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Tax evasion and the Criminal Finances Act

The Criminal Finances Act provides law enforcement agencies with greater powers to recover the proceeds of crime, tackle money laundering, tax evasion and corruption, and terrorist financing. The Act, which came into force on 30 September 2017, introduced two new criminal offences for corporations: one applying to the evasion of UK taxes and one applying to the evasion of foreign taxes.

These offences relate to the evasion of UK and foreign taxes and hold corporations and partnerships criminally liable when they fail to prevent their employees, agents, or others who provide services on their behalf from criminally facilitating tax evasion.

Where UK tax evasion has been found to take place, the offence can be tried by the courts of the United Kingdom regardless of whether the company who performs the criminal act of facilitation has a business presence in the UK or overseas.

HMRC is responsible for investigating offences in relation to UK tax whilst the Serious Fraud Office is responsible for investigating offences in relation to foreign taxes.

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Seeking clearance from HMRC

Under certain circumstances, taxpayers can apply to HMRC for clearance or approval for a specific transaction. This can help give certainty about how a proposed transaction will be treated. Of course, there are numerous caveats to seeking clearance and the taxpayer must have provided all relevant facts regarding the intended transaction. If any relevant information was not provided, then HMRC’s clearance will be invalid.

There are two types of clearance available. A statutory clearance / approval or a non-statutory clearance / approval.  Statutory clearance applications can be made to HMRC before the relevant transaction or event has taken place based on the underlying legislation. Although, it is not mandatory to do so in cases where statutory clearance is available, it is usually recommended to obtain HMRC’s approval up-front.

The non-statutory clearance service concerns areas of tax where the legislation does not otherwise provide for a formal clearance process. Before using this service HMRC requires the taxpayer to check a transaction is not covered by a more appropriate clearance or approval route, and to have fully considered HMRC’s guidance about all clearance and approval routes.

HMRC does not provide clearances or advice for the application of the ‘settlements legislation’ or the tax consequences of executing non-charitable trust deeds or settlements. In addition, HMRC does not provide either formal or informal clearances that the general anti-abuse rule (GAAR) does not apply or in cases that in HMRC’s view relate to tax avoidance.

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Processing of criminal records data in recruitment

Unlock, a charity that assists people with criminal convictions, has published new guidance to help employers ensure that their policies and practices on collecting criminal records data during recruitment are compliant with the GDPR and the Data Protection Act 2018. The guidance includes contributions from the Information Commissioner’s Office.

The guidance emphasises that collecting criminal records data during the initial job application stage is unlikely to be compliant with data protection laws as it’s unlikely to be necessary; employers must be able to demonstrate that processing criminal records data is necessary at whatever stage they decide to collect it. The guidance also states that employers should have a policy in place on collecting personal data, which includes a section on the processing of criminal records data. That policy should clearly identify the purpose of collecting criminal records data and the lawful basis for collecting it, explain how long this data will be retained and who it will be shared with and set out job applicants’ legal rights in relation to their information.

Finally, Unlock recommends employers follow a three-stage process to determine if, when and how they should ask about criminal records:

  1. Define the purpose of collecting criminal records data.
  2. Identify a lawful basis for processing and meet a condition of processing.
  3. Set out their privacy policy and data subject rights.
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Finance (No.3) Bill and the Budget

The Financial Secretary to the Treasury, Mel Stride has confirmed that the government will publish Finance (No.3) Bill on Wednesday, 7 November 2018. The Bill is so named as it is the third Finance Bill in the current special two-year session of Parliament. The Bill will contain the legislation for many of the tax measures announced by the government. The Bill is colloquially known as Finance Bill 2018-19 and will become Finance Act 2019 after Royal Assent is received.

The publication of the Bill will follow the Autumn Budget 2018 which will be held on Monday, 29 October 2018. The timing of the Budget should allow the Finance Bill to pass through Parliament before any controversial Brexit legislation is put before the House.

This is the second Budget to take place in the autumn following the government’s decision to switch to a new Budget cycle. The Budget will be followed by a Spring Statement in 2019 where the government retains the option to make changes to fiscal policy if the economic circumstances require it. Details of all the Budget announcements will be made on a special section of the GOV.UK website which will be updated following completion of the Chancellor’s Budget speech.

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Electing not to have Incorporation Relief

If a taxpayer owns a business as a sole trader or in partnership, a capital gain will be deemed to arise if the business is converted into a company by reference to the market value of the business assets including goodwill. This may give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

A number of options exist in such situations. One of these involves arranging the incorporation of the business so that it satisfies the conditions necessary to secure incorporation relief. One such condition is that the entire business must be transferred as a going concern in exchange for shares in the new company. It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

However, there may be certain circumstances where this relief may not always be advantageous, and it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next following the tax year in which the transfer took place e.g. an election in respect of a transfer made in 2018-19 must be made by 31 January 2022. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

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Son’s failed investment in father’s company

A recent Upper Tribunal case examined whether a sole trader operating a skip hire business was entitled to Income Tax relief on irrecoverable loans made to a company. The company was owned by the sole trader’s father. HMRC had rejected the claim for Income Tax relief on the basis that the loans were capital investments and were not wholly and exclusively laid out for the purposes of trade.

The sole trader appealed this decision to the First-tier Tribunal (FTT) where his appeal was dismissed. The sole trader was then granted permission to appeal the FTT’s decision to the Upper Tribunal. In an unusual turn of events the Upper Tribunal agreed that the appeal should be remitted to the FTT for a re-hearing by a different panel. That re-hearing took place in April 2016 more than 2 years after the original hearing and the sole trader’ appeal was once again dismissed.

The Upper Tribunal finally heard the taxpayer’s appeal earlier this year. The Upper Tribunal examined a number of factors relating to the decisions of the FTT. The Upper Tribunal found that the sole trader was unable to satisfy the burden of proof as to the existence or amount of the loans in question and whether the loans were capital or revenue in nature and made wholly and exclusively for the purposes of his skip hire business.

Further, on the basis that the loans were capital in nature. any associated losses should be considered a capital loss. The sole trader’s contention that the loan was intended to ensure that the company could continue to provide him with essential business facilities was rejected. The Upper Tribunal dismissed the taxpayer’s appeal.

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Data protection self-assessment checklist launched for small business owners

The Information Commissioner’s Office (ICO) has launched a self-assessment checklist to help small business owners and sole traders to assess their compliance with the GDPR and the Data Protection Act 2018.

The ICO’s interactive online checklist asks users to answer a series of eight questions by giving either a “yes”, “no” or “in part” answer. At each stage, the user can first click to view more information on the particular question. Once all questions have been completed, an overall “green”, “amber” or “red” rating is generated based on the user’s responses. For any individual answers that are given an “amber” or “red” rating, there is a bullet point list of suggested actions for the user to address the non-compliance issue, together with handy links to relevant ICO guidance for more detailed information.

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Genuine messages from HMRC

HMRC has issued an updated version of their online guidance on Genuine HMRC contact and recognising phishing emails and texts. The guidance provides a current list of genuine messages from HMRC. This includes email messages, text messages and telephone contacts from HMRC.

HMRC is currently carrying out compliance checks for midsized businesses, charities and public bodies by way of a compliance check interview over the phone. If you are unsure if a request is genuine you can ask the HMRC staff member to send an email while you are on the call to confirm their identity. Their email address should have their name and end in @hmrc.gsi.gov.uk. You can also call the relevant HMRC general enquiry helpline to check if a request is genuine. HMRC may also ask for business records to be sent by post or electronically, by a secure platform.

Until December 2018, HMRC is also working with Populus, an independent research agency to carry out stakeholder engagement research. First contact will be by email with follow up contact by email and telephone. Populus may send further emails to stakeholders or telephone them to encourage them to take part in the research.

Although these communications are genuine, taxpayers should still be wary of receiving messages that are purported to come from HMRC. Fake email and text messages can appear to be genuine, but clicking on a link from these messages can result in personal information being compromised and the possibility of computer viruses affecting your computer or smartphone. If you are unsure as to the validity of any message it should not be opened until the sender can be verified.

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The Digital Disclosure Service

HMRC has used targeted campaigns to recover underpaid taxes and penalties from specific sectors and industries where significant underpayment of tax has been identified. The use of these campaigns is part of the government’s continued moves to tackle tax evasion, avoidance and fraud. 

Current campaigns include the Card Transaction Programme, a disclosure opportunity for businesses that accept card payments and have not paid the right amount of tax due and the Let Property Campaign for landlords who have undeclared income from residential property lettings in the UK or abroad.

HMRC also publishes separate guidance for individuals and companies who need to make a voluntary disclosure but who aren’t eligible for a specific HMRC Campaign. The service is known as the Digital Disclosure Service (DDS).

There are three main stages to making a disclosure, notifying HMRC that you wish to make a disclosure, preparing an actual disclosure (within 90 days from the date HMRC acknowledged your notification) and making a formal offer together with payment.

Taxpayers that come forward voluntarily will usually benefit from better terms and lower penalties for making a disclosure. The actual rate of the penalties will vary depending on the specific circumstances. There are higher penalties for offshore liabilities. For undisclosed liabilities, the penalties could be up to 100% of the unpaid liabilities, or up to 200% for offshore related income.

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Companies and trading losses

Corporation Tax relief may be available when a company or organisation makes a trading loss. The loss may be used to claim relief from Corporation Tax by offset against other gains or profits of the business in the same or previous accounting period.

The loss can also be set against future qualifying trading income. Any claim for trading losses forms part of the company tax return. The trading profit or loss for Corporation Tax purposes is worked out by making the usual tax adjustments to the figure of profit or loss shown in the company or organisation’s financial accounts.

Some of the basic requirements for a trade loss to be set off against other income sources include:

  • being within the charge to Corporation Tax
  • the trade must be carried on a commercial basis and with a view to the realisation of profit
  • at least some of the trade must be carried out within the UK

The rules for the Corporation Tax treatment of carried forward losses changed from 1 April 2017. The changes increased flexibility to set off carried forward losses against total profits of the same company or another company in a group whilst at the same time introduced new restrictions as to the amount of profits against which carried forward losses can be set. Any losses carried forward prior to 1 April 2017 fall under the old loss relief rules and must be handled accordingly.