Helping hand

Tweet

KEY POINTS

• Toolkits for record keeping.
• Clarifying tax technical issues.
• Input tax on fuel for cars.
• Deterring tax evasion.

Small and medium-sized enterprises (SMEs) are variously described as the engine of the economy, the starting point for entrepreneurism and the creators of employment. For HMRC they represent a significant taxpayer segment with myriad challenges and opportunities.

HMRC deal with close to five million incorporated and non-incorporated SMEs, more than 99% of all UK businesses. The SME population is hugely diverse ranging from millions of one-man bands to international companies with a turnover of up to €50m and 250 employees.

Each year we estimate that more than 700,000 businesses start, and 600,000 cease. Many will be run by people completely new to business; others will be new endeavours by experienced entrepreneurs.

All, though, will need to undertake basic registration and record keeping to be able to meet their tax obligations.

SMEs account for around 50% of total UK business turnover, contribute around 35% of all HMRC tax receipts (including employer taxes) and employ roughly 13m employees (60% of the UK private sector).

Tax agents are appointed to deal with all or some aspects of an SME’s compliance obligations in more than 70% of cases, so are a key link between HMRC and SMEs.

These enterprises are therefore important to the UK economy and this is why HMRC have developed an approach for this group that supports growth. We aim to reduce administrative burdens while at the same time levelling the playing field by tackling tax evasion, for example through the recently launched taskforce initiative.

The challenge for HMRC is to influence attitudes and behaviours to tax compliance by SMEs early on in their business life.

We know from research that businesses that keep good records and meet their tax obligations are also those that continue as a viable concern and grow; so influencing attitudes and behaviours early on in their business life is key to success. But even where there is good intent and robust records, mistakes can be made.

HMRC produce a number of free tools to help businesses get their records into good shape. These can be downloaded from the HMRC and Businesslink websites and cover:

• Keeping records for business: what you need to know: a basic guide with a helpful list of where to get more information.
• A general guide to keeping records for your tax return: detailed guidance on record keeping covering what type of records you may have to keep, common problems and examples for different types of business.
• Setting up a basic record keeping system: with examples of spreadsheets and information about setting up a record keeping system.
• Find out what records you should be keeping: looks at the records you need to keep and how well you are keeping them.

Common technical issues

Over the past two years, HMRC have been working with the main representative bodies on the development of toolkits to identify where errors are made and offer a view on how the scope for error can be reduced. These cover a range of taxation issues.

This article highlights a number of the most commonly seen errors from HMRC’s perspective and some of the main changes that will affect the SME community.

Some of the areas may seem quite basic, but they are exactly the common errors we see and, as a result, enter into correspondence with agents to resolve.

Putting things right ahead of submission of the return will reduce costs for both agents and HMRC and give greater certainty for the client.

Use of the toolkits is voluntary, but we have seen more than 150,000 downloaded since they were published.

Work in progress

Identifying and accounting for work in progress can be difficult and accounting records may initially include three types of uncompleted work: manufactured products, contracts for services and long-term contracts. The tax treatment of these items follows the accounting treatment, which is broadly as follows.

• Manufactured products should be valued at the lower of cost and net realisable value.
• Contracts for services which straddle accounting periods are treated as long-term contracts and should be assessed individually on a contract by contract basis and turnover and attributable profit or losses included in the accounts.

The profit allocated to the accounting period should be calculated having regard to the period of the contract using a method of allocation appropriate to the particular circumstances.

Attributable profit is the part of the profit estimated to arise on each contract, after allowing for remedial and maintenance costs and any costs not recoverable, that fairly reflects the amount of work performed by the accounting date.

This should only be brought into account where the profitable outcome of the contract can be assessed with reasonable certainty.

While any profits arising should be accounted for over the period of the contract, any losses anticipated should be recognised immediately.

Capital allowances

There have been changes to the maximum annual investment allowance (AIA). The toolkit highlights the special rules on the calculation and allocation of the allowance where the chargeable period spans the date of a change in the maximum amount.

Where the period spans 1 April 2010 for corporation tax or 6 April 2010 for income tax, the maximum allowance is the sum of:

• the maximum entitlement based on £50,000 for that portion of a year falling before the date the limit changed;
• the maximum entitlement based on £100,000 for that portion of a year falling after the date the limit changed.

However, a maximum of only £50,000 AIA can be claimed in respect of expenditure in the part of the accounting period that falls before 1 April 2010 for corporation tax or 6 April 2010 for income tax.

Director loan accounts

One of the most common errors is claiming relief for repayment of a loan in the wrong accounting period under CTA 2010, s 458. To give relief in the accounting period in which the loan was made, any repayment must have been made within nine months of the end of that period.

If the loan was repaid after this date, relief cannot be given until nine months after the end of the accounting period in which it was repaid.

For loans made in accounting periods ending before 1 April 2010, the provisions of TA 1988, s 419 are relevant, with any subsequent claim for relief due being claimed under s 419(4).

One final point is that the timing for such claims changed from 1 April 2010. A claim for relief under s 458 or s 419(4) must now be made within four years from the end of the financial year in which the loan is repaid, released or written off.

Attribution of rights

There has been a recent change to the rules relating to the attribution of shareholders’ or participators’ rights and powers to identify companies under common control (associated companies).

For accounting periods ending on or after 1 April 2011 the revised CTA 2010, s 27 states that where no substantial commercial interdependence exists between businesses, the tests under CTA 2010, s 450 and s 451 are limited so that they are not treated as associated for the purposes of small profits rate and marginal relief.

This means, for example, separate companies owned by a married couple or members of the same family will not be treated as associated if there are no other links between the companies. This, in effect, mirrors and extends the treatment previously given in extra-statutory concession C9.

Transferred assets

When an asset is transferred to a director or employee there will normally be a chargeable benefit. The value to be used will depend on certain factors.

When the asset is new, the value to be used is the higher of the asset’s market value when transferred or its initial cost. For used assets, which have not previously been made available as a benefit, the market value at the date of transfer should be used.

The value of a used asset previously made available as a benefit is the higher of:

• the asset’s market value when transferred; or
• its market value when it was first made available as a benefit, less any amount charged to tax and national insurance while provided as a benefit.

There is a special rule for the transfer of used or depreciated assets to a director or employee, for example cars and vans. If the asset is chargeable as earnings from the employment under ITEPA 2003, s 62 the amount chargeable is its second-hand value less anything the director or employee has already paid for it.

However, if it is not chargeable as earnings, the amount chargeable is the lesser of the expense, originally incurred by the person transferring the asset, in producing or acquiring it or the market value at the date of transfer less any sum paid for the asset by the director or employee.

VAT

Claiming input tax if a business purchases fuel for car can be difficult. One of four options must be adopted for each car in respect of the VAT incurred:

• claim all of the VAT because the car is used exclusively for business journeys;
• claim all of the VAT and apply an output tax fuel scale charge based on the car’s carbon dioxide emissions to reflect private use;
• maintain detailed records to separate business mileage from private mileage and demonstrate that fuel has only been provided for business journeys; or
• claim no VAT on any road fuel purchased for any vehicles (both cars and commercial vehicles).

Cars for which fuel has been supplied and input tax claimed need to be identified and output tax calculated by reference to the VAT scale charge for each car.

Alternatively, the exact figure can be applied if business mileage records are maintained to separate business from private journeys or the car is used exclusively for business journeys.

Tackling the SME tax gap

HMRC’s challenge is effectively to combine how we deal with the large number of SMEs that make relatively minor errors in their tax returns, with the small minority of businesses that deliberately seek to break the rules.

A clear message about our determination to catch and penalise those who bend or break the rules is an essential component in deterring taxpayers who are potential rule breakers, as well as giving confidence to honest businesses.

Over the next few years HMRC will reinvest more than £900m into work against avoidance, evasion and criminal attacks, and aim to bring in around £4bn a year in additional revenue from the SME segment by 2014/15.

Evaders and criminals will notice a stark difference in the risks of not paying the tax that is due. And those that take the risk, but are caught, will feel the full force of HMRC’s penalties and powers.

We are imposing more behaviourally based penalties to tackle non-compliance whereby those who deliberately conceal their tax liabilities or fail to co-operate with investigations will be subject to higher penalties then those who come forward voluntarily.

HMRC are increasing the number of staff carrying out compliance checks and ensuring that they are better able to recognise and confront cases of evasion.

Tax agents have asked how the department’s compliance activity works today and how this differs from the understood TMA 1970, s 9A approach in self assessment. Our approach balances the need to resolve simple errors quickly and to maintain an appropriate pace in more complex enquiries.

The range of intervention work includes:

• Compliance centre interventions: focused, single issue, non-complex interventions based on third party information that indicates potential omissions from tax returns. Where formal authorisation is held, a taxpayer’s agent can expect to be contacted. All intervention work is carried out using the same statutory powers which facilitate HMRC’s compliance activity generally.
• The launch of 12 compliance taskforces which bring together expertise from across the department to focus specifically on tax evasion in particular sectors and locations. Already we have launched a restaurants taskforce in three locations, and a fast food taskforce in London.
• Campaign activities aimed at high risk areas whereby those who come forward voluntarily will face different treatment from those caught. We have recently concluded work on medics and plumbers, and in June announced details of the campaigns we plan to introduce in the rest of the year. These activities are in addition to our work to identify non-declaration of income through offshore disclosure.
• The ‘managing deliberate defaulters campaign’. This was launched at the start of 2011 and encompasses more than 700 tax cheats who have been told that they will be subject to closer HMRC monitoring for up to five years. Monitoring could range from additional reporting requirements to more in-depth compliance checks. Later this year we will begin publishing the names of the most serious deliberate defaulters.
• Increasing the number of criminal prosecutions of fraud to 1,000 a year and using civil recovery and asset confiscation orders under the Proceeds of Crime Act.
• Investing in 100 additional specialist investigators to tackle non compliance in the labour provider sector.
• Trialling improvements to existing compliance check processes. The single compliance process seeks to align existing practices for different regimes into a single, consistent framework. Using open and early dialogue we want to provide businesses with a proportionate response to risks that need checking, work collaboratively to provide greater clarity and certainty in a compliance check and conclude checks in a shorter time.
• Piloting a ‘test and learn’ exercise during 2011/12 which aims to carry out up to 1,200 real-time business records checks. This trial period, in which we will not be issuing penalties, has identified record keeping inadequacies in around 45% of the visits undertaken thus far. Business records checks are intended primarily as a ‘compliance check’ for businesses where we have identified a risk which suggests that their record keeping systems may be inadequate. We know that some agents have concerns about the implementation of these business record checks and the additional burden they could place on business, so we are working closely with agent representatives to develop the approach.

Vital to the UK

SME taxpayers are hugely important to the UK economy and our approach recognises the complexity that they and their agents need to manage. We offer support and assurance for those who seek to comply, especially at a time when the economy is dependent on their growth and success.

We believe that the majority are honest and we want to support them in an even-handed way. But HMRC will also pursue those who are evading their obligations and we will deal with them using the full powers at our disposal.

Brian Redford is deputy director of HMRC’s business customer & strategy directorate

Issue: 4322 / Categories: Comment & Analysis , Business , Income Tax