HMRC Launches New Site For Those With Undeclared Income

HMRC has launched a new mini-site aimed at those with undeclared income. “We’re closing in” they say, using new technology and additional staff. They follow it up to say “if you have any income you haven’t told us about, you need to declare it before we catch you”. So the site aims to encourage relevant parties to come forwards voluntarily to declare such income, rather than waiting to be discovered. It’s not quite an ‘amnesty’ but it kind of hints at being a better way to deal with the situation. Links are given such as “How do I put it right” which takes them to the main HMRC website page outlining how to put your tax affairs in order.

Other links on the same mini site take visitors to areas such as ‘Owning up to fraud‘ and ‘Tell us about someone who is not declaring all their income” so the net is clearly closing in*. We took a look at the ‘Owning up to fraud’ page and it makes interesting reading. According to the site it seems that it’s better to own up voluntarily when tax fraud has been committed, and enter into what is known as a ‘CDF contract’ with HRMC. By following the terms of the CDF contract, HMRC will apparently agree “not to criminally investigate and prosecute you over the fraud you tell them about in that CDF contract” so clearly it’s better to volunteer such information rather than it being discovered.

HMRC have  run adverts on billboards, telephone boxes and bus shelters for 2 weeks  aimed at all such people who might have undeclared income.

* According to The Independent, last year HMRC managed to claim back a whopping £21bn from tax avoiders/evaders. This was a significant increase compared to other recent years and signals that the clamp-down on tax cheats is finally bearing significant fruit.

Will there be a rush of visits? Time will tell, in the mean time if you need advice on Tax – get in touch, we are here to help.

The more eagle eyed of you may be aware that HM Revenue & Customs’ (HMRC) released a consultation document on partnerships, representing the biggest shake up of partnership taxation for decades.

A very quiet revolution has been going on in the world of partnerships over the last few months, starting with low-key announcements in the Autumn Statement and further announcements in the Budget. Ordinarily, this would largely be of interest to partners in professional service firms and other businesses that traditionally operate in partnership (and I admit to a certain level of personal interest). But these changes are likely to be far wider reaching given the number of businesses that have in recent times incorporated limited liability partnerships (LLPs) for good commercial reasons.

There are two parts to the consultation. The first focuses on the presumption of self-employed status for a member (partner) of an LLP and the National Insurance that arises as a result.

The second focuses on countering the reduction of tax liabilities by firms that have introduced corporate partners to shelter their profits. While this kind of structuring has received mixed levels of interest, a number of businesses have explored it, often in order to preserve cash flow in the increasingly difficult market place.

The changes are expected to generate additional revenues for the Government of around £300m a year, so these changes are clearly significant. So the impact of the consultation may feel like yet more bad news for many firms struggling in a difficult economic climate. There have been well-reported victims of the downturn while others have seen cash flow become increasingly difficult in recent times – especially around tax payment deadlines.

In particular, firms with fixed share equity partners as a normal step in career progression and those that have introduced corporate partners for reasons such as partner ‘lock in’ or long-term incentivisation will need to keep an eye on what the changes mean for them.

While the new rules won’t come into effect until 2014, firms and partners that could be affected need to follow these developments closely over the coming weeks and months so they can prepare well in advance for the changes.

As the owner of a small business, when you decide to “go limited” you have two choices – private limited company (LTD) or a limited liability partnership (LLP). When there are only 2 or 3 of you in the business it can be hard to make the choice – and it may not make much difference either way in the early days. The answer may lie in your plans for the future…

We outline here ten reasons why you should use an LLP

1. Flexible business structure.

2. Key individuals can be rewarded and retained by offering share of income profits and capital profits on a disposal without having to resort to establishing share schemes such as the EMI.

3. If the business of an LLP is acquired by a third party purchaser, they can claim tax relief on the amortised amount of the goodwill acquired. Whilst this can be achieved similarly in a company (where the company sells the business as opposed to the shareholders selling the shares) it avoids the double tax charge that arises where the buyer does not want to purchase the shares.

4. Where there is a corporate member, excess profits can be allocated to the member and are taxed at corporate rates.

5. Individual members profit share allocations are not liable to employers NIC. By contrast anyone using a company would suffer employers NIC at 13.8% on salary or bonus payments.

6. Where individuals possess business knowhow, the value of this knowhow can be introduced into the LLP. The individual members can draw surplus cash from the business against their capital account (represented by the knowhow) without an immediate tax charge. In a company, if a director or shareholder borrow from the company there is a tax charge under s455 Corporation Tax Act 2010 where they borrow in excess of the balance of their directors capital account with the company. There is currently no similar tax charge where an individual member borrows from an LLP against their capital account.

7. There are no taxable benefits in kind on individual members so there is no requirement for P11Ds. Any non-business element is added back to taxable profits.

8. Favourable tax savings where cars are provided to individual members.

9. Non-resident partners can avoid all UK taxes providing there is no UK trade carried out.If a UK company was used this would remain subject to UK corporation tax irrespective of the residence of the shareholders.

10. If all profits are extracted from a company there is not usually a massive difference in the actual tax payable on the profits as an LLP versus a limited company, particularly for profits under £200K. The LLP though can provide other tax planning opportunities as above.

Here is an example of the importance of accuracy in your tax return.

HMRC has returned the tax return to a man in Evesham after he apparently answered one of the questions incorrectly.

In response to the question: ‘Do you have anyone dependent on you?’ the man wrote: ’2.1 million illegal immigrants, 1.1 million crackheads, 4.4 million unemployable scroungers, 900,000 criminals in over 85 prisons plus 650 idiots in Parliament and the whole of the European Commission’.

HMRC stated the response he gave was unacceptable.

The man’s response to HMRC was : ‘Who did I miss out?’

‘The truly wise investor does not seek merely to minimise the amount of tax payable, but rather to maximise the amount of wealth remaining after all taxes have been accounted for.’

Paying salaries to your children is a good way to reduce your taxable profits but which children can you legally employ?

With some limited exceptions, it is generally illegal to employ children under 13. The position for 13 year olds depends on local by-laws.  Some areas allow them to do limited work, some allow them to do the same work as a 14 year old and some do not allow them to work at all.

Children under school leaving age may do ‘light work’ (ie office work) provided that it does not interfere with their education or affect their health and safety.  Certain types of work (ie factory work) are prohibited and any business employing children under school leaving age must obtain a permit from the local authority.  Subject to this, children still attending school can work up to two hours a day.  On saturdays and weekdays during school holidays this is increased to eight hours (five hours if aged under 15).  Working hours must fall between 7am and 7pm and are subject to an overall limit of 12 hours per week during term time or 35 hours during school holidays (25 hours if aged under 15).  The child must also have at least two weeks of uninterrupted holiday each calendar year.

16 and 17 year olds over compulsory school age can generally work up to 40 hours per week and can do most types of work, although some additional health and safety regulations apply.  In essence you can generally employ any of your children aged 13 or more and pay them a salary which is deductible from your own business income.

How much can you pay?

A salary paid to a child must be justified by the amount of work which they actually do in your business.  If you employed your 15 year old daughter to answer your office phone one hour each evening, you could not justify paying her a salary of £30,000 but a salary of, say, £1,500 should be acceptable.

The National Minimum Wage applies to any employee aged 16 or more, with reduced rates for those aged under 21 or undergoing training.

However, there is no fixed rate of pay which applies to children.  The rate paid must, however, be commercially justified – in other words, no more than you would pay to a non-family member with the same level of experience carrying out unskilled work, the national minimum wage for 16 to 17 year ods (£3.68 per hour) represents a good guide.  Where the child has some experience, or the role requires some skill, a higher rate will often be justified.

Assuming that a rate of £5 per hour can be justified, the maximum salaries which a child could earn would be approximately as follows:

13/14 year olds                              £3,780

15+ but still school age                  £4,380

Over school age but under 18       £10,400

Subject to this, a salary of up to £7,475 could be paid tax free to a child aged under 16 with no other income.  For those aged 16 or more, any salary in excess of £7,075 will give rise to employer’s National Insurance at 13.8% and any salary in excess of £7,225 will also give rise to employee’s National Insurance at 12%.

There are several different ways to save tax by effectively passing some of your business income directly to your children.  It is vital to remember that the income must be the child’s to keep.  Any arrangements requiring the child to pass the income back over to you will mean that the planning is ineffective and the income is taxed on you.

Many businesses start in a spare bedroom or on the dining room table.  Even when they’re well established most business owners work from home at least part of the time, for example during the evening or on weekends.

Working from home means you can claim part of your household costs for tax purposes. But who can claim, how much and which costs? It is amazing how many people think that they are not entitled to the ‘use of home’ deduction.  Many people think they can’t claim because they’re already claiming for an office, shop or other business premises.  Not true! Although the amount of the claim is likely to be less, a ‘use of home’ claim is still possible as long as some work is carried out at home.

How much can you claim?

Claims should be based on the proportionate use of the property for business.  The main factors to consider are time and space: how much spaceis set aside for business use and how much time is spent on business.

There are many possible methods for calculating the business proportion.  In practice, the most popular method is to simply take the number of rooms used for business as a proportion of the total number of rooms in the house.  Hallways, bathrooms and kitchens are excluded from the calculation.

What expenses can be claimed?

Most people don’t realise how many costs can be claimed if they work from home.  A self-employed person working from home is entitled to claim a proportion of most household costs, including:

• Mortgage interest or rent
• Council tax
• Water rates
• Repairs and maintenance
• Buildings and contents insurance
• Electricity
• Gas, oil or other heating costs
• Cleaning

Telephone and internet costs may also be claimed, where relevant, although this tends to form a separate claim as the business element of these costs is usually a far higher proportion than for other household costs.

A proportion of general repairs and maintenance costs relating to the whole property, such as roof repairs or gas maintenance costs may be claimed.

Capital allowances may also be claimed on any furniture and equipment used for business, with immediate 100% relief usually available thanks to the annual investment allowance, subject to a reduction for any private use.