Partnership tax enquiries

I've been hearing that HMRC are focusing more attention than ever before on the tax affairs of professional firms. And this means the tax affairs of more accountancy firms (and their clients eg: law firms and other professional partnership clients) are likely to come under increased scrutiny.

When I was in practice we tended to discourage clients from claiming excessive deductions in respect of business use of car, business use of home phones and payments ostensibly for spousal support. In addition to these items which are often still relevant, HMRC are asking about two other partnership expenses:
- ex-gratia payments to departing partners (paid to encourage them to go quietly and quickly - and thus for the benefit of the trade); and
- recruitment fees paid to source and secure new partners from outside the firm.

In both of the latter cases HMRC's starting point is that the expenditure does not qualify for tax relief. I'm not aware of anyone securing tax relief in eaither case - simply becuase HMRC are keeping their enquiries open in the hope of securing a definitive view in each case, once the matter has been before the Commissioners.

Finally there are two other partnership specific issues that also feature in HMRC enquiries:
- the basis of computing accrued income under FRS5 and UITF 40; and
- the justification or otherwise as regards provisions that are supposed to comply with FRS12.

Some people mistakenly assume that only Limited Liability Partnerships (LLPs) need worry about those accounting related issues. After all only LLPs are required to produce accounts that comply with Generally Accepted Accounting Principles (GAAP). But all partnerships - indeed all traders - are required to compute their tax charge by reference to profits calculated in accordance with GAAP. Thus all partnerships are required to comply with the same accounting requirements, if not in their accounts then in their adjusted profit computations for tax purposes.

HMRC hires retired tax advisers

Now that's going to come as a shock to a few people. It was included in that report from Reuters to which I referred in my tax blog post yesterday.

I've long been aware that HMRC employ accountants to assist with the accounting issues that arise when Inspectors are reviewing business and company accounts. Indeed when an accountant in practice tells me that a Revenue official has made an ill informed comment about a client's accounts I suggest that the accountant asks for the matter to be referred to a revenue accountant. One of the roles is specifically to help their colleagues and to reduce the time wasted on 'non points'.

But - 'retired tax advisers'? Now that could put the cat among the pigeons. You shouldn't have anything to worry about of course as long as you have nothing to hide.

I suspect that initially the 'retired tax advisers' will be expected to provide insights and advice in connection with large corporates and corporation tax issues. Will they also suggest questions, challenges and arguments to adopt in negotiations with accountants who advise 'smaller clients'? We'll have to just wait and see.

Perhaps this is a further prompt of what to do when tempted to advice on tax related issues with which you're not totally familiar. You could try a bit of research. You could ask a mate. Or you could speak to an independent tax specialist adviser. And where better to find one than in the Tax Advice Network? ;-)

Conservative tax proposals to help small businesses

Has someone announced that we're going to have a general election next month? The detailed 'proposals' called for by the Conservative party this week are the sort of thing I would expect to hear about at election time.

These proposals, announced by David Cameron in the Observer and aired during an interview on BBC Breakfast this morning are quite detailed and, sad to say, entirely academic.

I suspect that the idea is to give some idea as to what the Tories would do if they were in power at this time. A series of proposals. And that's a good thing. But have these ideas been thought through or are they nice soundbites designed to generate some useful headlines?

Cameron proposes 1p cut for firms
This is a 1% cut in employers' NICs for businesses employing four or fewer staff. And only for 6 months. Given where we are now that would mean partially in the current tax year and partially in the next tax year. I hate to imagine the administrative hassle this would cause - even if it were possible to get HMRC and taxpayers' software systems to cope. And that's a BIG if.

I think the costs of managing this and dealing with the inevitable errors will exceed the (upto) £600 saving to the employer that the proposal is said to be worth. Thank goodness it's just a proposal by an oppoition party and not a realistic policy.

Six-month VAT holiday for small and medium-sized firms
No need to pay to HMRC the VAT collected from customers for six months to assist cashflow.
I can see good and bad in this 'proposal'. What do you think?

Small companies’ rate of corporation tax to be reduced to 20p
Not mentioned by David Cameron in the TV interview but included in the statement issued yesterday by Alan Duncan, the Shadow Secretary for Business. And it was also in The Observer.

I can just imagine the Treasury's reaction this one. The rate is being increased to counter the impact of Gordon Brown's ill judged introduction of a zero rate of corporation tax. This led to hundreds of thousands of small businesses to 'incorporate' and save tax. Various attempts to counter this were subsequently introduced, most recently a steady increase in the small companies rate of corporation tax.

What I did like about these announcements is the evident focus on the "vast majority of businesses that are 'small and medium sized'". But don't be misled. The definitions commonly used for small and medium sized companies are not what you might think. This becomes obvious if you consider the Government's definition (as imposed by the EU) simply of 'small' companies:

A company (or group) qualifies as a small or medium-sized company (or group) if it meets two out of three criteria relating to turnover, balance sheet total and number of employees:

• Turnover: Upto £5.6 million. (Five point six million pounds)
• Balance sheet total: Upto £2.8 milliion.
• Number of employees: Upto 50.

What I find most odd though is that David Cameron, in his Observer piece refers to "a typical small business with 50 employees". Er, no. Something like 95% of small businesses have less than 5 employees (sorry, can't trace the statistics that show this at the moment). Once a 'small business' gets upto 50 employees it's about to be reclassified as medium sized.

Tax advisers beat HMRC 60% of the time

Reuters reported today that the Parliamentary Public Accounts Committee has urged the Revenue to get tough on businesses dodging corporation tax and to sharpen up its investigations into compliance.

Whilst the message may be right I can't agree with the two quotes attributed to the committee's chairman, Edward Leigh:

"The fact nearly 60 percent of the Department's enquiries into compliance turn out to produce less than one percent of the additional tax raised constitutes very poor targeting,"

"It's extraordinary there's no correlation between the resources HMRC commits to each inquiry and the amount of corporation tax in question."

I'm trying to be objective here. Turn that first percentage around and you find that 40% of HMRCs enquiries are generating meaningful returns on the investment of time and effort. In the other cases it is possible that there was no material tax capable of being collected. Equally the taxpaying company, their accountants or tax advisers may have succeeded in defending HMRCs challenges. The tax at stake could have been high but HMRC eventually had to back down. They won't always have been wrong to open the enquiry. Will they?

On the second point, I think it's 'extraordinary' that the Committee seems to expect HMRC to become psychics. The quantum of tax collected as a result of an enquiry or an investigation cannot be determined at the outset. The amount at stake MAY become apparent during the course of an enquiry or investigation - even then this won't always be the case. But what does the committee expect HMRC to do? Close down all enquiries where the tax at stake is below a deminimus amount? Wouldn't we all like to know how much that is......................

I'm no apologist for HMRC and I've long been among the first to criticise and complain about their procedures and approach. But I'd like to think I'm fair too.

What do you think?

The new penalties regime - making tax taxing

Have you seen the latest adverts by HMRC for filing tax returns? Moira Stuart is the new celebrity face of HMRC and the print ads focus on a reminder to:

"Keep your tax affairs in order and you'll avoid a penalty"

The TV ads however simply contain a reminder of the new filing deadline of 31 October for paper returns. And at the end of the ads Moira repeats that old line that so annoys those of us who know something about the tax system:

"Tax doesn't have to be taxing"

It's not her fault though. By her own admission she's not a tax expert and knows precious little about the tax system beyond how to avoid penalties - presumably by fling before the deadlines.

I found a short video piece of Moira being interviewed about the ads. This video then continues with an interview with Clare Merrills who has featured in previous HMRC podcast too. I thought she came across exceptionally well. If I was writing for the general public I'd highlight some of the points she made but they aren't really relevant to his blog. You can watch it though by clicking on this link to the HMRC video.

Getting back to the print ads, these contain some important warnings that are worth stressing to all clients and taxpayers - even though they are more relevant to next year's tax returns - as the quality of records being maintained NOW will impact the care with which those returns can be completed:

"Completing your Tax Return is a lot less stressful if you keep all your records in order and check with us [HMRC or your accountant!] if there's anything you are uncertain about.
And this is more important than ever.
From April 2009, if you make a mistake on your Tax Return and can't show that you took reasonable care to get it right, you will have to pay a penalty."

If you're not yet familiar with the new penalties regime, you should be. Briefly, penalties for tax errors (related to tax returns due after 1 April 2009) will be imposed on four different scales according to the category of behaviour the taxpayer is judged to fall into. These categories are:

a) Making a mistake in spite of taking reasonable care: no penalty

b) Failing to take reasonable care: up to 30% penalty

c) Deliberate inaccuracy: 20% to 70% penalty

d) Deliberate and concealed inaccuracy: 30% to 100% penalty.

HMRC have released guidance on how they will interpret the new rules in the Compliance Handbook Manual. You may be surprised to learn what HMRC consider to be a deliberate inaccuracy in para CH 81150:

“deliberately withdrawing money for personal use from an incorporated business and not making any attempt to make sure it is treated correctly for tax purposes.”

How many of your clients are slightly slack with their paperwork and thus would fall into the ‘deliberate inaccuracy’ category, attracting a penalty of up to 70%?

The use of the company to pay personal expenses can be viewed by HMRC as a deliberate and concealed inaccuracy as demonstrated in para CH 81160:

“describing expenditure in the business records in such a way as to make it appear to be business related when it is in fact private (possibly with the supplier agreeing to change the description on the relevant invoices)”

The inference is that an incorrect entry in the prime records of the company could be enough to put your client in the worst category of behaviour potentially attracting a penalty of up to 100%.

Back in August we addressed this issue in one of our weekly tax updates for accountants in general practice. I have also addressed the point in an earlier blog post: 'Take care to avoid a penalty' in which I provided some salutary warnings and advice to accountants who were not yet familiar with the new regime.