2009 Tax rules update

Every year we review forthcoming tax changes and every year Whiplash produces a text so full of irritation and indignation that I have to tone it right down. This year you get the full story in its uncensored glory:

The Whiplash Chronicles

There’s much change ahead: none of it good.

HMRC will have greater power to force information out of you and will be able to charge higher penalties when they find/assume something is wrong.

HMRC information powers

There has been a shift in approach from HMRCs responsibility for the ‘care’ and management of taxes to the ‘collection’ and management of taxes (their words).

The stated reason for this is to standardise the procedures used by the old Customs and the Inland Revenue. However, the new regime goes far beyond this. HMRC have concluded that they need longer than one year to be able to identify the risky cases. Under the new rules they can ask what they like when they like.

The way that this will work is that Inspectors will be able to insist on inspecting business premises, business assets and business documents with little or no notice. An enquiry does not need to have been started. There is no right of appeal against a request for ANY records, which are connected with the business. The Inspector will be able to see the private account statements if there are any transactions related to the business. They will charge penalties if you do not comply.

HMRC are currently receiving training on the new rules and being instructed on reasonable, proportionate and consistent conduct. Strangely, I’m not reassured.

Perfect records

HMRC will be able to decide the appropriate format of records for a particular business. No longer will the business owner be able to make that decision for himself and woe betide the business that does not keep the prescribed records. Sadly, they’ve not said what these perfect records are to be yet, but you can bet that a bag of receipts or a book that’s written up several months later, is not it.

Of course, we never experience unreasonable Inspectors who ask for intrusive levels of information which is totally unrelated to their enquiry.

It has been the case for many years that an individual who is under investigation is deemed guilty until proven innocent and I assure you that I am not overstating the case here.

An individual is better protected by the law if he is suspected of a serious crime than if he is suspected of not paying even a comparatively small amount of tax. HMRC do not have to prove their case even to the civil standard. It is the taxpayer who has to prove that he is innocent to the civil standard. As a burglar, I would have a number of legal protections, whereas if I am suspected of having failed to disclose all of my income, I forfeit nearly all the protection which would be available to a burglar.

But it’s going to be all right because they’ve decided to resurrect the Taxpayers Charter. It’s not in the legislation, but those honourable chaps at HMRC promise to abide by it.

This is what they’re proposing:

HMRC Charter

Not yet finalised, but the draft starts as follows:

You can expect HMRC to:

• treat you as honest, believing you are willing to pay what you owe, claiming only what you are entitled to, unless we have good reason to doubt you.
• Respect you, listening to your needs and taking into account your circumstances

Chocolate teapot anyone?

Are you likely to be targeted?

The way that cases are selected now will not change. It’s no secret that HMRC have access to huge amounts of information, which is controlled by the Risk Intelligence Assessment Team. They spot trends by comparing profit ratios with other similar businesses nationwide.

The more significant likely triggers are:

• More than one set of accounts overdue in recent years
• Significantly fluctuating income or expenses
• Obviously incorrect expenses
• No adjustment for private use
• Low income compare with likely outgoings

New penalties

Will apply to incorrect Returns submitted on or after 1 April 2009. It will be vital to keep proof that you have taken reasonable care in completing your Return as, if something is wrong, but you can be seen to have taken reasonable care, HMRC will not charge a penalty. If HMRC think that you were careless, they can charge a penalty of up to 30% of the extra tax. We will therefore be getting you to sign all sorts of pieces of paper to use as evidence of reasonable care. That’s going to be tiresome, but necessary.

Under previous rules, Inspectors got more points according to the penalties charged and I have no reason to believe that this will have changed. I therefore expect Inspectors to pursue penalties wherever they can. We will have an uphill struggle to prove reasonable care.

Sadly, it doesn’t stop there. If the error is considered deliberate, HMRC will charge a penalty at 70% of the extra tax. If it’s deliberate and concealed, the penalty will be 100% of the extra tax. Their definition of "concealed" is unusual.

These penalties can be reduced if you make an unprompted confession. Should we be considering a nationwide campaign that every taxpayer in the country makes a confession every year?

New Tribunals

If you’re not happy with a decision from HMRC, the old way of taking a case to the Commissioners ends from April. Instead you ask for a review. This is carried out by another HMRC officer. If you’re still not happy, you then approach the tax Tribunal. They will either arrange a hearing or make a decision without one. This could involve costs. The appeals process is loaded in HMRC's favour.

Offshore Disclosure #2

The once in a lifetime opportunity did not yield quite as much as expected, so they’ve decided to do it again. We don’t know when. The first one was sold on the grounds that the penalty would be 10% as opposed to much harsher possibilities. We don’t know what the carrot/stick will be this time. We must be forgiven for assuming that if you miss this one, you can catch the next one. A bit like the DFS sale.

New Capital Allowances

For some there is good news. Expenditure on kit (not cars) from April 2008 attracts 100% allowance where it’s under £50k. So that means that many clients are better off.

The rest of it’s worse though.

The existing rate goes down from 25 to 20%

ABA/IBAs are being phased out and if that’s not bitten yet, it will do now.

Cars with CO2 emissions of 160g/km or more will only attract allowances at 10%.

Existing cars acquired pre April 09 will continue under the old rules

VAT

Will be subject to the new penalties regime.

You can put right an error of up to £10,000 on your Return. The reasonable care rule applies here, so if the error arose carelessly or deliberately you will be liable to a penalty. So we have the ridiculous situation where you put right the problem without disclosing it but then separately disclose it to avoid a penalty AND THIS APPLIES REGARDLESS OF THE SUM INVOLVED.

Vat registration delays

Every month from August 07 to March 08 HMRC deliberately understated the extent of the VAT registration delays. They misled Parliament, the National Audit Office and the nation as a whole in capping the time elapse at 60 days when it was actually more like 90. Does that matter? Yes, when they expect honesty from their ‘customers’.

VAT returns must be filed online after April 2010 where turnover is over £100k.

VAT goes back up to 17.5(?)% on 1 December 2009.

Time to pay

Apparently, 60,000 businesses have taken the opportunity to pay tax by instalment. Where do you think that the shortfall will come from?

Increase in Tax and NI rates

A reminder that in April 2011, nearly all of us will pay more tax and/or NI. Not everyone will be affected by the 45% tax rate, which kicks in when your income hits £150k, but many more of us will be affected by the 0.5% increase in NI.

>From April 2010, anyone with income over £100k will lose the personal allowance on a sliding scale.

More help with losses

The rules have been temporarily relaxed to claim losses, which can be used against income up to 3 years back rather than 1.

Where will your money be safe?

I’m not allowed to give investment advice. There is an alternative that you may not have considered. Certificates of Tax Deposit. No further comment.

IHT on holiday lets

Holiday lets are considered a business and are treated as such. Not, however, by HMRC for Inheritance tax purposes any more. Another stealth tax?

Some good news

Income shifting deferred indefinitely. This is the scheme that HMRC wanted to introduce in to prevent the ‘unfair’ way that business owners pay less tax by paying income to their spouses. The government claimed that the attack was being deferred in order to help small business. In fact, HMRC can’t work out how to do it because it’s just too hard.

Planning Gain supplement abandoned. This was the tax on the difference between the values before and after planning permission.

Conclusion

The new rules outlined above are a classic example of the bigger side moving the goalposts so that they can win. If you don’t want to have to dig deep for the Treasury, you are going to have to keep watertight records. You would also be wise to keep ANY private transactions away from the business account. We will do our best to keep you on the straight and narrow, but we can’t do it all for you. You have been warned.

Investigation Insurance anyone?

I’m off to buy a lottery ticket.

Disclaimer

Tax is sport, but only if you win.

DUCKETT | 01432 370 572 | contact us

DUCKETT

t: 01432 370 572

contact us