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.

 

Zahawi

Many people have to pay some extra tax or even repay some tax, and there may or may not be interest and penalties. However, it does not sit right that the person who occupied the post of Chancellor of the Exchequer should be in that position. It is also the scale of the payment that seems for some reason to make matters worse.

So, at the same time as Zahawi was Chancellor of the Exchequer, he, or his accountants, were negotiating a settlement with the very department that he was running. Did he declare this rather unusual conflict of interest and if so, who did he alert to this issue.

In 2000, Zahawi and another set up the polling company, YouGov.

Zahawi’s  42.5% stake in YouGove was held by Balshore Investments Limited, a company incorporated in Gibraltar, which was established around the same time.

While Zahawi was chancellor, HMRC examined his tax affairs after an inquiry was launched by the National Crime Agency (NCA). The investigation probed Zahawi’s involvement in a scheme to avoid tax by using an offshore company to hold shares in YouGov. His family trust, Gibraltar-registered Balshore Investments, held a stake worth more than £20m, but sold up in 2018, with the proceeds being transferred to an unknown individual.

If the shares had been held directly by Zahawi this would have triggered a capital gains tax liability of around £3.7M.

It appears to be that the device did not work. But it is a device and the only motive that would seem to fit is that, like everyone else, he was trying to avoid paying tax.

The penalty was set at 30% and the total settlement value was £4.8m being roughly the capital gains tax avoided of £3.7M plus the penalty.

Zahawi entered into a formal contract with HMRC acknowledging that he paid the wrong amount of tax in the past.

It has been reported that  Zahawi’s advisers achieved a very good deal for him negotiating the penalty down to 30%, as it could have been a lot worse. Was that because of his position.  Still, 30% is not an insignificant penalty.

So, he tried to avoid tax in the UK through an offshore device and got caught.

Sir Laurie Magnus, the prime minister’s independent adviser on minister’s interests, has been ordered to investigate whether the former chancellor had breached the ministerial code over his tax affairs.

So, we had a chancellor in charge of the nation’s finances asking the public to pay their taxes while apparently having failed to do so himself.

 

Gig-economy workers

HMRC are sending out thousands of “nudge” letters to individuals who earn significant amounts from selling goods or services online, or who receive value for creating online content.

There are two forms of the letter going out to two distinct groups.

The first letter is directed at those who sell goods or their own services through online marketplaces. This includes people such as taxi drivers who find their rides through an online platform as well as normal online traders.

The second letter is directed at people who have created online content as well as authors and influencers.

This database uses information that HMRC has received from online marketplaces.

The nudge letters say HMRC has information that the individual has not declared all or some of the income from online sales or from creating content on digital platforms.

The letters are only being sent where it has information that the recipient has traded and has earned more than £12,570 from their online sales.

However, online marketplaces don’t always ask for a full name, address and NI number when registering a user on the site so many are not in the HMRC’s headlights.

The monetary information HMRC has received from online marketplaces is likely to be restricted to amounts of gross sales or the commission paid to the individual. It does not take account of legitimate expenses that can be set off against this income.

Both nudge letters ask the recipient to make a disclosure using the online digital disclosure service (DDS) facility if they have undeclared earnings.

They are also asked to complete a declaration of honesty and completeness. In reality, there is no legal obligation to complete this and especially as the declaration on the certificate is not limited to a particular tax year.

 

Late Filing

Many accountants are battling through tax return season, with the 31 January deadline fast approaching, with many clients who have still to provide the necessary information for their returns.

Many returns will be filed late, and it is not restricted just to personal returns or this particular deadline. There can only be two possible reasons why filings are delayed beyond the deadline and that is that it is either a deliberate decision or some kind of unintended error.

Could it be that the penalties for failure to comply are ridiculously low. In the case of personal tax returns, if the penalty for missing a deadline was £1,000, that would focus taxpayers minds. However, there is also the view that it would increase the stress on accountants at this time of year.

The same principle applies to companies.

 

More 40% /41% taxpayers

Following the freezing of thresholds, the latest estimates from HMRC show that 1,130,000 more people will pay higher rate tax by the 2027/28 tax year than they do currently.

This means that over 7.1m people will be subject to higher rate tax, representing more than one in five taxpayers.

So as people’s income goes up, either due to inflation or promotion, they push through the higher rates of tax sooner, as the thresholds have failed to keep pace with inflation.

In tax year 2022/23 six million people had to pay higher rate rates.

HMRC is aware of the power of “fiscal drag” and exactly how many people they expect to be dragged into paying more tax due to the frozen thresholds.

Over a million more people will be subject to higher rate tax due to wage inflation and many of those may not feel wealthier as their salaries have simply kept up with inflation. This means that in real terms their buying power remains much the same, yet their salaries are taxed much more.

Freezing income tax bands is a form of stealth tax as you pay considerably more tax when bands are frozen, which will be on top of higher energy and food costs.

 

Who Pays Most Income Tax

It has been reported that 54% or 36 million individuals, are contributing less tax than they receive in state support.

83% of all income tax is paid by just 40% of British adults. 53% was paid by the top 10% of earners.

The top 20% of individuals pay 66% of all income tax, averaging £35,000 more in taxes than they receive in public spending.

At the bottom end of the income scale, the bottom 40%, or 27m people, receive an average of £23,000 a year in cash benefits and ‘benefits in kind’.

 

Covid Fraud Taskforce Closes

In 2021, the government announced an investment of over £100m in a taxpayer protection taskforce.

The taxpayer protection taskforce is set to have recovered around £1.1bn in funds lost to fraud from covid before winding down in March 2023, amounting to just a quarter of HMRC’s fraud and error estimate. The investigation activities will be moved to the regular compliance teams by September.

An estimated £4.5bn was claimed due to fraud and error across the full lifecycle of the three support schemes administered by HMRC, between 2020 and 2022.

HMRC is still in the process of attempting to recover covid support lost to error and fraud. By the end of March 2022, the tax authority said it had recovered more than £762m through compliance activity.

Some businesses also made unprompted decisions to repay £970m back to HMRC, either because they no longer needed the money claimed, even though they were entitled to it, or because they recognised an error and returned the money.

Over two thousand HMRC staff were moved from compliance work to handle covid related schemes and Brexit, reducing tax general take by £6bn as compliance work was reduced due to staff shortages and lack of experienced investigators.

During the pandemic, 1,250 staff were moved from HMRC’s customer compliance group to Covid-19 schemes while the situation was exacerbated as a further 1,043 staff were transferred to work on Brexit-related customs issues. This reduced the compliance workforce by 2,283 staff, representing around 10% of the compliance team.

As a result, the yield from HMRC compliance work dropped from £36.9bn to £30.7bn.

These staff have now returned to their primary jobs, and HMRC has ramped up compliance activity in the last 12 months.

 

Freeports

Inverness and Cromarty Firth Green Freeport and Forth Green Freeport will become Scotland’s first green freeports.

Development of the two freeports will be supported by up to £52m in start-up funding and will benefit from tax reliefs and other incentives through a combination of devolved and reserved powers.

Freeports benefit from a range of subsidies, including tax reliefs, customs advantages, reduced business rates, planning, regeneration, and trade and investment support.

Tax incentives include enhanced capital allowances, and reduced employer National Insurance Contributions for new employees.

John Swinney, deputy first minister, said: ‘This is a milestone achievement in the process to deliver green freeports for Scotland. Inverness and Cromarty Firth Green Freeport and Forth Green Freeport will support businesses to create high-quality, well-paid new jobs, promote growth and regeneration, and make a significant contribution to achieving our net zero ambitions.

The Inverness and Cromarty Firth bid aims to build a floating offshore wind manufacturing sector. It expects to create up to 25,000 new jobs and attract £2.6bn in inward investment. In addition to offshore wind manufacturing, it will focus on green hydrogen and creating a new innovation cluster.

 

MTD ITSA Postponement

How can you make best use of the additional time before you have to ‘go digital’.

The government has announced that MTD ITSA will now be introduced in phases from 6 April 2026.

The Financial Secretary to the Treasury has announced, in a written ministerial statement, that making tax digital for income tax self-assessment (MTD ITSA) will be mandatory from 6 April 2026 rather than 2024. MTD ITSA’s original start date was planned for April 2018.

Not only is the start date being deferred, it will now be introduced in phases.

• Self-employed individuals and landlords with a turnover over £50,000 will be mandated to join first from April 2026. HMRC estimates this will apply to 700,000 taxpayers.
• Self-employed individuals and landlords with a turnover over £30,000 will be mandated from April 2027. HMRC estimates this will apply to a further 900,000 taxpayers.

The government is now reviewing whether smaller businesses with an income below £30,000 will be mandated to join MTD ITSA. It is estimated that 2.6m taxpayers are within this group.

The government remains committed to introducing MTD ITSA to partnerships at a future date.

 

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.