HM Revenue & Customs (HMRC) integrate these into the new Single Customer Account, making it a central hub for Capital Gains Tax data, to ease the administrative burden for the 500,000 or so people who file returns of disposals in a typical year.

UK Property tax return

Around 150,000 individuals make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK Property tax return within 30 days.

Even with adequate awareness and preparation, the OTS considers that 30 days is a challenging deadline, even if this return were integrated into the Single Customer Account.

The OTS recommends that the Government consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.

Private Residence Relief nominations

Private Residence Relief takes main homes outside the scope of Capital Gains Tax. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.

At present, there is insufficient awareness of the nomination procedure among the 1.4 million people who own second homes. It is also peculiar that nominations are needed even where no capital gain can arise on a rented second home.

The OTS recommends that the Government review the practical operation of Private Residence Relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the Single Customer Account.

Divorce and Separation

Married couples or civil partners can transfer assets between them without triggering an immediate Capital Gains Tax charge.

Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate.

However, after that, transfers take place at market value in accordance with the normal Capital Gains Tax rules.

Treatment of deferred proceeds when a business is sold

Some of these more complex types of business and land sales create practical tax issues which can result in tax needing to be paid upfront before any cash has been received, distorting commercial decision-making, and which are difficult for taxpayers to understand.

The OTS recommends that the Government consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs.

At the moment, the recommendations above are just proposals for the Government to consider when amending or creating tax legislation. However, if any changes occur to Capital Gains Tax legislation, we will be sure to update you.

Link: OTS recommends new Capital Gains Tax reforms

For many businesses, the pandemic has turned the world on its head, with many who might have expected to be profitable experiencing a loss.

Sometimes losses happen simply because the business is very new, or because costs have unexpectedly risen.

However, COVID-19 has thrown another dimension into the mix, seeing thousands of companies fail to turn a profit due to closures and restrictions placed on their business.

Relief is now available through an extension to the carry back scheme, which the Government announced as part of the Budget earlier this year.

For accounting periods ending between 1 April 2020 and 31 March 2022, this will carry back relief be extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

Trading losses occur if the expenses and costs of a business are more than its income for a particular accounting period. Losses are calculated in the same way that you work out your yearly profits.

Under general rules, businesses can carry back trading losses from one year and put them against profits in the previous year. This reduces the amount of profit for the previous year – less profit generally means a lower Corporation Tax bill.

But because the business has already paid its tax bill for the previous year, it can then claim a reimbursement of the Corporation Tax or Income Tax that it paid in the previous year.

Here is an illustrative example of carry back losses:

• The business made a loss of £7,000 in the accounting period 1 January 2018 to 31 December 2018, and a profit of £19,000 in the previous 12 months.
• Under the carry back rules, the company’s £7,000 loss can be offset against the profits for the previous accounting year.
• It reduces the previous year’s profit from £19,000 to £12,000. Lower profit means less tax, but because the business has already paid tax on the full £19,000, the company gets a rebate for the difference.

The Chancellor announced a temporary extension to the carry back period from one to three years for trade losses of up to £2 million (adjusted for groups of companies), for two years.

This measure will provide a welcome cashflow benefit to businesses, both incorporated and unincorporated, who have suffered increased trading losses as a result of the COVID-19 outbreak by providing extended relief for those losses, thereby generating repayments of tax paid for two additional years.

The relief is capped at £2 million of unused losses per year. Groups with companies that have the capacity to carry back losses in excess of a minimum of £200,000 will be required to apportion the £2 million cap.

For groups of companies the maximum cashflow benefit is £760,000 (£2 million at 19 per cent for two years) so claiming the extended relief is likely to be a worthwhile exercise for many.

Details can be found in HMRC’s policy paper.

Link: Changes to the reform of loss relief rules for Corporation Tax

There are many problems associated with the pandemic, apart from the obvious one of the illness caused by the virus itself.

Conmen and scammers have taken advantage of the situation, bombarding people and businesses with bogus claims about tax owed in the hope that just a few respond.

For businesses, the accountant is the first and last line of defence and can save you thousands by preventing you from getting on the wrong side of the taxman.

With people on furlough or working from home, communications have become fractured with much reliance on phone and digital communications. So, it’s vitally important to keep in close touch with your accountant.

We have all had those dodgy calls and voicemails, with the curious numbers, not to mention suspicious emails and texts.

Many will have received a scam/phishing email, supposedly from HMRC, only to discover it’s a fake, however, be warned that not all messages are bogus – as some taxpayers are finding out at their own cost.

This is where your accountant can help with their expert knowledge of tax affairs and the ability to discover whether communications from HMRC are legitimate.

Take the case of someone who contacted a national newspaper after he mistook HMRC for a scammer.

The person was so wary of being tricked, he ignored the messages saying he owed £5,000 and now faces a big tax bill.

Determined to avoid falling victim to email and phone scams purporting to be from HMRC, the person involved ignored the genuine emails amongst the scam phone calls and messages.

After completing his tax return last May, he ignored automated reminders by email telling him to pay the balance due.

In fact, the scammers’ messages were so realistic, he couldn’t tell the difference and had to pay £300 in late payment penalties and interest.

With this case in mind, a quick check with your accountant, who will have a handle on your tax affairs, could save you financial grief in the long run.

Link: I mistook HM Revenue and Customs for a scammer