LLPs can score over Limited companies (re Entrepreneurs' relief)

Over the years I written and lectured extensively about the issues to consider when deciding on the 'right' structure for a business. (For example in my talk on Incorporation and in my September 2007 issue of Tolley's Tax Digest: Incorporation, Disincorporation and related issues)

I've long maintained, for instance, that the headline tax savings that many people sought through incorporation were just one of the factors to consider. Indeed the tax changes announced over the last couple of years mean the pendulum is swinging. Starting a business as a limited company is no longer even as superficially attractive as it was.

Now there is another factor to consider - in the context of Entrepreneurs' relief. If there are going to be minority investors (shareholders) in the business, they will need to hold at last 5% of the shares to benefit (in due course) from the entrepreneurs' relief and pay just 10% of their capital gain when they sell their shares.

There is no such 5% requirement for members of an LLP.

NB: This distinction will be more relevant for start-ups than for established businesses. The latter would need to first 'disincorporate' but this can be fraught with tax problems as no reliefs or exemptions are available to mitigate the normal tax rules that apply on disposal of business assets (including goodwill) by a company to related parties.

The end of the old paper bag jobs?

The provisions in Schedule 36 and 37 of the Finance Bill 2008 have the potential to revolutionise the way that accountants deal with smaller clients and will increase demand for quality bookkeepers.

Schedule 36 includes, at part 2, new powers for any officer of HMRC to enter into business premises to inspect....business documents...if such an inspection is 'reasonably required for the purpose of checking the tax position of any person'.

In effect this anticipates the prospect of 'in year' visits for direct taxes in the same way as has long been the norm for VAT and PAYE inspections. Only, in future, these checks may be designed to risk assess the quality of the accounting records DURING THE PERIOD OF ACCOUNT and with the provisions in Sch 37 in mind (see below).

Schedule 37 deal with 'record-keeping' and makes a small but important change to the existing fairly general requirements in s12B TMA 1970. New subsection 3A permits regulations to be introduced to provide:
- for certain specific records to be kept; and
- that those records may have to include specified SUPPORTING DOCUMENTS.

In due course when those regulations and supporting guidance are issued, it surely won't be long before HMRC start using their new powers to make spot checks and 'in year' visits in an effort to ensure that all is as good as it could be.

Once this all becomes commonplace I suspect that the demand for good bookkeepers will grow dramatically.

Discovery assessments (again)

Listening to Keith Gordon of Atlas Chambers speaking about Discovery assessments at a seminar today I feel I should amplify my earlier comments (10 April) on the same subject.

Keith stressed the importance of appealing against discovery assessments within the 30 day time limit. If you have the slightest doubt you should make a protective appeal. You may decide later to withdraw your appeal but once 30 days have passed you're too late.

Keith noted that HMRC often raise discovery assessments that are not valid. As in where the circumstances of the case do not fall within the legislative constraints surrounding discovery assessments. They are only lawful when 3 essential elements exist:

1- HMRC must have made a discovery (see SP 8/91)
2 - There must have been a loss of tax; and
3 - EITHER:
a) Insufficient information was supplied by the taxpayer
OR
b) The taxpayer's conduct was negligent or fraudulent

Discovery assessments enable HMRC to generate 'easy' money as appeals are often not made within the 30 day time limit even though the 3 tests have not been satisfied.

If you are in any doubt about the validity of a Discovery assessment, you can find help here in the Tax Advice Network, via a simple 'search' eg: for Discovery assessment.

Tax Advice Network welcomes survey findings by UK 200 group

I have just read a report in Accountancy Magazine about some research published by the UK 200 group. The report notes that:

Clients are more likely to ditch their accountants for giving therm incorrect or poor advice than for being too expensive......Clients only rate high fees as the THIRD most important reason for switching accountants behind incorrect or poor advice (87%) and lack of personal contact (66%).

Two other key points noted in the short report:

• Tax planning was rated as the most valued service;

• Around 60% of respondents had been with their accountants for upwards of five years;

I'm always dubious about drawing conclusions from surveys and reports when there are no details as to how the data was collected or of how representative was the sample surveyed. So with that caveat what do I conclude from this brief report of the UK 200 group's research?

1 - It seems to vindicate my view that more accountants could increase their fees without losing too many clients. Indeed, those most likely to leave are probably the D-list clients that you want to ditch anyway. Much depends on how you raise the subject and how you implement the fees increase of course.

2 - It reinforces the rationale for the formation of the The Tax Advice Network - which enables accountants to access vetted, independent, cost effective and expert tax specialists. Accountants can use our specialists to provide second opinions and so avoid giving "incorrect or poor advice" and to enable them to provide an appropriate level of "tax planning" to clients.

3 - It confirms my view that clients will pay decent fees for good advice.

When I ran the tax support for professionals team at a large tax consultancy, a few years ago, I noted that accountants were reluctant to engage the firm and often said things like "My clients are used to only paying £300 a year. They'd never pay £2,000 for tax planning advice." I'd be the first to accept that an accountant knows their clients best. Equally I have long felt that some accountants undervalue the advice they provide and make incorrect assumptions about the level of fees some clients would pay if the cost/benefit ratio made sense.

The UK 200 group's survey suggests that many clients are more interested in getting the right advice than in paying low fees - especially when it comes to the provision of tax planning advice.

HMRC have issued a discovery assessment. Let's appeal. Hmm.

I'm a simple soul. I adopt a pragmatic approach to tax. Perhaps it's one of the reasons why I don't give tax advice myself any more. (There are plenty of advisers in the Network who can do that very well).

A few years back I was part of a delegation of accountancy and tax professionals who went to see HMRC to find a pragmatic solution to the consequences of the Court of Appeal decision in the 'Langham v Veltema' case. The case and subsequent guidance set the future ground rules for the issue of Discovery assessments by HMRC.

I've just read a report of a more recent case re Household Estate Agents. HMRC issued a discovery assessment. The taxpayer appealed and the Commissioners found in their favour. Hooray?

Guess what? HMRC appealed against the Commissioners' decision and won. This is not unusual when the taxpayer represents themself or has an inexperienced advocate before the Commissioners.

I cannot stress enough how critical it is to anticipate what will happen if HMRC lose when you take a case to the Commissioners. The taxpayer never gets a second chance to introduce new evidence. If you go the Commissioners and you are prepared to fight on (win or lose) you must be fully prepared before the Commissioners' hearing. This generally requires specialist expertise. Not simply from someone who has been to the Commissioners before but from someone who really understands what happens thereafter.

I'm a simple soul. I know I don't have the requiste expertise. But I know where I'd turn if I was in that situation. (Another example of how the Tax Advice Network could be useful!)