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Tax credit cuts for higher rate taxpayers

If you have missed the media storm surrounding changes to the tax credit system, you may be in for a shock.

If you are a higher rate taxpayer (earning more than £50,000) and you currently claim child tax credits, you can expect to receive notification from HMRC very soon that your benefits will be cut or removed. You will be expected to repay any overpaid benefits via the tax system.

You will also be asked to complete a tax return, so that HMRC can work out precisely how much you need to pay back.

If this is the first time you have had to complete a tax return, you may find the experience a little unnerving. If you have multiple income sources (for example a rental property), the completion of your return will increase in complexity and you may feel it appropriate to consult an accountant or tax adviser.

An area that you should be thinking about now, especially if your household income is divided unequally between a breadwinner and a home maker is ways to reduce the principal household income. You could consider:
  • ensuring that income generating assets are held by the partner with the lowest income. This could include rental property, investments or cash deposits.
  • the partner with the highest income making additional pension contributions.
  • the partner with highest income sacrificing salary for other rewards such as holiday entitlement or employer funded pension contributions.
These points can also give rise to tax savings and it may be the case that you have already considered these for tax reasons. Remember that tax exempt assets, such as ISA's, still create income for benefit assessment purposes even though they are exempt from income tax. If you have accumulated substantial funds in ISA's, these will need to be considered as well.

Particular care should be taken by non-married couples when considering the transfer of assets since this could give rise to capital gains tax. This does not apply to transfers between married couples. 

It is very easy to fall foul of the rules and leave yourself in a worse position by make changes. Before doing so, it is always important to consult an accountant or tax adviser to ensure that whatever action you plan to take is appropriate and worthwhile.

Payroll - are you ready for Rti?!

Over the next few months, HMRC will be writing to all employers to tell them about forthcoming changes to the PAYE system.

The changes, said by many to be the biggest for 60 years, will essentially mean that employers will report employment and payroll information to HMRC on a monthly basis instead of yearly as they do now. Employers will also have greater responsibilities for reporting and managing information.

The changes will affect every business operating a payroll, irrespective of size. Clearly larger organisations will have greater resources to deal with the changes and many are already making plans to accomodate the new systems.

Smaller businesses will undoubtedly find it more diificult to cope and will rely on the expertise and knowledge of advisers. It is expected that many such businesses will decide to outsource the payroll function rather than invest in the time and software likely to be needed. We are inclined to agree with this, but would urge all business owners to start looking at this area as soon as possible.

More email scams: IRS

We report this morning the latest scam to appear via email.

Many will be familiar with the scam emails purporting to be sent by HM Revenue & Customs, HBOS, Santander and others. This practice (known as phishing) usually contains a link to a website and asks the recipient to login and update their account details, password etc.

A popular version circulating earlier this year, allegedly from HMRC, notified the recipient of a substantial tax refund which could only be collected by following a link and entering bank details!

We always advise anyone in receipt of such an email to delete it immediately. Sadly, we have seen some unsuspecting recipients respond to these emails . In such cases, we have encouraged the individuals concerned to contact their bank immediately.

The latest case of phishing involves the IRS (the US equivalent of HMRC) and requested confirmation of details to avoid being caught by the US tax system.

As always, the advice in relation to any email asking for information is to treat it with extreme caution. If in doubt, ask an adviser. 

The end of amnesty

The amnesty for on line traders ends today.
Why should this affect you?
If you sell items regularly, particularly on Ebay or Amazon, and do not declare your profits, you should be aware that HMRC have written to both companies asking for details of all registered traders. Undoubtedly these details will be supplied.
If you haven't yet received a letter from HMRC (and 30,000 letters have already been issued), then you can probably expect one soon.
As the amnesty has now closed, any undeclared earnings will result in substantial penalties being charged by HMRC. However, if you are affected, you should still take the opportunity to rectify your tax affairs as soon as possible to avoid an increasing bill for interest and even higher penalties. It is important to ensure you get the correct advice, both on calculating your trading profits and dealing with HMRC.
If you have any doubts about your situation, contact us for a no obligation meeting.  

On-line traders: Amnesty reminder

Following on from our last post, we remind you that the HMRC amnesty to online traders is still open but closes next month.

Under "The e-Markets Disclosure Facility", online marketplace traders can pay the tax they owe and benefit from lower penalties available to those who come forward rather than wait for HMRC to catch up with them.

On announcing the scheme, Marian Wilson, head of HMRC Campaigns, said "This campaign is part of a wider HMRC initiative to provide support and guidance to the public on tax evasion and is aimed at people using online marketplaces to buy and sell goods as a trade or business and who fail to pay the tax owed. Those who only sell a few items and who are not traders are unlikely to be liable to pay tax on what they sell and will not be targeted by this campaign. Our aim is to make it easy for online traders to contact us and make a full disclosure of income, thereby putting their affairs in order".

Under the opportunity, online marketplace traders can come forward at any time between 14 March and 14 June to tell HMRC they want to take part. They then have until 14 September to give details of the tax owed and arrange for full payment, including any interest and penalty due. If they make a full disclosure of what they owe before 14 September, some will receive no penalty at all, with most receiving a penalty of no more than 10 per cent of the tax owed.

If you deal in goods online, a key issue is whether you are trading or not. If you are selling items that are part of your home and chattels, you will not be regarded as trading. Any profit you generate from this activity will not be taxable. However, if you are buying goods to sell on, whether in the same condition or altered in any way (for example refurbished or separated into smaller units), you are likely to be regarded as having a trading activity and the profits will be potentially taxable. In such circumstances, the key issue is to consider whether your profits, when added to all of your other income, exceeds the personal tax allowance, which currently stands at £8,105.

If you are in any doubt about your status and you have an online presence, be aware that HMRC are monitoring activity. You should seek professional advice as soon as possible.

Another plumber convicted by HMRC

Another successful prosecution for HMRC has seen a plumber from Hampshire handed a suspended 4 month jail sentence for failing to declare tax for over 14 years of over £90,000. This follows the conviction of a plumber from the Midlands in early March of evading around £100,000.

Both plumbers in question had evaded tax over a relatively long period of time and whilst the amount of tax evaded was comparatively small, the aggressive nature of these prosecutions confirms HMRC’s declared new approach of focussing on tackling behaviour, rather than simply looking at high value tax cases.

For some time, HMRC have been using amnesties as a means of encouraging individuals and businesses to get their tax affairs in order. The standard approach is to offer the amnesty to a specific trade or profession for a period of time, allowing low (or no) penalties for rectification. At the end of the amnesty, HMRC will concentrate specialist investigation teams on the industry concerned, with the objective of identifying any remaining defaulters.

Mike Wells, HMRC, director of risk and intelligence services said: "We want people targeted by any HMRC campaign to come forward and use the opportunity to put the record straight and pay any tax due on the best possible terms. It really is better for people who owe tax to come to HMRC, before we come and find you."

Given that HMRC have recovered over £500m in undeclared tax through the use of amnesty schemes, we expect this tactic to continue and to be expanded to other areas. Sectors which have seen, or are currently seeing, an amnesty include the medical profession, plumbers, electricians, coaches & tutors, and on-line traders.

If you are not correctly declaring income, you should consider getting your house in order now. If you are in one of the sectors mentioned above, we recommend taking immediate action to notify HMRC under the terms of the amnesty without delay.

HMRC crackdown on mileage records

HMRC has recently announced that between now and 2015 they intend to carry out 60,000 "Business Record Checks". The stated aim of these checks is to ensure that companies are keeping proper records. However, this is not simply a case of HMRC helping small businesses. Where records are inadequate, HMRC can levy penalties, even where there is no unpaid tax! These penalties can be up to £3,000.

Why is this important?

Owing to the tax cost of company cars, it has been the case for a number of years that many companies prefer to structure car provision by a combination of car allowances and reimbursement of the cost of business mileage. Although the tax free rates permitted by HMRC do not necessarily reflect increases in fuel prices (45p up to 10,000 miles and 25p thereafter, this option is usually still more effective than the traditional company car in most circumstances.

The mileage reimbursement approach is also used by many small company owners to recover the cost of their own business mileage.

HMRC are also likely to argue that mileage claims not supported by proper records should not be allowed as bona fide expenses. This will, in many cases, lead to additional tax liabilities for business (sometimes covering up to 6 years) with interest and further penalties to be added.

HMRC forecast additional tax collections of £13m next year, rising to £62m in 2014/15. Make sure you aren’t caught!

The key message to all businesses is to ensure :
  • That you restrict claims to genuine business mileage;
  • That you keep records of all journeys, including date, distance, start and finish points and purpose of trip;
  • If VAT registered, ensure you have sufficient receipts to cover the cost of all mileage reimbursed.
Finally, it should be part of all employment contracts that employees must provide these details in order to validate an expenses claim and enable it to be paid.

Surge in fake HMRC emails

This week has seen a resurgence of fake emails purporting to be sent by HM Revenue & Customs. Many of these phishing emails alert the recipient to a possible tax refund, often over £1,000, and ask for confirmation of bank details "to enable us to pay the refund to you immediately".

Whatever you do, do not reply to these emails. Ideally, you should report the incident to the HMRC fraud hotline but, at the very least, delete the email without opening any attachments or links.

HMRC do not request information from tax payers by email, so you can safely assume that any communication of this kind is likely to be fraudulent.

Change in tax treatment of smart phones

BlackBerrys, iPhones and other smartphones will no longer be viewed as benefits in kind, following a change of heart from HMRC.

HMRC have announced that it has changed its interpretation of the legal definition of "telephone apparatus" to include mobile phones and smartphones.  As a result, employers no longer need to record smartphones on P11Ds, nor pay Class 1A NICs on the supposed benefits of the smartphones.

Many employers will have already stopped treating smart phones in this way, but those who have not could seek refunds on amounts paid going back to 2007-08, with employees seeking similar recovery.

The problem arose when mobile phone use was exempted from tax in the Finance Act 2006. Not unreasonably, most users consider smart phones to simply be a variant of the traditional mobile phone. However at the time the exemption was introduced, HMRC thought differently and did not allow multimedia-equipped smartphones to qualify.

Under the new approach, there will be no benefit in kind provided the primary purpose is to allow an employee to perform their job, on the condition that private use is not significant.

It should be noted that this does not apply to non-smart phone PDAs, sat nav devices, tablet/laptop computers and devices that use voice over internet protocol (VoIP) to make calls, which will potentially continue to attract a taxable benefit.