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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.

Byadmin

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.

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VAT – option to tax

There are special VAT rules that allow businesses to standard rate the supply of most non-residential and commercial land and buildings (known as the option to tax). This means that subsequent supplies by the person making the option to tax will be subject to VAT at the standard rate.

The ability to convert the treatment of VAT exempt land and buildings to taxable can have many benefits. The main benefit is that the person making the option to tax will be able to recover VAT on costs (subject to the usual rules) associated with the property including the purchase and refurbishment of the property.

However, any subsequent sale or rental of the property will attract VAT. Where the purchaser or tenant is able recover the VAT charged this is not normally an issue. However, where the purchaser / tenant is not VAT registered or not fully taxable (such as bank) the VAT can become an additional (non-recoverable) cost. Once an option to tax has been made it can only be revoked under limited circumstances, for example:

  • within a 6 month ‘cooling off’ period,
  • an automatic revocation where no interest has been held for more than 6 years and after 20 years has elapsed.

There are strict rules and conditions which must be met for all these revocations.

Proper consideration of the various issues is important prior to making an election.

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High penalties for offshore tax evasion

There are higher penalties for taxpayers evading Income Tax and Capital Gains Tax relating to offshore matters. HMRC’s compliance check notice entitledHigher penalties for offshore matters, has recently been updated to include details about penalties under the Requirement to Correct (RTC) legislation.

The RTC rules apply to any person with undeclared UK Income Tax, Capital Gains Tax and/or Inheritance Tax liability concerning offshore matters or transfers relating to offshore tax non-compliance committed before 6 April 2017 (i.e. up to and including the 2015-16 tax year). With effect from 1 October 2018, any new disclosure relating to this (pre-6 April 2017) period will be subject to the new failure to correct (FTC) penalties. The FTC standard penalty will start at 200% of any tax liability not disclosed under the RTC, and cannot be reduced to less than 100% even with mitigation.

The existing penalty regime for other offshore matters remains as before, and is linked to the tax transparency of the territory in which the income or gain arises. There are three separate categories which correspond to the three penalty levels:

  • Where the income or gain arises in a territory in ‘category 1’, the maximum penalty rate is 100% of the tax. These are territories that have agreed to exchange information automatically with the UK.
  • Where the income or gain arises in a territory in ‘category 2’, the maximum penalty rate is 150% of the tax. These are territories that have agreed to exchange information with the UK but only when asked.
  • Where the income or gain arises in a territory in ‘category 3’, the maximum penalty rate is 200% of the tax. These are territories that have not agreed to exchange information with the UK.

A breakdown of which territory is in which category can be found on the GOV.UK website. In certain circumstances, HMRC may reduce the amount of penalties due. The largest reductions are for unprompted disclosures. The penalty levied can also vary depending on whether the errors are careless, non-deliberate, deliberate or deliberate and concealed.

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Ways to liquidate a limited company

There are a number of reasons why a limited company may be no longer required and can be shut down. This may be because the limited company structure:

  • no longer suits the needs of its owners,
  • the business is no longer active, or
  • the company is insolvent.

The agreement of all the company’s directors and shareholders to close down the company will be required.

The method for winding up or liquidating a limited company depends on whether it is solvent or insolvent. If the company is solvent, you can apply to get the company struck off the Register of Companies or start a members’ voluntary liquidation. The former method is usually the cheapest. You should also make sure that no business assets are left as any funds left in business bank accounts could revert to the Crown.

Where a company is insolvent, the creditors’ voluntary liquidation should be used. There are also special rules where the company has no director, for example if the sole director has passed away. A compulsory liquidation will be put in place where a company cannot pay its debts and an application is made to the courts to liquidate.

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What are National Insurance credits?

National Insurance credits can help qualifying applicants to fill gaps in their National Insurance record. This can assist taxpayers to build up the amount of qualifying years of National Insurance contributions which can increase the amount of benefits a person is entitled to, such as the State Pension.

For example, National Insurance credits may be available to:

  • those looking for work,
  • who are ill, disabled or on sick pay,
  • on maternity or paternity leave,
  • caring for someone or
  • on jury service.

Depending on the circumstances, National Insurance credits may be applied automatically or an application for credits may be required. There are two types of National Insurance credits available, either Class 1 or Class 3. Class 3 credits count towards the State Pension and certain bereavement benefits, whilst Class 1 covers these as well as other benefits such as Jobseeker’s Allowance.

There are usually no National Insurance credits available to the self-employed required to pay Class 2 National Insurance, nor for older married women who chose to pay a reduced rate of National Insurance (pre-April 1977).

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Charity filing deadline approaching

The Charity Commission has warned charities that the deadline for submitting the 2017 annual return is fast approaching. The deadline for charities with a standard 12-month accounting period is 31 October 2018. According to the Charity Commission, there are many charities that have yet to file their annual return. Not filing on time means that the charity will be in default, and this information may be displayed to the public on the charity register.

The annual return is separate from the charity’s annual accounts and the charity tax return sent to HMRC.

The 2018 annual return will see the addition of new questions which are added to ensure greater transparency.

They will include:

  • Charities being asked to provide more information about salaries to increase accountability and in response to public concern about high levels of pay.
  • Charities will need to provide a breakdown of salaries across income bands, and the amount of total employee benefits for the highest paid member of staff.

In response to a number of concerns raised, the Charity Commission will not publish details of benefits given to the highest paid member of staff on the public register.

There will also be two new sets of questions regarding charitable expenditure overseas. This will establish how charities transfer and monitor funds sent overseas and about income sources from outside the UK.

The completion of these question sets will be optional for the 2018 annual return to give charities time to gather and record the necessary information. The two question sets will become mandatory for the 2019 annual return and thereafter.