HMRC impact assessment is a disgrace

If you knew the taxman was going to come round to your office to check your business records, how much do you think it would cost you?

The taxman has made up some numbers that it is hard to take seriously. They suggest that the only costs to small businesses will typically be related to the "up to" 4 hours that each 'business record check' will take. HMRC have then placed a value of £11.70 per hour on all the accounts and wages clerks, book-keepers, other financial clerks and sole traders who will be involved in each 4 hour meeting.

These numbers are contained in HMRC's Impact Assessment of Business Records Checks. It was published in December alongside the consultation document on the subject of 'Business record Checks'. The deadline for responses was 28 February which is why the Institute of Chartered Accountants in Scotland (ICAS) view has now been made public.

HMRC's estimate is that each half a day, will cost a business £54. ICAS has re-costed an average visit using “realistic” estimates of business disruption and adviser’s time - coming up with a total of more than £560 per visit.

ICAS' revised estimate of £562 for each HMRC visit is as follows:

• 1 hour preparatory meeting between the business (£50 per hour) and its accountant (£75 per hour) = £125
• 3½ hours spent by the business (£50 per hour) and its accountant (£75 per hour) in dealing with HMRC visit = £437

I think this is still woefully short of the real cost to most small businesses. Don't you?

One of the problems with HMRC's impact assessment is that it only reflects estimated figures for the smallest of small businesses and assumes they do not have an accountant. Perhaps this is deliberate and HMRC do not intend to visit businesses that already have someone, like an accountant, to check their business records. If this were the case though the impact assessment should make it clear. It's not an assumption that accountants are making.

I don't check every HMRC impact assessment and missed this one when it was published in December. The last one I looked at related to Mr Darling's plan to reduce the rate of VAT to 15% for 13 months. That too was woefully inaccurate. I blogged about it here.

Tax on TV: Sort your paperwork or watch The Business Inspector on Channel 5

If only all small business owners had time to watch TV and would choose to watch a new 4 part series: The Business Inspector, a new programme, that premieres on 10 March. It's sponsored by HMRC!

Although HMRC are not referenced in the programme they are co-producing it and have paid £370,000 for the privilege. Their objective: To raise awareness among small businesses that they need to keep good records.

I well remember the campaigns about record keeping that were run by the then Inland Revenue in the mid 1990s. This was during the reign of the cartoon Hector the Inspector when the self assessment system was first introduced. I only threw out the old cassette and old video last month during a tidy up. Might have been fun to have compared the messages with the new programme. I wonder how the relative investments compare and what the current sponsorship is REALLY expected to achieve.

Free Tax Advice and Tax Help for business start-ups

Many people start up in business without first taking professional advice. That's a fact.

Many of these people are unaware of the services and advice they could get from an accountant. There is also a common misconception that all accountants are the same. They're not. Some specialise in advising business start-ups. Many others are far better at advising only established businesses.

I would always encourage a business start-up to discuss their plans with a suitable accountant. This will provide an objective insight into the feasibility of the plans and financial projections. It could make all the difference down the line - although there is a limit as to the valuable advice you will get for nothing.

One of the issues that an accountant should address are your tax obligations as a new business owner. This is not a subject that the Tax Advice Network attempts to address. Our role is more to provide support and advice in cases of tax investigations and other issues arising from the less common tax difficulties, challenges and difficulties.

But we do get visitors to our website looking for free tax advice - especially in the context of business start-ups. Whilst we don't seek such visitors the challenge is how to help them find what they want even if it's not something that we can provide ourselves.

So I was very pleased that the Tax Advice Network was selected as one of 20 trusted organisations to share some simple new tax support material and tools, tailor-made for small businesses. Included are easy-to-read PDF guides and 'bite-size' videos on a variety of key subject matters - from record keeping and how to avoid a penalty, to PAYE.

We will be incorporating links to some of this material into our website shortly. For the moment here's a link to the relevant items which are being made available through the Business Link website. Do please add your comments to this post to let us know what you think of them.

I'm also posting links on twitter and am curious as to whether that will generate much traffic to the Business link website. So far as I know we're the only one of the 'trusted organisations' to have a twitter strategy so it'll be interesting to ascertain the reach of our message after ReTweets. Please help if you care.

Taxman visits to home businesses - the truth

No one will be interested in this blog post. It contains the truth about the taxman's new powers of entry to enter your home. Don't bother to read on if you simply want reinforcement of the scaremongering that has been widely reported over the last few days.

The Times for example reported "HMRC given powers to raid home businesses" and that

"Anyone running a business from home could soon have an unannounced visitor — in the form of the taxman"

The Telegraph piece was headlined: "HMRC allowed to raid homes without warning"

Both papers and many others quoted just ONE firm of accountants (a decent firm to be fair) that had issued a press release giving a worse case scenario about how the taxman could use their new powers after 1 April. It includes the following statement, which is factually correct as far as it goes:

“The many thousands of business people and sole traders who claim expenses for 'use of home as an office' should recognise that from next month, HMRC has the right to enter their home to inspect business records. This power includes visits to any business premises, including any part of a residential home used as an office,”

Background
The new powers were introduced by Finance Acts 2007 and 2008. Over the last couple of years HMRC has held extensive consultations with professional bodies who have been very concerned about the extent of the new powers. HMRC has also made the official line very clear. Unannounced visits to private homes will be very few and far between. And I believe that.

When I was Chairman of the ICAEW Tax Faculty I met with many of the top officials from HMRC. I still see some of them at official functions. They are honourable people and I generally believe them when they explain how they intend the law to be applied. They require extensive powers to constrain the efforts of the worst tax evaders. They don't intend that their new powers will be used on a day to day basis.

Insufficient safeguards
Having said that I have also written previously on this blog about the widespread concern across the profession that taxpayers have insufficient safeguards to protect them from abusive use of HMRC's new powers. So you might expect me to agree with the suggestion that small businesses operating from private homes are suddenly at risk of imminent and frequent visits from the taxman - after all this is the scenario painted by the recent press reports.

My position is clear. I share the concern that others have expressed that the new powers could be misused - just like children enjoy playing with their new toys and learn to use them in unexpected ways. But that won't happen immediately. Of that I'm sure.

In practice
Richard Tyler writing in the Telegraph paints a fairer picture. He notes that:

"The new powers mean that income and corporation tax inspectors will have the same powers of entry and the longstanding powers enjoyed by Customs officials investigating upaid VAT"

There we have it. How often have home based businesses had such unannounced visits in the past? Rarely, if ever.

What this means is that if you are a compliant taxpayer you have nothing to fear. Contrary to the press reports, there is next to no prospect of the taxman starting to make unannounced visits to check up on people running their business from home.

If however you've been defaulting on your taxes you could expect a visit. If you've ignored requests from HMRC to produce your books and records for investigation you could expect a visit. And if you've been involved in tax evasion or even possibly 'abusive' tax avoidance schemes you could expect a visit.

But even then I don't expect such unannounced visits to take place in the near future. Indeed there is a very clear statement in HMRC's own instruction manuals for it's staff:

"a visit would only be justified in exceptional circumstances, perhaps to support a challenge to the amount of domestic expenses claimed as a business deduction."

And note even then such a visit would rarely be "unanounced".

HMRC's public comment
This features at the end of some of the recent press reports:

"HMRC does sometimes need to access premises connected with businesses to see such things as goods and assets where it is reasonable to do so, to ensure the right tax is being paid. Although HMRC is extending these powers, it is also extending safeguards. In particular, unannounced visits can only be made with the approval of specially authorised officers."

Bottom line
What this all means is that someone senior has to sanction an unannounced visit by the taxman. In practice it will be far easier for them to make appointments. Even then they will only insist on coming to your home if there is no other way to secure the information they require. In most cases you will be able to go to the taxman's office. Better yet is to meet with him on neutral ground - eg: your accountant or tax adviser's office.

Tax relief for Networking - can you or can't you?

I'm told that some accountants tell their clients that they shouldn't claim tax relief for the mileage involved in traveling to networking events. I'm astonished by such a suggestion.

As most of us know, what matters to the tax man (and more importantly the underlying tax rules) is the taxpayer's objective when incurring costs. Were these incurred for business purposes? Is there a specific rule that denies tax relief (eg: as there is for entertaining expenditure)?

Someone who is an employee probably won't be able to claim tax relief for networking related costs that come out of their own pocket. In most cases they'll be fine though as their employer will reimburse them. This is as important for directors of their own Limited companies as it is for all the business expenses they pay for personally (in error?).

The self employed (and the limited companies that pay or reimburse networking costs) can generally claim tax relief for the costs of attending and of getting to and from business networking events. The test is whether the expenses were incurred "Wholly and exclusively" for business purposes.

Even if someone enjoys networking (and some of us do) this does not disqualify the related costs. Tax relief is still available if the costs satisfy the tests above. So what matters is whether attendance is driven by a desire to build relationships and advocates that could lead directly to new work or introductions to prospective new clients? Invariably these are the primary purposes. And they are evidently directly related to increasing the level of business. Networking is just another form of business development; it's a marketing cost; face to face business promotion and advertising. And as such it's tax deductible.

The water can get muddied if the promoter effectively downgrades the Networking element of the event and focuses on the provision of free food and drink. And of course the retention of related receipts (and maybe even the promo material) would form part of the necessary record keeping to support valid claims for tax relief.

I'd welcome comments on this blog post especially from accountants who have advised on this topic and where they draw the line.

MP expenses row: The tax angle that's getting missed

The row about disclosure of MP's expenses is about more than the shameful attempt to exempt disclosure of their expenses from the Freedom of Information Act.

We also have to consider the lax rules as regards their receipts for those expenses. These came to light last year when the current system was described as "deeply unsatisfactory" by the Information Tribunal. Liberal Democrat MP Norman Baker, who won his own FOI battle to get MPs' travel expenses broken down, told the BBC the judgment had been "inevitable".

The press focused on what they called the 'John Lewis' list. My interest was more in the reports that:

"Each MP can claim about £23,000 a year and can submit claims of up to £250 without a receipt and up to £400 a month for food".

Along with this revelation was the suggestion that detailing all of their expenses and retaining all of their receipts would be too onerous for MPs.

And that's the bit that, to me, is so very shameful. Why should MPs be exempt from the very rules that they impose (through HMRC, the taxman) on all of their constituents?

MP's do not pay tax on their reimbursed expenses. And that's right as long as those expenses were properly incurred on fulfilling their roles as MPs. With no obligation to retain receipts as evidence of the expenses they have incurred, there is no proof that the expenses were properly incurred. And that's exactly what the taxman says to all self employed taxpayers, all employees, all directors and all entrepreneurs. If you want to avoid becoming liable to pay tax on reimbursed expenses then you must retain receipts and proper records.

On 1 April 2009 HMRC gain new powers as set out in Schedule 37 of the Finance Act 2008. This authorises HMRC to specify what they consider is a 'statutory record' that taxpayers will then need to produce to prove that, for example, expenses were properly incurred for genuinely business reasons. Sdly such a power will never be imposed on MPs if they continue to be expemt from having to retain receipts.

It is a total disgrace that public officials should be exempt from a similar requirement. If the obligation to retain receipts for all receipts is too onerous for them it's too onerous for everyone. If it's a reasonable obligation to impose on taxpayers generally then it's even more important for MPs whose expenses and salaries are funded from the public purse.

The taxman wanted the new powers in Schedule 37 because there are some people who do not tell them the truth. For example claiming thast they have incurred business expenses that were more of a personal nature. Are there perhaps some MPs who might be similarly tempted or who might have done this in the past?

What do you think?

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