Taxing Times – April 2015

Welcome to the April edition of Taxing Times. In this edition we’ll look at: Tax Opps

  • Goodwill Changes: Surprise from Autumn Statement – Part 2: Restriction on Corporation Tax Relief
  • How to deal with penalties from HMRC
  • PAYE updates
  • Goodbye to tax returns?!
  • What’s New in the World of Tax? 

SAVE THE DATE: We are running a free solicitors seminar on Wed 20 May at Rheged please click here for more details! Dotted Line

Goodwill: Changes on Incorporations – Part 2: Restriction on Corporation Tax Relief

During the Autumn (“Winter”) Statement in December, the Chancellor unexpectedly introduced a) a restriction on the availability of Entrepreneur’s Relief on the transfer of goodwill to a related party and b) a restriction on company Corporation Tax deductions for certain intangible assets acquired from a related party on incorporation. This article looks at the Corporation Tax restriction. See March’s edition of Taxing Times for some thoughts on the Entrepreneur’s Relief restriction.

A measure has been introduced to restrict Corporation Tax deductions under the intangible asset regime where goodwill and certain other intangible assets are acquired by a company from a “related party individual” or from a firm in which one of the members is a related party individual.

A related party individual broadly means anyone with a share or interest in the capital or income of the company or their spouse/civil partner, parent/child, grandparent, grandchild, brother/sister or partner.

The restriction on Corporation Tax relief is drafted more specifically than the restriction to Entrepreneur’s Relief, as it applies to goodwill AND also to “certain customer related intangible assets” – together called the “relevant assets”. If an asset is not a “relevant asset” then the Corporation Tax restriction does not apply.   In addition to goodwill, the other relevant assets are as follows:

  • information which relates to customers or potential customers of a business, or part of a business (such as customer lists)
  • a relationship (whether contractual or not) that the transferor has with one or more customers of a business, or part of a business
  • an unregistered trade mark or other sign used in the course of a business, or part of a business
  • a licence or other right in respect of goodwill or any of the other assets listed above

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There is a third party acquisition rule which permits a Corporation Tax deduction on the relevant assets still to be made in particular circumstances.  Where the related party themselves acquired the asset wholly or partly from a third party then the new rules permit a deduction to be claimed for the third party asset – which is at least some good and sensible news but does involve needing to look at the accounting values of the various different elements of the goodwill and other assets listed above.

The Corporation Tax restriction applies to all transfers on or after 3 December 2014.  Where an accounting period commences before 3 December 2014, the accounting period is split so that the corporation tax restriction applies only after 3 December 2014.  Where Corporation Tax relief is already received for intangibles recognised on transfers which took place before 3 Dec 2014 the relief will not be adjusted – so at least this is not a retrospective measure.

Please contact us if you would like to discuss how Dodd & Co can help you with incorporations. Dotted Line2

How to deal with ‘careless’ penalties from HMRC

One specialist tax group formed by the Chartered Institute of Tax – The Low Incomes Tax Reform Group (LITRG) – notes that there seems to be an increase in ‘inaccuracy’ penalties for carelessness charged when people get their return in on time, but have made a mistake. These penalties – charged by HMRC for people making an allegedly ‘careless’ mistake in their tax return – typically amount to 15% of the tax understated.  But when it comes to errors on a tax return and the matter of penalties, there is a very important distinction to make between being ‘careless’ and  simply making a mistake.  Mistakes should not be subject to a penalty at all.  Therefore it is well worth taking the time to think about which side of the fence the error falls on.

An inaccuracy penalty is chargeable if you give HMRC a document (e.g. a tax return, or a claim for an allowance or relief) and both of the following apply:

The document contains a mistake or inaccuracy which results in you understating your liability to tax, or claiming too much by way of loss relief or repayment of tax.

The mistake was ‘careless’ or deliberate. ‘Careless’ indicates that you have failed to take reasonable care; what is ‘reasonable’ depends on your circumstances and abilities.

For a penalty to be chargeable, it is not enough that there has been a mistake….the mistake has to have resulted in a loss to the ‘public purse’.  And it also has to have been careless or deliberate.  If a genuine error has been made despite best efforts, and if it isn’t something so obvious that an ordinary person paying attention should have picked it up, then no penalty should be due.

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And note that what is reasonable to one person might not be reasonable to another depending on their background and abilities and circumstances.  So HMRC should take into account these facts when deciding whether an error is a mistake (no penalty) or is careless (penalty).  But in reality, HMRC is a huge organisation and has millions of taxpayers to deal with, so it is likely that a penalty is just applied.  This doesn’t mean it is correct.  And it can be appealed.

The level of penalty is normally worked out as a percentage of the extra tax that becomes due and payable as a result of correcting the error. The standard penalty is 30% but HMRC can mitigate this downwards to 15% (if HMRC have found the error) or even to 0% (if you tell HMRC about the error before they know about it).

HMRC have a discretion to reduce a penalty or not enforce it if they think that there are “special circumstances” which make it appropriate to do so. These are not defined, although  simply being unable to pay, or the fact that the tax owed is balanced by a possible overpayment of tax are not valid reasons. So you can request that they use their discretion to reduce it to nil.  Or you can formally appeal the penalty.  As a rule of thumb, you have 30 days from the date of the decision to lodge an appeal against it, so do not park it in a drawer to worry about later! You need to have a valid reason to appeal which you explain to HMRC. For example, if HMRC are charging you a 15% penalty for failure to take reasonable care, you might feel that you made a genuine mistake while doing the best you could to get things right, in which case you should explain this and ask that you are not charged a penalty at all.29976849_m

If HMRC cannot be persuaded to agree that you were not careless, you can ask them to suspend the penalty.  This means they will not collect the penalty now, but if any further errors are found within the suspension period, that suspended penalty becomes payable immediately, as well as any other penalty that now becomes payable in relation to the new error.

 

Conclusion

So perhaps the most important message to take away is that you shouldn’t simply accept that you have to pay a penalty if you do not believe you have been careless, or done anything wrong, and you should follow it up with HMRC.  Anyone can make a genuine mistake – after all, it’s not unheard of for HMRC to make mistakes too!

Please contact us if you would like to discuss how Dodd & Co can help you with HMRC enquiries or penalty notices. Dotted Line

PAYE Updates

HMRC Disputed Charges

HMRC have over 12,500 cases of disputed charges outstanding which they acknowledge is a matter of concern.  Disputed charges occur where an employer disagrees with HMRC Debt Management over the PAYE amount owed.  Employers have found HMRC’s Employer Helpline unsympathetic and blaming the employer.  Dodd & Co’s Payroll team have contacted the helpline ourselves and been told that the dispute could take 5 to 6 months to resolve…..not very satisfactory and difficult to understand why it will take so long.  HMRC have now said that it is a mixture of issues from employers not processing their payroll correctly, software developer issues and HMRC problems.

If you have any concerns over PAYE charges you have received please contact the Dodd & Co Payroll team.

Auto Enrolment Update

Although the personal tax free allowance rose to £10,600 for the 2015/16 tax year the threshold for employees being automatically enrolled into a qualifying workplace pension scheme still remains at £10,000.  The government are looking to simplify auto enrolment procedures and the draft regulations being consulted on cover simplifying the information employers need to provide employees among other areas. hol pay

Meanwhile, the Pension Regulator is being criticised  for the “ACT NOW” letter sent out to employers which contains threats of penalties for failing to set up a workplace pension scheme and which employers say is intimidating.  It is reported that some employers are struggling to cope with Auto Enrolment and there were 166 cases of fines issued during the final three months of 2014.

If you need any assistance with your own Auto Enrolment process please contact the Payroll team as they can help you plan appropriately. Dotted Line2

The end of the tax return?

Sounds too good to be true?  Well, you know what they say……

George Osborne announced in the Budget that the Government will “transform the tax system” over the next Parliament by “abolishing the tax return”.  Instead they will introduce digital tax accounts.  This is intended to remove the need for individuals and traders (not companies) to complete annual tax returns. The official Treasury briefing note envisages these accounts as “bringing together each taxpayer’s details in one place, just like an online bank account, so they can register for new services, update their information and understand quickly and easily what they need to pay”.  Abolishing the tax return sounds fantastic as a headline grabber but what does it really mean and are there some pitfalls to this apparently good news?

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The headline hides the reality that taxpayers will still have to confirm their income online and add details of income that HMRC doesn’t know about, such as business or investment income. So the tax return will not be so much abolished as moved into the digital sphere, with some boxes prepopulated by HMRC from information they hold but other boxes having to be completed by the taxpayer (or their adviser).   The pre-population of tax returns may save a few entries but taxpayers will still need to ensure that the numbers are correct. And unfortunately, HMRC doesn’t have an unblemished record when it comes to introducing new online services so the potential for pre-population error and implementation issues is ever present.

Further details on the policy and administrative changes needed to deliver this will be published later in 2015 so watch this space for updates as we find out how it will all work. Dotted Line

What’s new in the world of tax?

HMRC update guidance on phishing emails and bogus contact

HMRC have updated a guidance document containing examples of emails, letters, text messages, and bogus calls used by scammers and fraudsters to obtain taxpayers personal information.  This guidance provides examples of the different methods that fraudsters use to get you to disclose personal information in order to help you decide if a contact pertaining to be from HMRC is genuine or not.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/415297/Phishing_emails_and_bogus_contact.pdf

Bond film rewritten to obtain Mexico tax breaks

Mexico offered Sony Pictures Entertainment, the makers of the latest James Bond movie, Spectre, tax breaks of $14m in return for changes to the script away from certain stereotypes.  The country requested that the film’s villain not be Mexican, that an assassination target should be changed from a Mexican to an international leader and that a Bond girl called Estrella be played by a Mexican actress.

Who says money doesn’t talk? 

National Minimum Wage
In the budget, the Chancellor confirmed that the National Minimum Wage will rise in October 2015 to the following levels:

  • Aged 21 and above: currently £6.50 will increase to £6.70
  • Aged 18 to 20 inclusive: currently £5.13 will increase to £5.30
  • Aged under 18 (but above compulsory school leaving age): currently £3.79 will increase to £3.87
  • Apprentices aged under 19 or Apprentices aged 19 and over, but in the first year of their apprenticeship : currently £2.73 will increase to £3.30

While just last week HMRC named firms which failed to pay minimum wage.  Major high street brands French Connection and Foot Locker, Champneys, discount retailer 99p Stores and Toni & Guy along with 48 other employers were all named and shamed by HMRC.

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