HMRC have issued their Employer Bulletin for February 2016, and we have summarised all of the key content for you, with links to our detailed guidance on the topics covered.
SME Tax News
Julie Deane, CEO of the Cambridge Satchel Company, has made ten recommendations along with her self-employment review, which was commissioned by David Cameron in July last year.
The Government’s new savings allowance is an excellent idea but needlessly complex in its implementation says the Low Incomes Tax Reform Group (LITRG).
In David Crossman v HMRC [2016] UKFTT TC04811 the First Tier Tribunal (FTT) denied a claim for reasonable excuse when an accountant failed to notify a bathroom fitter of his obligations under the CIS scheme, but agreed that some payments he made were not within the scheme.
In R (on the application of City Shoes Wholesale Ltd) v HMRC [2016] EWHX 107 (Admin) an application for judicial review was denied to nine EBT operators who were refused the benefits of the LDF.
Making Tax Digital: separating the alternative truths from the myths.
Spreading your word through an inventive use of propoganda is not new. We may be in the first or second phase of 'the Information Age' and the current trend is the spread of fake news full of alternative truths.
HMRC's Making Tax Digital team produced something called a Myth Buster back in 2016. This was in response to a parliamentary debate about quarterly reporting. If the Myth Buster was the truth, then why does HMRC say different elsewhere. The truth is out there (somewhere)...Can you spot the myth from the alternative truths and the facts?
HMRC set out five items which it referred to as 'Myths' and then made its comments.
| 'Myth' | HMRC's myth buster said: | HMRC's 'alternative truths' are: | The actual facts |
| Businesses will need to do four tax returns a year |
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HMRC says elsewhere: "All businesses, with income tax, National Insurance contributions, VAT or Corporation Tax obligations will be impacted by MTD as they will need to keep track of their tax affairs digitally and update HMRC more regularly using digital tools..." They have to report to HMRC both quarterly and annually using software to file returns for them. |
Yes, it is FIVE tax returns per year. HMRC will also be risk testing your data. It will be pretty risky to press 'send' without reviewing your analytics.
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| 'Myth' | HMRC's myth buster said: | HMRC's 'alternative truths' are: | The actual facts |
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This does not consider those who are digitally excluded |
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Help is by default available online |
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HMRC has not published details as to how it will deal with those who struggle with IT or do not have access to reliable internet or phone signals. |
| 'Myth' | HMRC's myth buster said: | HMRC's 'alternative truths' are: | The actual facts |
| Businesses don’t want to do tax digitally |
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HMRC admits that: less than 8% of VAT returns are filed using third party software. |
Online filing of VAT is already mandatory. Most people use HMRC's software because third party software does not make the adjustments required for VAT 98% of corporation tax returns are filed online because it is mandatory to do so. 86% of self assessment returns are dong online because the deadline is later than the paper filing deadline.
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| 'Myth' | HMRC's myth buster said: | HMRC's 'alternative truths' are: | The actual facts |
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Businesses will need to keep extra records and the digitisation will cost a fortune |
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HMRC says that: By 2020, most businesses will be required to use software or apps to keep their business records and to provide regular updates of information." In short, businesses who currently do not use software or computers will be required to do so, or engage an agent to act for them. HMRC is not providing free software. |
Anyone who is mandated to file under Making Tax Digital will have to equip themselves with the necessary hardware and software. An internet connection is required. HMRC is providing APIs so that software can 'talk' to it. You will in time be fined if you make errors in recording or sending your data. You will have to pay your accountants more if you wish them to check your data. They will have FOUR extra submissions to check. |
| 'Myth' | HMRC's myth buster said: | HMRC's 'alternative truths' are: | The actual facts |
| The new plans will increase errors and hinder compliance |
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In 2014 HMRC re-launched its Business Record Checks pilot. Amidst allegations that small business was poor at record keeping, it was discovered that the situation was not as bad as feared. HMRC have never published the result of this pilot. Many taxpayers will have to start using new software and learn bookkeeping whilst running their business. People will need to set up software to link to their bank accounts etc. Apps do not automatically sort out bank feed: the customer still has to instruct what expenses are business or not. HMRC's guidance is not the tax law. There is a limit how much guidance you can fit on a small screen. Tax liabilities can be estimated - this is a joke right? Surely if MTD works tax liabilities will be correct. Taxpayers will be required to make payments on account quarterly. Late payment penalties will apply. MPs are exempt from MTD because of 'security'. |
Comment
Despite HMRC assurances, concerns remain about the costs involved in complying with digital filing requirements which are likely to have the greatest impact smaller businesses, many of whom are already struggling to keep up with the PAYE Real Time Information requirements.
Some will not have up-to-date computer systems and despite promises about “free software and apps” may still have to buy additional hardware, software and assistance packages or even employ additional staff to deal with this extra level of compliance.
Links
For more discussion of this topic see our articles:
HMRC has carried out a very short consultation into proposed regulations which will have implications for everyone involved in providing tax advice, requiring advisers to notify their clients about the "Common Reporting Standard".
In Dr Sharat Jain v HMRC TC 04788 [2015], an NHS consultant who carried on private work at weekends from various hospitals was disallowed his home to travel and subsistence costs. They were not wholly and exclusively incurred: the FTT applied the reasoning from the Dr Samadian decision.
In HMRC v Peter Vaines [2016] UKUT 0002 (TCC), a partner in a law firm was disallowed tax relief on a payment made to avoid potential bankruptcy and to protect his reputation, it was not wholly and exclusively incurred for the purposes of the trade.
In D S Sanderson v HMRC [2016] EWCA Civ 19 the Court of Appeal upheld a discovery assessment on the grounds that the information disclosed by a taxpayer on his tax return was not sufficient to provide a hypothetical HMRC officer with enough information to raise an enquiry, even though the actual officer involved did possess that information.
- Mr Sanderson entered into the Castle Trust tax scheme to generate a capital loss.
- The losses were disclosed on his 1998/99 Tax Return which he did not submit until February 2003.
- In July 1999 HMRC’s Special Compliance Office (SCO) received a list of names and addresses of individuals who had participated in the scheme, including that of Mr Sanderson.
- When this list was forwarded to Mr Thackeray, an SCO officer, Mr Sanderson had not yet submitted his Tax Return.
- Mr Thackeray was not aware that Mr Sanderson had claimed the capital losses on his 1998/99 return until after the enquiry window had closed. As soon as he saw the Return, in January 2005, he issued the discovery assessment for capital gains tax of £713,011.48, plus interest.
The issue before the Court of Appeal was whether Mr Sanderson’s disclosure of the scheme was adequate. If it was not then HMRC could raise the discovery assessment. Both the First Tier Tribunal and the Upper Tribunal had found in favour of HMRC.
Legislation
TMA 1970 s29(5) enables HMRC to make a discovery if at the time when an officer ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return, the officer “could not have been reasonably expected, on the basis of information made available to him before that time, to be aware of the situation [which gave rise to the loss of tax]…”
Mr Sanderson’s argument
Mr Sanderson contended that HMRC was out of time to raise a discovery assessment on the grounds that:
- He had disclosed on his Tax Return that the losses arose as a result of his participation in the Castle Trust.
- HMRC were already aware when he submitted his Return that he had participated in the scheme.
- Mr Thackeray knew as soon as he saw the Return that the Scheme losses had been claimed and admitted that he could have raised an assessment within the enquiry window, based on the information in the return, if he had seen it in time.
- The hypothetical officer who did see Mr Sanderson’s Return within the enquiry window should therefore also have had sufficient information at that time to raise the assessment but did not do so.
Court of Appeal Decision
- The correct test is that the hypothetical officer should be able to infer the information he needs.
- That inference must be:
- Reasonably drawn.
- Relate to the insufficiency of tax rather than be a general inference of something that might shed light on the taxpayer’s affairs.
- Drawn from the Return provided by the taxpayer.
- It would be speculative for the hypothetical officer to conclude when viewing the Return that another branch of HMRC might have relevant information about the effectiveness of the scheme.
- It cannot be assumed that a hypothetical officer would have the same knowledge as an actual officer such as Mr Thackeray who happens to possess the specific knowledge that he needs to enable him to raise an enquiry.
Comment
The Castle Loss scheme was, if our recollections are correct, a tax saving scheme perhaps devised by KPMG and marketed by Coutts bank and it did not work. HMRC received a lot of data on scheme users but it had some difficulties, having in many cases lost or destroyed the original returns. Taxpayers had been advised to make a disclosure in respect of the scheme on their tax returns when submitted. When it was discovered that the scheme had failed Coutts' advisers had called the taxpayers in and explained that they probably had no case. It seems that HMRC was overwhelmed with data, however the result is equitable given the circumstances.
It should be noted that the Upper Tribunal has previously determined that the inclusion of a DOTAS number on the Return was adequate disclosure for the taxpayer (Charlton v HMRC [2013] STC 866). The Sanderson case precedes the DOTAS regime, and although the standard disclosure given to scheme users mentioned the scheme, it did not reveal that it did not work, and HMRC's officers had no way of knowing at the time whether it did.
Useful guides on this topic
How to appeal a decision of HMRC
Key steps in appealing a decision of HMRC.
How to appeal a tax penalty
Essential reading in cases were there are penalties too
Discovery assessment and time limits
How far HMRC can go back, what conditions must be met for a valid discovery
Penalties: Error in a return or document
How work out penalties for different forms of inaccuracies
DOTAS: Disclosure of Tax Avoidance Schemes
Rules for declaring use of tax schemes
External links
Case reference: Mr David Stephen Sanderson v HMRC [2016] EWCA Civ 19