Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

£32bn Tax Gap … is it your fault?

The estimated tax gap for the 2020 to 2021 tax year is 5.1% with small businesses accounting for nearly half of unpaid tax

Small businesses represent 48% (£15.6bn), followed by criminals at 16% (£5.2bn).

The level of small business tax avoidance is an area that HMRC will inevitably want to focus on to close the tax gap. But given that they have been trying to do this for decades, you wonder how successful they can be, A prime reason for the failure to pay the correct tax is due to understated earnings and errors.

It has been estimated that failure to take reasonable care accounts for the largest proportion of the tax gap at 19% (£6.1bn). Error account for 9% of non-payment of taxes.

However, HMRC will not manage to make inroads into the gap until it ‘is adequately resourced with technology for data analytics, as well as expert investigators. While government still views it as an overhead, it will always look to cut costs. 

Tax avoidance as such only accounts for 4% (£1.2bn). but  evasion accounts for 15% at £4.8bn.

The tax gap for income tax, National Insurance contributions and capital gains tax is 39.5% (£12.7bn) of the total tax gap.

HMRC estimates that £7.4bn is attributable to income tax self-assessment taxpayers equivalent to 12.4% of theoretical income tax self-assessment liabilities.

The wealthiest self-assessment taxpayers are estimated to have a tax gap of 4% of liabilities in 2020 to 2021, equivalent to £1.2bn.

Over a quarter of unpaid tax relates to VAT, with a total of £9bn remaining uncollected.

Have You Registered Your Trust?

Almost all UK express trusts and some non-UK express trusts established must be registered on or before 6 October 2020.

The UK TRS came into effect following implementation of the EU’s Fourth Money Laundering Directive. The directive is designed to improve transparency around the beneficial ownership of assets held in trusts with UK tax liabilities.

The Fifth Money Laundering Directive, implemented on 6 October 2020, extended the scope of the TRS with limited exclusions and covers certain non-UK trusts, but all UK express trusts. Brexit has not affected the obligation to comply, as the Directive was transposed into UK law.

Registration deadlines

The following deadlines apply to register with the TRS:

• trusts created prior to 4 June 2022 and not already registered as taxable trusts, the deadline is 1 September 2022;
• trusts created on or after 4 June 2022, the trustees must register within 90 days of creation;

R&D Tax Credits – HMRC Anti-Fraud Campaign

HMRC is sending letters to thousands of taxpayers effectively accusing them of fraud.

The letters from HMRC’s Fraud Investigation Service (FIS) indicating that they have fraudulently claimed research and development (R&D) tax relief and credits.

The letter states in all cases we have seen:

‘The claim triggered an alert on our systems and has caused HMRC to believe that you have fraudulently claimed money to which you were not entitled. Therefore, HMRC has blocked payment of this money, to which we believe you are not entitled.’

HMRC then go on to request a  significant amount of information about the claim.

A recent article highlighted that there do appear to be a number of issues with R&D, with rogue consultancy firms encouraging some businesses to make R&D claims which do not always stand up to scrutiny.

Recently published statistics from HMRC on R&D tax relief for 2019/20 show that R&D claims are still increasing, both in number and in value. How much of this is due to specialist R&D Tax Relief companies promoting the claims procedure.

The total number of R&D claims for the year has risen by almost 16%, with the main driver being an increase in claims by SMEs. The rise in claims by large companies is much less.

The R&D relief is a part of the government’s efforts to drive an increase in R&D spending in the UK to 2.4% of GDP by 2027. Official figures show that this was only at 1.74% in 2019, so there is some way to go, so maybe these increases should be seen as a positive outcome.

However, it seems that this increase in relief claimed is troubling government who are clearly concerned that the rise is not necessarily the result of genuine and valid claims.

 Is it the HMRC view that R&D claims by SMEs, particularly payable credit claims, are being driven up by a relentless campaign by unscrupulous ‘advisers’? HMRC continues to express concern that some ‘advisers’ are taking advantage of the R&D reliefs and encouraging claims that are less than robust with HMRC and the professional bodies working closely to find ways to deal with this problem, whilst encouraging you to use reputable R&D advisers to assist with their claims.

This is why HMRC recently announced that it had paused some Research & Development Tax Credit (RDTC) payments s0 that it could investigate some irregular claims.

IHT – Business Property Relief

Business property relief (BPR) provides relief for transfers of value during an individual’s lifetime or on death where the assets being transferred are ‘relevant business property’ and this might comprise shares in an unquoted trading company. Gifting such shares to the next generation . will be a potentially exempt transfer for IHT.

Provided that you survive more than seven years after the gift then the normal rules surrounding potentially exempt transfers (PETs) will apply and the transfer will be out of your estate and not considered for inheritance tax (IHT) purposes.

However, if you die within seven years of making the gift, then the transfer will be brought back into your estate on death. And the shares will need to satisfy conditions at the date of transfer and at the date of death for BPR to apply.

The initial transfer will qualify for BPR provided:

• the shares are in an unquoted company and are relevant business property ;
• the company’s activities do not wholly or mainly involve investment activities; and
• you satisfy the minimum ownership condition and you have held the shares for at least 2 years .

The next generation would need to hold the shares from the date of the transfer up to the date of your death.  However, the shares themselves do not have to qualify for BPR at the time of his death.

Although surplus cash held in a company does not constitute investment activities, it may still be an excepted asset for BPR and not attract BPR with the  amount of relief being apportioned.

It may not be an excepted asset if it is used wholly or mainly for the purposes of the business during the relevant period or is required for future use in the business.

Building Costs and Corporation Tax Relief

Capital Allowances

Companies generally claim capital allowances on plant or moveable fixtures but they can also claim a  corporation tax deduction for the value of embedded fixtures and fittings in commercial property.

These can provide a reduction in a company’s profits for corporation tax up to 100% of the expenditure incurred in the year of purchase.

While the amount of tax relief on property embedded fixtures and fittings (PEFFs) varies for each building it is not uncommon to see claims based upon  15% to 35% of the value of new buildings.

If the property is being purchased as opposed to constructed, you may need to look into the history of claims made  by the previous owner.

Since 2012there was a fixed value requirement to determine a value at which the fixtures will pass for capital allowances purposes from one party to the other and so this should be determined at the time of the sale / purchase.

There is a two-year window from the date of the transaction for the appropriate election under s198 CAA 2001 to be submitted to HMRC. So that the purchaser can then claim the relevant capital allowances.  

R&D

Research and development allowances (RDAs) give tax relief to companies which incur capital expenditure on property and plant and equipment that is to be used for qualifying R&D activities.

The benefit of RDA claims is that expenditure which would otherwise not be available for corporation tax relief could be claimable.

Land Reclamation Relief

Corporation Tax Relief can be claimed on qualifying expenditure on the removal of contaminants from buildings, e.g., asbestos.

The additional corporation tax relief available in the year of expenditure is 50% for property developers or a higher 150% owner occupier/investor rate.

In the event that a company is in a tax loss position for a particular accounting period, a tax credit (cash in hand) of up to 24% of qualifying expenditure is available.

Structural and buildings allowances (SBAs)

Qualifying expenditure incurred on the construction of new buildings and structures as well as the enhancement of existing, commercial buildings and structures, is eligible for structural buildings allowance.

This relief may be available in respect of both UK and overseas properties where companies which incur the expenditure submit UK corporation tax computations. Corporation tax relief is available on a straight-line basis currently at 3% per annum, i.e., over 33⅓ years.

Unscrupulous Tax Repayment Claim Agents

HMRC estimate that there are around  200 repayment agents who make routine tax claims on people’s behalf but can take up to half, or even more, of the payment. HMRC estimates that around 500,000 people use tax repayment agents in a single year.

There is also strong evidence that many taxpayers do not understand the terms they are signing up to and feel misled, some even believing they are dealing with HMRC directly rather than a third party.

Taxpayers can make a claim directly through HMRC’s free online service on gov.uk and keep 100% of the repayment themselves.

There are also many complaints about the use of reassignment so that the agent receives the refund directly from HMRC rather than the taxpayer.

HMRC received 350 formal complaints which explicitly referred to assignments between April 2021 and March 2022, a figure which has been increasing annually. These complaints primarily relate to individuals not understanding that their repayment would be sent to the agent rather than directly to themselves, and where individuals do not recall signing an assignment. This does not include calls to HMRC contact centres from taxpayers questioning why they have not been paid directly’.

Much of the activity is online only with a majority of repayment agents offering a virtual only presence and advertising on social media. They tend to operate a no-win no-fee commission-based structure with large volumes of relatively low value claims.

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.