Travel Expenses HMRC asking for copies of detailed mileage logs as confirmation of business journeys. Need to ensure clients are keeping these and they are being updated in year as opposed to being created at the year end to justify a mileage claim. Keep in the car. Provide starting/ending odometer reading, confirmation of journey type (business v personal) and corroborating information including client/supplier name etc. Ensure business journeys agree with date books and/or calendars as HMRC are asking for all back-up information and sources. Look at duality of purpose on journeys. Are family accompanying the Director? Is business element incidental to personal travel? Trips can be extended if costs of return travel are cheaper in midweek as there is a genuine commercial reason for doing so, does not necessarily make journey private. Private Expenses Need to ensure that the company is only getting a deduction for costs that are incurred wholly and exclusively for the benefit of the trade. HMRC are looking at costs which may be paid for the company in relation to the directors and/or senior members of staff. The most common expenses which get missed are the preparation of the annual tax returns which may be included within one single accountancy bill. Keyman insurance costs usually life policies on the senior members taken out when obtaining company finance are often mistreated for corporation tax deductions and for personal tax (inclusion on P11D). There has been an increase in challenges by HMRC on the use of sponsorship where there is a personal involvement of a director or member of their family (usually racing cars or yachts but also applies to sponsorship of children s sports teams). These costs are disallowable in the company s corporation tax return unless it can be demonstrated that there is a direct link between the company incurring these costs and an increase in the company s turnover/profit levels. HMRC are also challenging the availability of company owned assets such as yachts and planes which may be used privately by the company directors and the relevant P11D charges which are applicable. This will need to be reviewed on a yearly basis to ensure the correct allocation is applied (when the asset is available to be used as opposed to actual usage). Private Proportions Where a self-employed individual uses their own vehicle, it is important to remember that there are two sides of the expenditure they can claim in their tax computations the actual expenses incurred and the capital allowances on the use of the asset by the business. Must ensure that where private use fluctuates year-onyear that the same proportions are claimed in both revenue and capital accounts. 1
This will link with the need to keep detailed mileage logs to ensure the correct apportionment. Use of home charges now at 4 per week. Always use the weekly charge unless an increase in household bills as a result of working at home can be specifically identified and calculated. For example graphic design business using multiple computers and servers can likely demonstrate an increase in the electricity bills of the house as opposed to a director of a manufacturing business choosing to work from home one day a week which will have a minimal effect on the overall household expenditure. Historic claims by farmers to apportion up to 1/3 of all household bills to the business use of the property is being challenged by HMRC especially where there is a farm office in the property (or elsewhere on the farm). Costs must now be apportioned on a usual room apportionment basis to be deductible. Exclusive use of a room within a house by a company where rent is paid will affect a future PPR claim by the property owner as the room will no longer remain part of their private residence. Rent will need to be declared by the freeholder(s) on their returns. If the property is owned jointly by a husband and wife or civil partners, the rent receivable will automatically be split 50:50 and cannot be apportioned in any manner the owners choose unless there is a different legal or beneficial ownership and this has been notified to HMRC via a valid Form 17. Change to the rental split will only apply from the acceptance of the submitted form (and relevant documentation) and cannot apply retrospectively. Private Mileage in company vans/cars As mentioned above, the need to keep detailed, contemporaneously completed mileage logs is becoming more targeted. Important for company van usage where incidental private journeys are allowed without necessarily giving rise to a benefit in kind. Private journeys in company cars are almost irrelevant as harder to remove a car from the benefit regime. Need for logs to ensure the 45p/25p per mile claim is correctly applied (where above 10,000 business miles in a year). Private mileage details will be important where the company initially pay for all of the car s fuel. If the cost of the fuel used for private journeys are not reimbursed in full then the fuel benefit charge will also arise (99% of cover is not enough to remove this charge). For pool cars, the onus of proof is on the client to show that rules are adhered to throughout the year. HMRC are looking at insurance documents to see who is able to drive the car under the company/business policy. 2
Reimbursement of Expenses For an employee to receive a tax deduction or reimbursement of an expense paid personally, it must be proven to have been incurred wholly, exclusively and necessarily in the performance of their duties. This varies from the business requirement of wholly and exclusively only. The addition of the word necessarily is the biggest obstacle when trying to persuade HMRC that the expense is allowable. HMRC will ask could the employee do his job without incurring that particular expense? If the answer is yes then the expense will not have met the criteria; if the answer is no they couldn t then it will be allowable. Expenses will fall into five main categories: expenses deductible under s336 ITEPA2003 (usually difficult to claim); travel expenses (s337-340 ITEPA03), payments made to an occupational pension scheme; professional fees or subscriptions paid to an organisation approved by HMRC (shown on List 3) and donations made by an employee to charity under the Payroll Deduction Scheme. Travel expenses will usually be the most common and as mentioned above, mileage logs are important in justifying this claim. Any journeys for ordinary commuting will not be allowable. This is usually from home to the permanent workplace. For employees this is usually fairly straightforward. Consider temporary workplace rules for those on secondments and/or those individuals who work through a Personal Service Company. For self-employed individuals, it will be necessary to identify the Base of Operations. This may not necessarily be the individual s home even though that is where they claim it to be (Dr Samadian Tribunal case). The performance of duties from their own house can be a determining factor in this case (Dr Samadian did not have the facilities to see patients in his own home). Another common error in this area is the claiming of training costs. Courses or training that act as a continuous development of the skills already held by the individual will be deemed to meet the criteria whereas those which provide the employee or principal (if self-employed) with new skills are not allowable as a deduction both for the individual or the business. Payment of expenses which are private to the individual known as meeting pecuniary liabilities - will give rise to payroll issues. This usually occurs mainly within owner managed businesses. Main issues to consider here are the use of personal credit cards. Even where the card is used solely for business purposes and never used for any personal transactions (which can be supported by the credit card statements) as it is in the individuals personal name as opposed to the company s should the company settle the bill the individual is receiving a benefit which is liable to both PAYE and Class 1 National Insurance both employers and employees. 3
Another area where this is often overlooked is where a newly formed company is unable to obtain credit or finance for example obtaining a loan for working capital or more commonly buying/leasing a vehicle and the Director takes on the agreement personally. Again, where the company settles the monthly payments (whether loan repayments or monthly hire costs) this will again be deemed to be meeting a private expense of the Director and will be chargeable to employment taxes. See the Baldorino case (TC0166) for the legal view which created this position. This issue can potentially be avoided where the finance provider is aware that the Director is making the arrangements as an agent of the company. Proof will be needed to satisfy HMRC on this issue. Discovery Assessments The use of section 29 TMA1970 Discovery Assessments are increasing as more information is made available to HMRC from third parties. Give HMRC powers to enquire into years where there may be a loss of tax to the Treasury and the usual enquiry windows are closed. There is no statute of limitations on these enquiries. Recent campaigns and amnesties have proved successful for HMRC to claim historically underpaid or evaded taxes so using provision more. HMRC are now collecting information from lettings agents and estate agents on historic property transactions and rentals so an increase in specific targeting from HMRC should be expected where full information has not been disclosed. White Space Disclosures Should be used to confirm positions on potential disputes with HMRC allocations on a PPR disposal if more land claimed for reasonable enjoyment or if large acreage sold with a property; estimated figures included on returns for both CGT and income tax issues; reason for making claims etc. Use for confirmation of the reasons for fluctuations of business profits in the current year as HMRC are now looking at trends in both specific businesses/ self-employments along with general averages for industry sectors (for example expected Gross Profit percentages). If a specific reason for the increase or decrease in business expenses, turnover or profit levels then the White Space can be used to define this reason so HMRC do not need to enquire into the return. Expansion on figures included in boxes where there is no option to provide further information. It is a fine line. Ideal use is to give HMRC enough information so that they do not need to ask generic questions into the return but not provide too much information that they can find fault in the return/treatment initially. If they feel that they need to ask further questions for clarification then they will still raise an enquiry. 4
Mehjoo Initial decision has now been overturned by the Court of Appeal so accountants cannot be expected to provide complex tax avoidance schemes unless this is a service they claim to offer. Review engagement letters on a regular basis to ensure that the practice is not left unintentionally open to a challenge. Assumed that if tax avoidance schemes or planning has been offered in the past, then it could give rise to a legal opening if further opportunities to reduce the tax liability are not put forward at other times. Overdrawn Loan Accounts HMRC are requesting more information on the source of capital introduced to the company from external sources so records must be maintained in this area. Confirmation that funds have been transferred from a personal bank account to the loan account is not sufficient for this purpose and HMRC are asking for the source of the original capital. HMRC are also looking at book entry dividends. Ideally they would like to see the money being paid out of the company s bank account to the Director/Shareholder s private account and then being reintroduced to the company as opposed to a paper credit as this demonstrates an active decision to use the dividends to repay the loan account instead of using the legally entitled funds for a personal use at that time. This position also applies to interest charged on the loan to avoid a potential benefit in kind. Ideally the interest should be physically paid into the company by the individual. Rolling-up interest does not change its status to capital and HMRC can remove the credits if it is found to have been included incorrectly giving rise to historical P11D issues but the company will still be liable to the corporation tax liability on the assumed payments. Dividend vouchers confirming the date of the payment should be kept. Employment Status From 1/6 April 2014 the rules have changed as HMRC attempt to find a successful way of challenging false self-employment cases and the application of IR35 legislation. More importance place on the overall direction, control and supervision of the individual by the end client than there has been historically. Intermediaries such as agents or payroll bureaus may now become liable to the relevant PAYE and Employers NIC charges and this issue will need to be addressed. 5
Whilst the focus has changed to control, issues such as the use of substitutes are still as important and it will be necessary to ensure that the contract terms agree to the actual working practices. If not, HMRC have the ability to disregard the contract in its entirety and base their decision on the working relationship. Taxwise do offer a contract review service (through a trusted consultancy partner) and we can arrange for contracts to be assessed to ensure that there are no adverse impacts following HMRCs change of tack on this issue. Termination Payments HMRCs position on termination payments has not changed in this area. They will still look to review redundancy payments to ensure that, if applicable, the 30,000 exemption is being correctly applied. Payments can fall into charge under section 62 ITEPA2003 as employment income or if they are not caught by that will fall into charge under s401 ITEPA2003. The 30,000 exemption will only cover payments which are chargeable under s401 and only if the relevant conditions are met. The taxable position should be reviewed in advance of the compromise agreement being finalised to ensure that the exposure to income tax and NIC is known and the exemption is correctly applied (where applicable). Partnerships with Corporate Members The recent changes in this area have seen HMRC challenges on the provision of loans or benefits to the partners of the partnership where they are also involved in the Limited Company. HMRC now take the view that the benefits have actually been made to the individual by virtue of their employment within the company as opposed to by virtue of their partner status. Loans made to the partners will now (and should have always been) caught by the loans to participators rules under s455 CTA2010 (previously s419 ICTA88) and the company will be liable to the usual 25% tax charge and a P11D declarable benefit. The provision of a vehicle through the partnership (which doesn t give rise to a P11D benefit) was successfully challenged by HMRC in Coopers v HMRC [2012] UKFTT439(TC) where it was found that the cars provided through the partnership were only made available to the partners because of their involvement in the corporate partner company. If it can be provided that there is a genuine commercial rationale for the provision of the vehicles to the partners as part of the partnerships daily trading activities then this provision may not apply 6