Entries from September 2006 ↓

HM Revenue & Customs has been accused of sending letters written in a ‘threatening tone’ to company directors who have to fill in personal tax returns.

The letters suggested directors might be lying about how much tax they owe, stating ‘Company directors commonly make errors in claims for business expenses as they include personal expenses. Examples that we often find incorrectly claimed are: entertaining, clothing, food and drink, household running costs.”

They go on to say: ‘If we do not hear from you within 30 days we will make an assessment to collect the amount that we believe is due… we will then send you a revised self-assessment statement with details of how to make a payment.”

The tone of the letters has been described by accountants as intimidating and implying that the tax payer is lying. If you receive such a letter we recommend you seek professional advice.

There have been recent reports of the Taxman scaling back his attempts to collect IR35 tax. Although we suspect that IR35 is falling down his list of priorities here is a IR35 press release on whether it is still alive and well.

As part of the ICAEW Tax Faculty’s Tax Return Week, it has offered advice on 13 ways for small businesses to reduce their tax bill.

1. Make sure that you have claimed all the tax relief that you are entitled to for purchases of plant and machinery. A tax deduction for the cost of buying office furniture, computer equipment and other tools is given by ‘capital allowances’.

2. If you buy a computer or other item of equipment which may have a life of four years or less, it may be worthwhile making a ‘short life asset’ election when you claim capital allowances. This will mean that you get tax relief for the full cost of the item much more quickly in the event that you sell or scrap it within that period – ask your Chartered Accountant or HM Revenue & Customs for further details.

3. Tax relief for cars with emission levels below 120mg/km is given more quickly than for other less environmentally friendly cars. If you are thinking about replacing your business vehicles, this is worth bearing in mind.

4. Consider whether you would be better off trading as a partnership, limited liability partnership or a limited company rather than as a sole trader. Tax is not the only consideration, but it is true that you may save tax by incorporating your business in the right circumstances.

5. If your spouse (or indeed any other person) is helping you out with some of your business tasks – administration, packing up goods for sale, running errands – consider whether you can afford to pay them a small salary. If this is above the National Insurance lower earnings threshold (£4,368), but below the level of the income tax personal allowance (£5,035), this has several advantages: there is no tax or National Insurance to pay by either of you, it is fully tax deductible in your business, and the recipient gets a credit on their National Insurance record which counts towards their entitlement to certain State benefits.

6. If you have a job as well as running your small business, then you may already be paying enough National Insurance to allow you to claim exemption from the need to pay Class 2 weekly NIC of £2.10 per week. You may also be liable to Class 4 NIC at only one per cent on your business profits, but working this out and claiming any refunds can be complex, so once again professional advice is a good idea.

7. If your business profits are below £4,465, you can claim exemption from Class 2 NIC on the grounds of small earnings. But think carefully before opting out of this, as the cost is only £2.10 a week and it counts towards your entitlement to state benefits.

8. Remember that payments into a pension scheme qualify for tax relief.

9. If you use your home for business purposes, then you will be able to claim a deduction to cover part of your home running costs. This will often be a deduction of between £2 and £10 per week, although larger amounts will be allowed if they can be justified.

10. Make sure that you claim your entitlement to the Small Business Rate Relief. This is a new relief, introduced from April 1 2005, which allows small businesses a reduction of up to 50 per cent of their full charge for rates.

11. Consider voluntarily registering your business for VAT. If you register you can claim back VAT; you don’t have to exceed the turnover limit, but remember that your competitors might not be charging VAT or your customers might not be able to reclaim it, which would put you at a competitive disadvantage. If you’re not registered, you can claim income tax relief for costs including VAT.

12. If a ‘low’ wage is to be paid to a spouse or other family member, that wage should ideally equal or exceed the current Lower Earnings Limit for the whole tax year, so that the employee retains their entitlement to contributory benefits. It is, of course, necessary to complete a P11 and then P14 once the Lower Earnings Limit (not just the earnings threshold) is reached.

13. Use a Chartered Accountant!

The Taxman has said recently that he is getting tough on people who consistently submit their tax returns late.

He is even threatening penalties of up to £60 per day that the return is overdue.

However, he has to get permission from the tax courts before doing this and it usually only occurs if you have been late with three or more returns. And even if you are hit with these penalties don’t just accept them - its been known to be possible to negotiate these penalties down to as little as £10 per day.

Oh, and get an accountant on board so that you get your returns submitted on time in future!

We have previously reported on the new ‘intervention letters’ being issued to taxpayers by the Taxman.

Early feedback indicates that HMRC are asking about income which appears to have been omitted from the tax return for the year ended 5 April 2004. The normal deadline for HMRC investigating this year expired on 31 Jan 2006. Specifically we have seen this in the case of the omission of land and property income. This will most likely be based on information which HMRC have got from a third party.

Where the self assessment enquiry window for 2003/04 has closed, HMRC can only normally re-open it by using their formal powers relating to ‘discovery’. A discovery assessment may be made if the omission is attributable to fraudulent or negligent conduct on the part of the taxpayer or their agent.

Hence, we would advise to think very hard before co-operating with an intervention (as opposed to a discovery) on a closed year. Remember that participation in the interventions pilots is entirely voluntary and the taxpayer, or his agent on his behalf, would be entirely within his rights to refuse to take part.

In the absence of co-operation with the intervention HMRC may well choose to issue a discovery assessment.This will bring with it the protection of the formal SA framework including the right of appeal. It will also mean that HMRC reveal what information they hold.

I am writing to you to express our thanks for your more than prompt reply to our latest communication, and also to answer some of the points you raise. I will address them, as ever, in order.

Firstly, I must take issue with your description of our last as a “begging letter”. It might perhaps more properly be referred to as a “tax demand”. This is how we at the Inland Revenue have always, for reasons of accuracy, traditionally referred to such documents.

Secondly, your frustration at our adding to the “endless stream of crapulent whining and panhandling vomited daily through the letterbox on to the doormat” has been noted. However, whilst I have naturally not seen the other letters to which you refer I would cautiously suggest that their being from “pauper councils, Lombardy pirate banking houses and pissant gas-mongerers” might indicate that your decision to “file them next to the toilet in case of emergencies” is at best a little ill-advised. In common with my own organisation, it is unlikely that the senders of these letters do see you as a “lackwit bumpkin” or, come to that, a “sodding charity”. More likely they see you as a citizen of Great Britain, with a responsibility to contribute to the upkeep of the nation as a whole.

Which brings me to my next point. Whilst there may be some spirit of truth in your assertion that the taxes you pay “go to shore up the canker-blighted, toppling folly that is the Public Services”, a moment’s rudimentary calculation ought to disabuse you of the notion that the government in any way expects you to “stump up for the whole damned party” yourself. The estimates you provide for the Chancellor’s disbursement of the funds levied by taxation, whilst colourful, are, in fairness, a little off the mark. Less than you seem to imagine is spent on “junkets for Bunterish lickspittles” and “dancing whores” whilst far more than you have accounted for is allocated to, for example, “that box-ticking façade of a university system.”

A couple of technical points arising from direct queries:
1. The reason we don’t simply write “Muggins” on the envelope has to do with the vagaries of the postal system; 2. You can rest assured that “sucking the very marrows of those with nothing else to give” has never been considered as a practice because even if the Personal Allowance didn’t render it irrelevant, the sheer medical Logistics involved would make it financially unviable.

I trust this has helped. In the meantime, whilst I would not in any way wish to influence your decision one way or the other, I ought to point out that even if you did choose to “give the whole foul jamboree up and go and live in India” you would still owe us the money. Please send it to us by Friday.

File your tax return by 30 September 2006 if you want the Taxman to calculate how much tax you owe for the tax year 2005/06. Normally, this liability is due for payment on 31 January 2007.

This date is also the deadline if you want your PAYE code adjusted to collect small amounts of tax owing through your wages rather than paying the cash yourself in January.