Self-assessment taxpayers are wary of receiving letters about random checks to their tax status. I don’t think this will be any surprise to anyone other than HMRC. But this is what recent research by HMRC has found.

Some respondents questioned the clarity of the communications, with some questioning what the next steps were, as this was not clearly laid out in the letter. They were looking for more details on how to send records, timings for the whole check, conditions for penalties and how open source data could be used, and about definitions contained in the document.

Some worried about the consequences of potential mistakes being uncovered, and particularly those who felt less confident in dealing with their financial and tax affairs imagined worst case scenarios, such as discovering they had submitted their tax returns incorrectly for years, resulting in owing HMRC large sums of money.

Even participants who were more confident in the accuracy of their self assessment returns were apprehensive towards what they saw as an audit, and while they would comply with it, they expressed some nervousness about HMRC going through their affairs.

Despite widespread acceptance that compliance checks were fair in principle (among both those who had and had not experienced one), some participants felt that targeting individuals and small businesses was unfair and that instead HMRC should focus on larger organisations who evade relatively larger amounts of tax, to make the return on investment worthwhile.

HMRC and Football

HRMC has collected £464m back from football clubs, players, and agents by reaching settlements on allegedly unpaid taxes after a six-year probe into the sport.

The six-year tax probe which was opened in 2015 and focused on image rights cash paid to players by clubs which boost multi-million-pound player contracts, with the extra earnings taxed at a lower rate.

Two of the clubs under investigation were Manchester United FC and Newcastle United.

Research by a leading firm of accountants found that the number of footballers investigated by HMRC rose dramatically in the tax year 2019-20 going up from 87 to 246 individuals.

Super-deduction and property landlord

Under the super-deduction, for two years from 1 April 2021 any investments a business makes in ‘main rate plant and machinery’ will qualify for a 130% capital allowance deduction.

When the scheme was first announced in March 2021, property letting companies were excluded from the scheme, meaning only occupiers could claim. However, amendments set out in the Finance Bill, now given Royal Assent, mean that landlords are also now eligible to apply for the tax break.

The allowance is only available on investments made on or after 1 April 2021 and before 1 April 2023.

Enhanced allowances will be available where a company purchases or constructs a building to let out and fits it out with fixtures and other assets which contribute to the functionality of the building.

Property landlords will now be able to take advantage of the 130% super-deduction or main pool assets and maintain their AIA for special rate assets.’

Tax savings like this offer landlords a huge incentive to make additional investments and bring planned investments forward which will help stimulate much needed growth in the sector.’

Government departments – IR35 arrears

Two government departments have fallen foul of HMRC’s contractor taxation rules concerning off-payroll worker status, leaving them with bills topping £100m.

The Department of Work and Pensions (DWP) first made the admission in its 2020-21 annual report that it had used HMRC’s Check Employment Status Tool (CEST) to assess engaged off-payroll workers’ employment status or “correct tax treatment”. It owes the tax department £88m for “historic errors” in assessing tax liability for its off-payroll workers over the period 2017-21.

The Home Office published its own annual report with a similar admission that it had botched assessments of its contractors’ employment and tax status between 2017 and 2021.

It admitted being “careless” in its application of the off-payroll rules, and was penalised £4m along with a £29.5m bill for incorrect assessments plus interest on the accrued amounts.

IR35 reforms were introduced in 2017 for public sector workers, as all public bodies became responsible for determining the tax status of contractors they hired.

The DWP, Home Office, or any other government department or public sector organisation, became responsible for categorising the contractors they work with and taxing them either as permanent staff or as off-payroll employees, where they are outside of the scope of IR35.

It seems incredulous that one public organisation fines another in this way. You would have thought that they would be consulting HMRC on these sorts of issues. If government departments cannot get these things right what hope to the rest of us have. Surely this is a good argument for a more simplified tax system that everyone can understand.

Dividends

In practice there are two types of dividend:

• An interim dividend which is paid during the year and is usually declared by the directors; and
• A final dividend which is usually paid once a year, is recommended by the directors and is approved by the shareholders.

Dividends are lawful if they are paid out of accumulated realised profits less accumulated realised losses, generally the Reserves figure on the balance sheet..

It is important that there is sufficient distributable profit from which to declare a dividend. The directors also need to consider the impact that the payment of the dividend will have on the financial position of the entity. If the financial statements show no distributable profit available from which to declare the dividends and dividends have actually been paid, then they will be unlawful and trigger unwanted tax consequences..

In a recent case it was established that the legality of a payment is tested at the time it is made. Where it is subsequently discovered that the dividend is unlawful, it cannot then be re-characterised. So, if you are taking cash out of your company, don’t call it a dividend in your records. Better to declare a dividend at the end of the period when the status of the payment can be ascertained more accurately.

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.