HMRC INVESTIGATIONS - What you need to know!!!

Since the introduction of self assessment in 1996, HMRC has been retraining its staff to develop investigatory skills rather than deal mainly with compliance and the preparation of assessments, as was previously the case. This new focus of the Revenue and certain developments over the last year suggest that the number of tax investigations, which may target businesses or individuals, is likely to continue rising over the coming months.

The war on tax evasion

During 2009 governments across the world were engaged in a co-ordinated campaign to limit banking secrecy, sign tax information exchange agreements with known tax havens, gain information on any potential tax dodgers and stamp out tax evasion. With tax information exchange agreements negotiated even with the jurisdictions traditionally committed to banking secrecy such as Switzerland or Liechtenstein, HMRC has access to an increasingly wide pool of information and there are few places to hide for tax evaders.

Those who may have unpaid tax liabilities but choose not to come forward voluntarily, are likely to see investigations launched into their financial affairs, as tax inspectors attempt to recover revenue for the Exchequer. Britain’s public debt stood at £15.7bn at the end of 2009, and it is clear that the government will need to raise its tax take in order to plug that hole.

The information network

Details of offshore account holders handed over by banks under new tax information exchange laws are not the only reason for the start of HMRC enquiries. The tax authorities assess a wide range of information. For example, they look at gross profits of similar businesses up and down the country and if your income is significantly different from the average, that might trigger an investigation.

A large proportion of tax enquiries, perhaps over 50%, are started by informants - former business associates, jilted lovers and others.

What to do

Tax investigations are becoming an increasingly inevitable part of the fiscal landscape but there are some simple rules which will help you limit the trouble and anxiety associated with an enquiry if not avoid it altogether.

Keep good records

Good records are essential to running a business as well as keeping an individual’s financial affairs in order. They will also be a great help during tax investigations. You need to ensure (especially if yours is a cash business) that your books are carefully maintained, with all transactions properly logged and recorded so that should you or your business ever be subject to a tax investigation, you will be able to respond to all queries and provide all information requested. By law, self-employed individuals are required to keep all records pertaining to their tax return for five years from the filing date, and those whose tax is deducted through PAYE must keep records for 12 months from filing date.

Cooperate

Under the Taxes Management Act, HMRC has the right to request information from you or a third party (e.g. your accountant), and you are obliged to cooperate. However, cooperation is not just a matter of legal necessity - it can also significantly help your case. Timely responses to HMRC enquiry letters, providing all the information requested can help resolve an enquiry early on before it turns into a full-scale investigation, saving you a great deal of trouble.

Cooperation can also be rewarding in purely monetary terms as any penalties imposed can vary significantly depending to the extent to which you demonstrated a willingness to come forward with information and cooperate with HMRC investigators.

Seek quality professional advice

Having a good professional adviser representing you will, in many cases, help you avoid becoming the target of an enquiry in the first place. If you are facing a tax investigation, the help of an experienced professional who has a good reputation with HMRC will be invaluable in dealing with any enquiries.

Changing back to the old rate of VAT

On 1 January 2010, the standard rate of VAT reverts to 17.5 per cent after a period of 13 months at 15 per cent.

HMRC will allow the basic tax point to apply to goods delivered or taken away before 1 January but paid for on or after that date. Consequently, the 15 per cent rate will still apply to such sales.

It will also be possible to take deposits or prepayments before the change relating to supplies, which take place after it. However, there are anti-avoidance provisions to prevent abuse.

The trade of certain types of business will span midnight on 31 December 2009 and HMRC has acknowledged it would be unfair to expect them to stop what they are doing on a busy New Year’s Eve and change their systems to cope with an extra 2.5 per cent VAT.

They will be allowed to continue applying the 15 per cent rate until their trading session ends that night, or until 6am, whichever is the earlier. The types of business affected are: pubs, clubs, restaurants and similar retail shops and telecommunications providers.

Exempt and partly exempt businesses (and those with non-business activities, notably charities) should particularly consider taking advantage of early deliveries of goods or deposits or prepayments as explained above, where supplies received will be used in full or in part other than for taxable purposes because, by so doing, they will minimise irrecoverable input tax.

Business owners should also note that where a supply of services spans the change, i.e. it starts before 1 January 2010 but does not finish until on or after that date, the supplier may choose split his invoice to show amounts due at the two rates. As that treatment is optional, recipients of such services, whose input tax is not fully recoverable, should encourage their suppliers to take up the option.

Other businesses affected by the changes include those using the cash accounting, who must clearly identify receipts before and after the change date, and those using the flat rate scheme as percentages will revert to their November 2008 levels. All should remember that the VAT fraction for determining the VAT amount from a VAT-inclusive figure reverts to 7/47, from 3/23, and apart from gross takings, this will also affect, for example, fuel scale charges.

Changes to the flat rate scheme

The scheme allows small businesses with an annual turnover up to £150,000 to pay HMRC a fixed percentage of their turnover rather than the usual payment of output tax and recovery of input tax on actual positive rated outputs and inputs. The percentages are based on the norm for particular business sectors based on statistics available to HMRC.

The percentages were revised downwards on 1 December 2008 when the standard rate was reduced to 15 per cent. However, the changes from 1 January 2010 will not only reflect the reversion to the 17.5 per cent standard rate, but also take into account business patterns across the various sectors over the last year.

Joining the scheme is optional and businesses are entitled to leave it any time. Leaving the scheme retrospectively is at HMRC's discretion. However, HMRC have stated that they will apply this sympathetically if businesses consider it is no longer helpful to them after the changes.

Since its introduction in 2002, the flat rate scheme has generally been helpful to small businesses, so the forthcoming changes afford an opportunity for all qualifying businesses to assess its relevance to them.

Changes to VAT

Background




EC legislation has provided for the filing of ESLs for a number of years in a limited number of circumstances. The domestic provisions applying in individual Member States vary slightly, but the general principle remains that for certain supplies of goods from one member state to another an ESL is required. In the United Kingdom ESLs have been required for a number of years for those businesses that are registered for VAT in the UK and making supplies in the following situations:



supplying goods to a VAT registered business in another EU country;

transferring its own goods from the UK to another EU country; or

acting as an intermediary in triangular transactions involving VAT-registered purchasers and sellers in other EC countries.

The ESLs are filed separately from VAT returns and are generally issued as a consequence of making a declaration in the VAT return that intra-EC sales of goods have been made. Generally ESLs have been required for calendar quarters, with filing being due within 42 days of the end of the period, although it has in certain circumstances been possible to file monthly or annual ESLs.



The changes – summary



The changes have been introduced in response to two key areas of concern. In part the changes were aimed at modernising and simplifying the current rules relating to cross border supplies of services and also as part of the EU Anti-Tax Fraud Strategy. The key changes that will take effect from 1 January 2010 are:



the filing frequency for ESLs for goods will change to monthly in certain cases;

ESLs will be required where services are supplied to EU VAT registered business customers who account for the VAT under the reverse charge provisions; and the filing dates for ESLs for both goods and services will be significantly shortened.

The changes – for those businesses supplying goods



The current ESL reporting period is currently, generally, calendar quarters. With effect from 1 January 2010 this will change to monthly for those businesses whose turnover of such supplies exceeds a specified threshold. The threshold for which quarterly reporting remains relevant is that the value of supplies of goods made must be less than £70,000 per quarter for the period to 31 December 2011 and then from 1 January 2012 the threshold reduces to £35,000 per quarter.



Accounting & Tax



Any business that has exceeded the £70,000 threshold in any of the four quarters in 2009 will be obliged to file monthly ESLs from 1 January 2010. Similar provisions will apply ahead of the reduction in the threshold in 2012. If the threshold is exceeded during the course of a quarter, post 1 January 2010, the option to file quarterly ESLs will cease at the end of that month, such that monthly ESLs will then be required. So, if the threshold is exceeded during February a “quarterly” ESL will be required for January and February and then a monthly ESL for March.



Businesses currently have a period of 42 days after the period end in which to submit ESLs. With effect from 1 January 2010 this period will reduce to 14 days for paper returns and 21 days for electronic submissions.



The changes – for those businesses providing services



Currently there are no provisions for the filing of ESLs for those businesses providing services to other VAT registered businesses in other EU countries. With effect from 1 January 2010 this changes and any business providing services where the customer accounts for VAT under the reverse charge will be obliged to file an ESL. In the case of the UK and Isle of Man such ESLs will be due on a calendar quarter basis with the ESL being submitted in the same time frame as for goods, ie 14 or 21 days.



Those supplies not covered by the new provisions will include:



Supplies that are exempt from VAT according to the provisions in place in the customer’s Member State;

B2B supplies where the customer is not registered for VAT; and

B2C supplies.

The same form as for goods will be used to report intra-Community supplies of services and whilst the UK and Isle of Man permit the filing of quarterly ESLs businesses have an option of filing ESLs on a monthly basis, which may be beneficial perhaps where a business files an ESL for goods.



Those businesses that supply both goods and services to EU VAT registered businesses will be able to report both on the same form, but the indicator “3” will be used to identify the supply of services. No indicator is required for the supply of goods other than where the business is involved in triangular supplies where an indicator “2” is required.



Time of supply for services



Changes have also been announced to the date on which the VAT is accounted for under the reverse charge provisions for intra-Community supplies of services. This will also impact the time on which such supplies should be included on the ESLs.



Currently VAT is generally due under the reverse charge provisions on the date on which the service is paid for, but with effect from 1 January 2010 the date will change as follows:



the time of supply of such services will be the earlier of when the service is completed or when payment is made; butfor continuous supplies of services, the time of supply will be linked to the end of each billing or payment period, but where no invoice or other accounting document is issued or payment made during the year, the time of supply will be the end of each calendar year.

Accounting for VAT by reference to the completion of the service is already accepted practice in the UK, as VAT is generally due based on the date of completion of the service. Accounting for the reverse charged VAT and including the supply in an ESL based on the date of completion of the service is bound to create some uncertainties and inconsistencies. The UK VAT authority, HMRC, have now confirmed that there is no need for the supplier to confirm with the customer the date on which the supply is considered to have been completed.



Accounting & Tax



Penalties



HMRC have indicated that they expect businesses to take reasonable and appropriate steps to ensure the completeness and accuracy of ESLs. Furthermore they have accepted that there will be operational issues to contend with in the early stages of the adoption of these new policies. As such, provided necessary care has been taken HMRC will not seek to apply penalties in the early stages of the new ESL regime.



However, once the initial period of grace is past HMRC will seek to levy penalties at a rate of £5, £10 or £15 per day for each day an ESL is late, depending on the number of times a business has been late in submitting their ESLs.



In addition, where an ESL contains a material inaccuracy a penalty of £100 will be applied. Material inaccuracies will fall into three categories:



data missing from the ESL;

lines on the ESL are factually incorrect; or

an invalid VAT number is used.

VAT numbers have a preset format according to the Member State of the supplier or customer and will contain a country code prefix.These registrations can be checked by reference to the EC website, which can be located at http://ec.europa.eu/taxation_customs/vies/vieshome.do. Penalties will not be charged where a business has reasonable excuse, but providing an invalid VAT registration number is not considered “reasonable”.



Furthermore, “reasonable excuse” does not include reliance on a third party to complete and file the ESL. As such, whilst SMP Accounting & Tax may be agent for the completion and submission of VAT returns and ESLs the business remains legally responsible for the accurate and timely completion and submission of ESLs.



Our and your responsibilities and actions



Clearly, whilst it remains the responsibility of the business to ensure the accurate and timely submission of the ESL SMP Accounting & Tax will wish to ensure the ESLs are submitted correctly and on a timely basis. In order to do so we will require the necessary information to complete the filings within 14 days of the end of the period end. Should online submissions not be possible the information will be required within 7 days of the period end. Whilst we cannot guarantee submission of the ESLs where information is provided after that date we will endeavour to file by the due date.



Where we are responsible for the filing of ESLs we will contact you at or towards the end of the period advising that an ESL is due for filing. Unless we hear from you to the contrary we will file ESLs according to the greatest time period available, ie quarterly ESLs for services and for goods, until the threshold of £70,000 or £35,000 is exceeded. We will then require confirmation that there has been no activity during the period or, alternatively, details of any relevant sales made during the period, supported where possible by relevant sales invoices. The information that should be declared on the ESL will be:



customer’s country code;

customer’s VAT registration number; and

total value of the supplies to each customer in the period expressed in £sterling.

In order to speed up the process, given the deadlines for filing it is imperative that we have email access wherever possible to you so we can contact you quickly to obtain the necessary information and to deal with any queries.



Accounting & Tax



If you have any further queries on this matter at this time, or if we can be of any further assistance, please do not hesitate to contact one of the team.

4 Reasons Your Business Should Use a Bookkeeper

Should I or shouldn’t I use a bookkeeper? From the perspective of us it really looks like a no brainer. Even so we speak to a number of businesses who do not see why it is important for businesses to have a bookkeeper or the importance of sound financial record keeping systems.




First and foremost the reason to implement a bookkeeping process into your business is to help you to manage your business tasks more effectively. It is difficult to have an accurate financial picture of your business without bookkeeping records. In essence financial records answer questions such as: Is my business making money? Are my sales increasing? How does business expenditure compare to sales?



REASON 1: MAKING DECSIONS



Evaluating the financial consequences of all your business decisions should always be part of your decision making process. Without the aid of accurate records and financial information forecasting the results of any given course of action will be difficult. Presumably you are in business to make money. Hence forecasting the profitability of sales will give you an indication of whether or not you will need to hire or fire staff; sell more of one product or to stop selling another.



REASON 2: APPLYING FOR FINANCE



Making the decision to apply for finance for your business is fairly straight forward. However it is not so simple to prepare the supporting documentation if you do not already have it. Both banks and financial institutions will want to see proof of income, balance sheets, tax statements and projected returns before they make a decision about whether or not to loan you money. Preparing such information when it is required is never a good idea. Ideally this information should all be at your finger tips.



REASON 3: SEEKING INVESTORS



Once your business has developed to a stage where you would like to attract investors or a partner you will require financial information to demonstrate that you business is still a ‘going concern’. The source of this information usually emanates from day-to-day bookkeeping. It is possible that suppliers and creditors may want to see this information before permitting your business to have credit.



REASON 4: PREPARING A BUDGET



All businesses should use budgets for planning purposes. Budgets enable businesses to remain on track by forecasting cash needs and controlling expenditures. When reviewing what your business does and what it will be doing in the future it is always good practice to have a budget to prevent overspending and to control costs.



In short bookkeeping is an integral part of every healthy business.