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What triggers a tax investigation?

Since 2010, HM Revenue & Customs’ (HMRC) total revenue from tax has increased year-on-year and in 2016-17 reached £574.9bn[1], with £28.9bn of this generated as a result of compliance activities[2].

These figures demonstrate that HMRC has, in recent years, taken a much more steadfast approach to identifying non-compliance and pursuing those responsible, leaving no stone unturned.

It continues to invest large sums of money into its cutting-edge ‘Connect’ software which pinpoints anomalies in data, obtained from a range of sources, and directs HMRC towards people who may not be fulfilling their tax liabilities.

HMRC has been open about its intentions to pursue those who deliberately cheat the system and refuse to pay the sums that they owe, and its latest initiatives and plans to crackdown on tax avoidance and evasion are never far from the headlines.

From landlords and overseas investors, to the gig economy and SME’s and from trusts to online retailers; the truth is, no matter how big your business is, what sector you operate in or how long you’ve been in business, you are not immune.

Even if you have nothing to hide, there are several potential triggers that can raise HMRC’s suspicions and could leave you facing a tax investigation. Here, we identify some of these triggers and how you can reduce the risk of being HMRC’s next target:

1. Are you on time or always late?

If you consistently file your tax return late, HMRC will become suspicious. Being at the helm of a business is demanding and it can be all too easy to forget important dates and deadlines. However, submitting your return on time can save you a whole lot of stress in the long run.

2. Inconsistent cash flow

If HMRC notice sudden or sizeable changes to your reported income and outgoings, for example if your income plummets and your expenditure sky-rockets, alarm bells may begin to ring. The key here, is being able to explain why the fluctuations have occurred and to be able to provide evidence if necessary.

3. Is there something missing? 

Be sure that you’ve declared all your sources of income; regardless of whether it innocently slipped your mind, HMRC have the technology and will to dig deeper if it suspects you’ve deliberately omitted important information. With the rise in the use of social media, it’s worth noting that HMRC do also use these platforms to identify potential tax evasion. For example, if you share that you have just purchased a flashy new car, yet your tax return declares only minimal income, this could lead to an enquiry.

4. Be accurate, avoid errors

None of us are perfect and we all make mistakes but if they are making a regular appearance on your tax returns, HMRC will want to know why. Granted, tax returns can be complicated but you should be confident that your return is accurate and free of errors before you submit it.

5. Take responsibility for your records

Never underestimate the importance of keeping your records in order and up-to-date. If you can do this, you will undoubtedly find that the process of completing and submitting your tax return becomes quicker and easier. In addition, the information you do submit is less likely to contain errors.

6. Is HMRC targeting your sector?

Sometimes it can be as simple as your sector having been identified as HMRC’s next target. As we said at the start of this blog post, no business is immune and HMRC is watching; whether you rent property, provide legal advice, build offices or run a restaurant, you are at risk. Often, in these cases, there is nothing you can do but be prepared.

7. Conform to the norm

HMRC will likely compare your figures, to those reported by other businesses like yours. If you stand out as significantly over- or under-performing in relation to the industry average, this may prompt them to investigate further. Standing out from your competitors is typically a good thing but, when it comes to your figures, conforming to the norm might not be so bad. There may be a reason that you are under- or over-performing – just be prepared to explain this to HMRC.

8. No rhyme nor reason

In some cases, there may be no rhyme or reason for a tax investigation. Random selection is less common, but still possible all the same. The best thing you can do is make yourself less susceptible to an investigation by managing the other risks discussed in this post.

How can my accountant help?

Preparing and filing your tax return takes time; time that would be better spent on running your business. Not only this, but in the absence of expert knowledge and years of experience it is all too easy to make costly errors. Errors ultimately cause delays and will leave you feeling unnecessarily stressed.

You can easily avoid this by entrusting us with your annual tax return. Our trusted tax advisers will assist you with fulfilling your self-assessment obligations, whilst saving you time and money, helping you to grow your business and eliminating worry along the way.

As your accountant, we are also your best defence if you do find yourself subject to a tax investigation. Investigations can be disruptive, intrusive and expensive. This is why it’s imperative that you take expert advice and guidance when dealing with HMRC. We can:

• Translate the complexities of a tax investigation
• Manage dialogue with HMRC, acting as a barrier between you and the tax man
• Assist with the submission of documentation or information required by HMRC
• Minimise the impact of a tax investigation upon your personal and business life
• Aim to secure an outcome that satisfies both parties

We have years of experience when it comes to dealing with both personal and business tax enquiries and investigations, helping our clients to reach a satisfactory conclusion and leaving them with peace of mind when it comes to their tax affairs.

We also offer a Tax Investigation Fee Protection Service; you can find out more about the service and the protection it provides here. If you’d like to discuss your circumstances in more detail, contact us today.

[1], [2] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/628377/HMRC_Annual_Report_and_Accounts_2016-17__print_.pdf

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Self-Assessment tax return: less fuss if you file early

We know that just the words ‘self-assessment tax return’ uttered in succession can induce feelings of trepidation in those required to file one. This often leads to a reluctance to tackle the task at hand, head-on.

Though the 31st January deadline remains a constant in the tax calendar, procrastination still sees thousands of taxpayers filing their return at the last minute, year in and year out.

As the festive period comes and goes, they watch the days in January tick past until their time is almost up and they eventually conclude that they can’t avoid the inevitable any longer.

If this sounds familiar, revel only briefly in the fact that you are not alone. In January 2018, 2.6 million people had still not filed their return by the 29th January. Over 6% of all returns due were filed in the final 24-hour window – yet, some 745,588 people still missed the deadline completely.

The truth of the matter is, it’s far better to file early than to risk finding yourself in tax-related trouble.

It’s all in the timing…

“Time is what we want most, but what we use worst.”
― William Penn

Preparation and submission of your self-assessment tax return takes time; whether it’s registering for self-assessment (if it’s your first time), sourcing and assembling all the necessary documentation or prospective tax planning.

Be aware of how much of it you have at your disposal and, more importantly, use it wisely. Doing so will undoubtedly give rise to a better outcome than if you find yourself still agonising over the details fifteen minutes before the deadline.

Procrastination = penalties

“You may delay, but time will not.”
― Benjamin Franklin

No matter how long you spend procrastinating, the self-assessment tax return deadline will still arrive at midnight on 31st January 2019, as it supposed to. If, by this time, you have not filed your return, you will unfortunately incur penalties.

The initial penalty for failing to meet the 31st January deadline is £100. After this point, the penalties increase steadily depending on the amount of time that has passed since the deadline.

If HMRC believe you are deliberately neglecting your responsibilities, you may be liable for a fine amounting to 100% of the tax owed.

It’s less fuss if you file early…

“Better three hours too soon than one minute too late.”
― William Shakespeare

Take Shakespeare’s advice and get the ball rolling sooner rather than later. Taking your time, whilst time is on your side, and filing ahead of the deadline can eliminate the frantic fussing and fretting you might otherwise experience if you leave it too late.

Aside from the obvious advantages of being proactive and filing ahead of the deadline, such as avoiding penalties, improved tax planning, time to prepare thoroughly and the ability to budget, it can also give you peace of mind. This can be particularly beneficial during the festive period which, for some businesses, can be their busiest time.

You can avoid panic, penalties and poor guidance by entrusting George Hay with your annual self-assessment tax return. Our team of trusted tax advisers will assist you with fulfilling your obligations, whilst saving you time and money, helping you to grow your business and eliminating worry in the process. Contact us today to discuss your circumstances in more detail with one of our experts.

If you often find yourself dragging your feet when it comes to your self-assessment tax return, read our latest ‘What happens if…’ feature:

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Year-end tax planning: No time like the present

This week will see the end of the 2017/18 financial year on 5 April, as we transition into 2018/19. Ahead of the 6 April, you should be looking to tie up any lingering loose ends and aspiring to ensure that allowances and reliefs available to you have been utilised effectively. You should also familiarise yourself with the various changes, effective 6 April, that may impact upon your financial position in the year ahead.

By prioritising the ‘crossing of T’s and dotting of I’s’ before the financial year is out, you can rest-assured that you will be putting your best foot forward in the next! Here, we identify some of the things you should be thinking about when it comes to effective tax planning:

The Dividend Allowance

Currently, following changes to the way dividends were taxed in 2016, you can extract £5,000 from company profits before tax is payable. As of 6 April, the allowance will fall to £2,000. Consequently, those utilising it will likely see tax increases in the next financial year. As with any tax, careful planning and a thorough review of your position can help to mitigate the impact of these changes. You can read more about the impending dividend allowance cut in our article here.

Personal Taxes

Capital Gains Tax – The annual Capital Gains Tax (CGT) allowance will increase from £11,300 to £11,700 from 6 April 2018. It’s important to note that the allowance cannot be carried forward from one financial year to the next. You should, therefore, endeavour to crystallise gains each year to the full extent of the allowance to avoid missing out. The rate of Capital Gains Tax (CGT) is 10%, where taxable gains and taxable income total less than £33,500. Beyond this, the rate is 20%.

Income Tax Personal Allowance – The Personal Allowance (PA) determines how much you can earn before paying income tax. For 2018/19, the PA increases from £11,500 to £11,850 and the higher-rate threshold from £45,001 to £46,351. Bear in mind though, that for every £2 that income exceeds £100,000, the PA is reduced by £1. Consider assessing your income annually to ensure you’re getting the most out of your personal allowance.

ISA’s, LISA’s and Pension Pots

ISA’s – The ISA allows you to make an annual maximum investment of £20,000 into a tax-free savings pot; an allowance which renews each year on 6 April. With only 2 days left to invest for 2017/18, as part of your tax planning, consider whether you have used this year’s allowance effectively.

LISA’s – The LISA facilitates saving but also awards you with a 25% Government credit. If you are aged 18-40 you can invest up to £4,000 each year and earn a £1,000 top-up from the Government. The resulting funds can be used to purchase your first home or to save for retirement.

Pensions – Pension contributions must be paid on or before 5 April 2018 for them to be relieved against 2017/18 income. You can invest a minimum of £3,600 and up to £40,000 per year and you may carry forward up to three years of unused allowances. The Lifetime Allowance (LTA) was reduced in April 2016, from £1.25m to £1m, but it will now increase in line with inflation. This means that from 6 April 2018, the LTA for 2018/19 will be £1.03m. Pension contributions can be an effective tool when it comes to minimising your liabilities; however, you should seek professional advice before investing so that you can be confident you are making the right decision.

Tax Relief for Landlords

Changes announced in 2016 are currently being phased in, whereby mortgage interest tax relief for landlords is slowly tapered. From 6 April 2018, landlords may only offset 50% of the interest payments against their rental income. Instead, landlords can benefit from a flat rate tax relief at 20%. This is also being phased in, so only half of the 20% can be offset from April 2018.

Starting up or planning your exit?

If you are seeking to exit a business in the next financial year, you should consider when and how the exit will take place. Equally, if you’re thinking of starting your own business it is important to consider which is likely to be the most suitable structure; whether sole trader, partnership, limited liability partnership or limited company. The decisions that you make throughout the lifecycle of your business will impact upon your future financial position. Consequently, they are worth putting some serious thought into.

Inheritance Tax

Annual exemption – The annual IHT exemption is £3,000. This is the amount individuals can give away each tax year, without any IHT implications. If you fail to utilise the 2017/18 exemption, you may carry this forward. This means that up to £6,000 can be given away tax-free in 2018/19.

Nil-rate bands – The IHT nil-rate band will remain frozen at £325,000 until 2020/21. The additional nil-rate band, introduced in 2017, is worth £125,000 per individual from April 2018 (increasing from £100,000 in 2017/18). This means that a main residence with a value of up to £450,000, or £900,000 for married couples or those in a civil partnership can be passed, on death, to a direct descendant without any consequence.

At all times, thorough and careful tax planning is vital if you are to ensure that your affairs are handled in a tax-efficient manner. Despite this, many businesses remain in the dark about the reliefs and allowances that are available to them and, indeed, how to apply them correctly, as referenced in our article ‘Time to prioritise tax planning’, here. Discussing your plans and ideas with a tax advisor or accountant could help you to significantly reduce your liabilities.

So, if you’d like to talk to one of our team about effective tax planning, no matter what stage your business is at, please contact us today, or you can fill in one of our online enquiry forms here. You can also find helpful tax fact sheets and tables in our resource centre, here.

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Be savvy when it comes to your Personal Savings Allowance

What is the Personal Savings Allowance (PSA)?

As of 6 April 2016, the Personal Savings Allowance (PSA) has meant that basic-rate taxpayers and higher-rate taxpayers can earn £1,000 and £500, respectively, in tax-free savings interest. Additional rate taxpayers do not get an allowance.

These rules, according to HMRC, take roughly 95% of savers out of paying any tax on their savings.

If you already receive interest without tax being taken off, you’ll no longer need to tell your bank or building society that you qualify for tax-free interest.

Note that if your total taxable income, including savings income, is less than £17,500, you won’t pay tax on any savings income.

What counts as savings income?

The following interest counts as savings income:

  • Any interest from bank and building society accounts;
  • interest from accounts provided by credit unions or National Savings & Investment (NS&I);
  • interest distributions from authorised unit and investment trusts and open-ended investment companies;
  • income from government or company bonds;
  • most types of purchased life annuity payments;
  • peer-to-peer lending interest and,
  • interest earned on other currencies held in UK-based accounts

It is worth bearing in mind that interest earned on ISA accounts, tax-free NS&I products and premium bond winnings do not count towards your PSA.

What tax will I pay if I exceed the threshold?

Basic-rate taxpayer: A basic-rate taxpayer’s PSA is £1,000. Anything you earn in savings income, above £1,000, will be taxed at 20%. For example, if you earn £1,250 in savings income, you will pay 20% tax on the £250 excess.

This means £50 will be deducted from your savings income.

Higher-rate taxpayer: A higher-rate taxpayer’s PSA is £500. Anything you earn in savings income, above £500, will be taxed at 40%. For example, if you earn £1,800 in savings income, you will pay 40% tax on the £1,300 excess.

This means £520 will be deducted from your savings income.

What do I need to do?

HMRC has recently updated its guidance in respect of what you need to do to claim your PSA.

If you currently fill out a self-assessment tax return, you should continue to do this as normal.

If you’re a sole bank account holder, not within the self-assessment system, HMRC will normally collect tax via your tax code. Your bank or building societies provide HMRC with the information they require to do this.

Essentially, your personal allowance for income tax will be reduced to accommodate any tax due on savings interest.

However, if you are a joint bank account holder and not within the self-assessment system, you must contact HMRC and report the interest that you have earned on savings.

Applying the PSA to joint accounts

If you are a basic-rate taxpayer and the person you hold a joint bank account with is a higher-rate taxpayer you should be aware of how the PSA applies in this instance.

The basic-rate taxpayer will be entitled to £1,000 tax-free savings interest as before. The higher-rate taxpayer will also be entitled to the same allowance, as before, of £500.

The interest earned on the joint account is assumed to be split equally between the account holders. So, if £1,000 in interest were to be earned, the basic-rate taxpayer would have £500 of their allowance remaining. The higher-rate taxpayer, however, would be left with no remaining allowance.

The higher-rate taxpayer will pay tax at 40% on any savings income received in addition interest on the joint account. The basic-rate taxpayer could, however, earn interest on other accounts up to £500 before any tax would be due.

At George Hay we understand the challenges individuals face when it comes to personal taxation. For a start, the range of personal tax rates and allowances is huge and effective planning is essential.

Whether you’re employed or self-employed, our team of expert tax advisers can help. We can assist with everything from fulfilling your self-assessment obligations and dealing with HMRC, to maximising your tax savings and supporting you in the event of an enquiry.

To find out more about our taxation services, click here, or contact us today.

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The dangers of DIY tax returns: Why risk it?

There are and always will be plenty of people who opt to prepare and file their self-assessment tax returns themselves. This is commonly referred to as the ‘DIY’ approach. There are also thousands who choose to hand the paperwork over to their accountants and let them do the rest.

The truth is that the DIY approach carries a number of potential ‘dangers’. Under all but the simplest of circumstances, going it alone is best avoided. Working with an accountant can eliminate unnecessary worry, save valuable time and money and ultimately avert risk.

 

The dangers…

Here we identify just some of the hazards associated with DIY tax returns:
 

1. Tax returns take time – preparing a tax return can take a significant amount of time, particularly if the affairs aren’t straight-forward. Gathering relevant information and completing forms thoroughly and correctly can be a challenge for individuals lacking know-how and experience.

2. Easy to make errors – when preparing a tax return, alongside the day-to-day running of a business, it’s all too easy to miss important details. HMRC have a keen eye for errors on tax returns and no matter how minor, a mistake can be costly.

3. Forget deadlines, expect penalties – remembering deadlines and key dates can be difficult if there is no-one there to give you a polite reminder. Failure to submit a tax return on time and pay the tax owed will result in financial penalties. The deadline for doing this is 31 January 2018.

4. Protecting your best interests – when going it alone, it’s easy to fall into the trap of evaluating tax affairs purely in terms of the ‘here and now’, however this isn’t always the most sensible or effective approach to take. A professional adviser, on the other hand, will consider the long-term tax position and ensure the client puts their best foot forward.

5. Avoid insufficient instructions – online guidance can be useful, but for the most part it’s written from a very generic perspective and is unlikely to appeal to anyone with circumstances that deviate from this.

 

Why risk it?

Why risk falling victim to penalties, panic and poor guidance? By entrusting us with your tax return you can take comfort in the knowledge that your tax affairs are being taken care of quickly, efficiently and compliantly. If you’d like to discuss your circumstances in more detail, call us today on 01767 315010 or fill in one of our online enquiry forms here.

 

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