HMRC Tax Investigations: Everything you need to know

In an ever-changing tax landscape, small to mid-sized businesses in the UK face increasing scrutiny from HM Revenue and Customs (HMRC). With a rise in investigations and the adoption of advanced technologies like artificial intelligence, understanding the intricacies of HMRC’s approach is more crucial than ever.

This article aims to demystify the process of tax investigations, offering insights into the types of investigations, recent trends, and how businesses can best prepare for this daunting experience.

Brief overview of HMRC tax investigations

HMRC tax Investigations on the riseHM Revenue and Customs (HMRC) is the UK’s tax authority responsible for collecting taxes, administering benefits, and enforcing compliance. Tax investigations by HMRC are formal procedures where the tax authority examines the financial records of individuals and businesses to ensure that the correct amount of tax is being paid. These investigations can range from simple checks to more complex and in-depth inquiries.

Importance for small to mid-sized UK businesses

For small to mid-sized businesses in the UK, an HMRC tax investigation can be a daunting experience. The process can be time-consuming, stressful, and potentially costly if discrepancies are found. Given the recent rise in the number of investigations, particularly targeting smaller enterprises, it’s crucial for business owners to understand what an HMRC investigation entails and how to prepare for one.

Types of HMRC investigations and recent trends

Understanding the landscape of HMRC investigations is crucial for businesses of all sizes. While larger corporations may be more familiar with Code of Practice 8 (COP8) and Code of Practice 9 (COP9) investigations, small to mid-sized businesses often face different types of scrutiny.

Aspect and full enquiries

Small businesses are commonly subject to either “Aspect” or “Full” enquiries. Aspect enquiries are more focused, often zeroing in on specific elements of a tax return, such as particular expenses or tax reliefs claimed. Full enquiries, on the other hand, are comprehensive and may involve a complete review of the tax return and the business records supporting it.

Compliance checks

Another form of investigation that small businesses should be aware of is “compliance checks.” These are not as intensive as full enquiries but are designed to ensure that your tax affairs are in order. These checks can be random or triggered by specific risk factors identified by HMRC.

COP8 & COP9 statistics for 2022-2023

HMRC’s Fraud Investigation Service (FIS) has been actively using Codes of Practice 8 and 9 to investigate tax compliance and fraud. The data for the financial year 2022 to 2023 provides valuable insights into the scale and focus of these investigations.

COP8 Investigations

  • Total on Hand: 1,121
  • Opened in Year: 674
  • Closed: 545
  • Interest (£m): 7.9
  • Penalties (£m): 6.4
  • Total Yield (£m): 72.4

COP9 Investigations

  • Total on Hand: 2,181
  • Opened in Year: 417
  • Closed: 661
  • Interest (£m): 8.1
  • Penalties (£m): 14.8
  • Total Yield (£m): 89.2

Implications for small to mid-sized businesses

The data shows a significant number of COP8 and COP9 investigations are ongoing, with hundreds opened and closed within the last financial year. The yield collected from these closed cases amounts to £72.4 million for COP8 and £89.2 million for COP9, including interest and penalties. This underscores the importance for businesses to be vigilant in their tax affairs, as HMRC is actively using these codes to investigate and reclaim lost tax revenue.

While the focus of COP8 and COP9 investigations is often on larger corporations or high-net-worth individuals, the increase in staffing and reclaimed amounts suggests that HMRC is becoming more aggressive in its efforts across the board. Small businesses contribute an estimated £13.4 billion to the tax gap, making them a likely target for increased scrutiny.

By understanding the types of investigations and being aware of the latest trends, small to mid-sized businesses can better prepare for the possibility of HMRC scrutiny.

AI use in tax investigations on the rise

The rise in HMRC investigations

Over the past couple of years, HMRC has been ramping up its efforts to ensure tax compliance, especially among small to mid-sized businesses. Recent statistics indicate a significant uptick in the number of investigations. For instance, HMRC’s investigations into individuals and small businesses raised a staggering £5.7 billion in the fiscal year 2021/22, marking a 54% increase from the previous year. This isn’t just a random occurrence; it’s part of a broader trend that’s been gaining momentum.

What’s behind the surge?

The government has been increasingly focused on closing the tax gap—the difference between the amount of tax that should be paid and what is actually collected. Small businesses and freelancers have found themselves under the microscope more than ever, with a 21% rise in investigations targeting this demographic. It’s clear that HMRC is casting a wider net, and no one is immune.

What triggers an investigation?

Understanding what might trigger an investigation can help you steer clear of unwanted attention from HMRC. Common triggers include significant fluctuations in income, inconsistencies between different tax returns, and late or incomplete submissions.

Preventive measures: What to watch out for

If you’re a small business owner, there are specific areas you should pay close attention to in order to minimise the risk of an investigation. Accurate record-keeping is your first line of defence. Make sure all transactions are documented and that you’re declaring all forms of income. Employing the services of a reputable accounting firm can also go a long way in ensuring that your tax affairs are in order.

HMRC InvestigationThe investigation process

When HMRC decides to investigate a business, it’s not a process to be taken lightly. The investigation can be initiated in various ways, such as random selection, specific triggers, or even a tip-off. Once you’re on HMRC’s radar, the process unfolds in several stages, starting with an initial letter of inquiry. This is followed by a request for specific financial documents, which could range from bank statements to invoices and payroll records.

The depth of the investigation can vary. Some are relatively straightforward, requiring only basic documentation to verify the tax returns. Others can be more invasive, involving interviews and a thorough examination of your business operations. It’s a process that can last anywhere from a few months to several years, depending on the complexity and the level of cooperation from the business being investigated.

The key takeaway here is that an HMRC investigation is a serious matter that requires immediate attention and thorough preparation. Ignoring or delaying your response to HMRC’s inquiries can lead to penalties and further complications.

Data utilised by HMRC

In today’s digital age, HMRC has access to an unprecedented amount of data to aid in their investigations. They utilise around 55 billion items of data from various sources, including banks, property records, and even social media. This data-driven approach allows them to create a comprehensive profile of taxpayers, making it increasingly difficult to hide any discrepancies.

What’s more, HMRC employs advanced data analytics and artificial intelligence to sift through this massive amount of information. These technologies enable them to spot inconsistencies or anomalies that might warrant a closer look. For instance, if your lifestyle appears to be more lavish than what your declared income would suggest, that could raise a red flag.

For businesses, this means that the bar for meticulous record-keeping has been raised even higher. It’s not just about keeping your books in order; it’s about ensuring that all your financial activities are consistent across the board. This level of scrutiny may seem overwhelming, but it underscores the importance of having a robust accounting system in place.

Penalties and consequences

If you find yourself at the receiving end of an HMRC investigation and discrepancies are discovered, the consequences can be severe. Financial penalties are the most immediate concern. These can range from a percentage of the unpaid tax for minor errors, all the way up to 100% of the tax owed for serious cases of fraud or evasion.

But the repercussions don’t stop at financial penalties. A prolonged investigation can take a toll on your business operations. The time and resources spent on gathering records, attending interviews, and seeking legal advice can be disruptive. In extreme cases, criminal charges could be brought against the business owners, leading to potential imprisonment.

It’s not just about the here and now, either. An HMRC investigation can have long-lasting effects on your business reputation. Clients and suppliers may become wary of engaging with a business that has been under investigation, which can have a domino effect on your future dealings and growth prospects.

The gravity of these potential outcomes makes it imperative for businesses to take HMRC investigations seriously. It’s not just a matter of paying what you owe; it’s about protecting the integrity and longevity of your business.

How to prepare and respond

Being the subject of an HMRC investigation can be a nerve-wracking experience, but preparation and a proactive approach can make all the difference. The first step is to ensure that your financial records are in impeccable order. This includes not just your tax returns, but also invoices, bank statements, payroll records, and any other financial documents that could be scrutinised.

tax interviewIf you receive that dreaded letter from HMRC, don’t panic. The worst thing you can do is ignore it. Respond promptly and consult with an accounting firm experienced in handling tax investigations. They can guide you through the process, helping you understand what documents you’ll need to provide and what questions you might have to answer.

Legal advice is also invaluable. Tax law is complex, and the stakes are high. A legal advisor can help you navigate the intricacies of the law and ensure that you’re taking the right steps to resolve the investigation as smoothly as possible.

Lastly, communication is key. Keep an open line with HMRC throughout the investigation. This not only helps in resolving issues more quickly but also shows that you’re committed to compliance, which could work in your favour.

New initiatives by HMRC

HMRC is continually evolving its methods and strategies for tax collection and compliance. One of the latest initiatives is the increased use of data analytics and artificial intelligence to identify potential cases for investigation. This means that HMRC is not just relying on traditional triggers but is also using predictive algorithms to identify high-risk taxpayers.

Another noteworthy development is the focus on sectors that are traditionally cash-heavy, such as hospitality and construction. HMRC is increasing audits in these sectors, aiming to clamp down on undeclared income and tax evasion.

Additionally, HMRC has been collaborating more closely with international tax authorities. With the advent of the Common Reporting Standard (CRS), information sharing between countries has become more streamlined, making it harder for businesses to hide income or assets abroad.

These initiatives indicate a more proactive and technologically advanced approach by HMRC, which has implications for how businesses should prepare for potential investigations. It’s a clear sign that HMRC is upping its game, and businesses need to do the same to stay ahead of the curve.

Final thoughts

Navigating the complexities of an HMRC tax investigation can be a daunting task, especially for small to mid-sized businesses. The rise in investigations, coupled with HMRC’s increasingly sophisticated methods, makes it more important than ever to be proactive in managing your tax affairs. From understanding what triggers an investigation to keeping meticulous records and seeking expert advice, preparation is your best defence.

But it’s not just about avoiding penalties or navigating an investigation smoothly. It’s about safeguarding the integrity and future of your business. With HMRC’s new initiatives and technological advancements, the landscape of tax compliance is changing rapidly. Staying informed and prepared is not just a good business practice; it’s a necessity in today’s ever-evolving regulatory environment.

So, if you haven’t already, now is the time to consult with an accounting firm like TaxAgility that specialises in tax investigations to ensure that your business is compliant and prepared for any scrutiny that may come your way. After all, it’s better to be safe than sorry.


How AI is Helping HMRC to Collect Taxes and Crack Down on Tax Evasion

HMRC has been developing its AI capabilities for a number of years. In 2016, it launched the AI Lab, which is a team of experts who are working to develop new AI-based tools and techniques to help HMRC collect taxes more effectively. In this article, we explore some of the ways HMRC is using its new tools to crack down on small business tax evasion.

How HMRC is using AI to counter small business tax evasion

The AI Lab has made a number of significant achievements in recent years. For example, it has developed an AI-based tool that can automatically detect fraudulent tax returns. This tool has been used to identify millions of pounds of fraudulent tax claims.

AI Lab is also working on developing AI-based tools to help HMRC with other tasks, such as identifying businesses that are at risk of tax evasion and targeting businesses for audits.

It appears that HMRC is committed to using AI to improve its ability to collect taxes and to crack down on tax evasion. The AI Lab is playing a key role in this effort, and it is likely that HMRC will continue to develop its AI capabilities in the years to come.

Here are some of the ways in which HMRC has been developing its AI capabilities:

  • Investing in research and development. HMRC has invested heavily in research and development of AI technologies. This investment has led to the development of a number of innovative AI-based tools and techniques.
  • Partnering with academia and industry. HMRC has partnered with academia and industry to access expertise and resources in AI. This collaboration has helped HMRC to accelerate the development of its AI capabilities.
  • Scaling up its AI capabilities. HMRC is scaling up its AI capabilities by training more staff on AI technologies and by investing in infrastructure to support AI-based processes.

HMRC’s investment in AI is a significant development that has the potential to transform the way that HMRC collects taxes. By using AI, HMRC can become more efficient and effective in collecting taxes, and it can crack down on tax evasion more effectively.

HMRC cracks down on small business tax evasion with AI

Small businesses are a vital part of the UK economy, but they are also at risk of tax evasion. The UK tax authority, HMRC, is using artificial intelligence (AI) to crack down on small business tax evasion. This is a significant development and it’s important for small business owners to be aware of the risks and to take steps to protect themselves and thus avoid the prospects of a tax investigation.

Why small businesses need to know this

There are a number of reasons why small businesses need to be aware of HMRC’s use of AI to crack down on tax evasion.

The use of AI is a significant development that small business owners need to take note of. AI is a powerful tool that can be used to analyse large amounts of data and identify patterns of suspicious activity.

This means that HMRC is now able to identify businesses that are at risk of tax evasion much more easily than in the past.

Small businesses are a target for tax evasion. Small businesses are often seen as being less likely to comply with tax laws than larger businesses. This is because small businesses may have fewer resources to devote to tax compliance, and they may be more likely to be run by individuals who are not familiar with tax laws.

The penalties for tax evasion are severe. If a small business is caught evading tax, it could face significant penalties. These penalties could include fines, asset seizures, and even imprisonment.

How AI is identifying businesses at risk of tax evasion

AI is being used to analyse data on businesses to identify patterns of suspicious activity. For example, AI can be used to identify businesses that are reporting unusually high expenses or that are making large cash payments.

Here are some examples of suspicious activity that AI can identify in businesses that are:

  • Reporting unusually high expenses, such as travel and entertainment expenses.
  • Making large cash payments, especially for items that are typically paid for by check or credit card.
  • Reporting inconsistent income and expenses from year to year.

How AI is assessing the risk of tax evasion by businesses

AI is being used to assess the risk of tax evasion by businesses. This risk assessment takes into account a number of factors, such as the business’s size, industry, and location.

Here are some factors that HMRC considers when assessing the risk of tax evasion:

  • The size of the business. Larger businesses are more likely to be audited by HMRC than smaller businesses.
  • The industry of the business. Some industries, such as construction and hospitality, are more prone to tax evasion than others.
  • The location of the business. Businesses that are located in areas with a high concentration of tax evasion are more likely to be audited by HMRC.

How AI is supporting HMRC’s enforcement activities

AI is being used to support HMRC’s enforcement activities. For example, AI can be used to identify businesses that are not complying with tax laws and to generate reports on tax evasion.

Here are some ways that AI is being used to support HMRC’s enforcement activities:

  • AI can be used to identify businesses that are not filing tax returns or that are filing late.
  • AI can be used to identify businesses that are underreporting their income or overstating their expenses.
  • AI can be used to generate reports on tax evasion that can be used by HMRC to target businesses for audits.

What this means for small business owners

As a small business owner, it’s important to be aware of the fact that HMRC is using AI to crack down on tax evasion. This means that you need to be more careful than ever to ensure that you are complying with all tax laws.

Here are a few things you can do to protect yourself from being caught up in HMRC’s AI crackdown:

  • Keep good records: It’s important to keep good records of all of your business income and expenses. This will help you to ensure that you are able to declare your income correctly and that you are not claiming false expenses.
  • Keep all of your receipts, invoices, and other documents related to your business.
  • Organise your records in a way that makes them easy to find.
  • Keep your records for at least seven years.
  • Get professional advice: If you are unsure about your tax obligations, it’s important to get professional advice from an accountant or tax advisor.

An accountant or tax advisor can help you to understand your tax obligations and to ensure that you are complying with all tax laws.

Be aware of the risks: Tax evasion is a serious offence and it can lead to penalties, asset seizures, and even prosecution. It’s important to be aware of the risks of tax evasion and to take steps to avoid it.

Penalties: HMRC can impose penalties for tax evasion. The amount of the penalty will depend on the severity of the offence.

Asset seizures: HMRC can seize assets, such as bank accounts, cars, and homes, from businesses and individuals who have evaded tax.

Prosecution: In some cases, HMRC may prosecute businesses and individuals who have evaded tax. If convicted, individuals can face up to seven years in prison.

How TaxAgility has helped clients avoid tax evasion issues

As a specialist small business accounting firm in Richmond and Putney, we’ve been on hand to assist our clients ensure they meet all their tax reporting obligations in a timely manner. We are also able to spot simple and more elaborate issues in their day-to-day operations and tax reporting, that may bring them to the attention of HMRC, often quite inadvertently so.

Don’t hesitate to contact TaxAgility, if you’re concerned that mistakes may have been made and you are worried about HMRC’s response. Call today on: 020 8108 0090.


VAT changes in 2023

Changes to the VAT Penalty System in 2023

Situations often arise where we are unable to hit payment deadlines, whether human error, or circumstances conspiring unfavourably, it happens. So, it’s good to see HMRC taking a positive stance in this regard, in its latest revision of the VAT penalty system. In this article, we’ll review the changes to the VAT system you can expect in 2023.

VAT changes in 2023As of January 1 the default VAT penalty system has been replaced by a scheme that on the face of it seems to be less punitive for the occasional late payment or submission. The new system treats late submissions and payments separately. It also calculates interest on late payments differently too.

Period of familiarisation

While the new system is already in operation, HMRC has said that it will allow a period of ‘familiarisation’, to allow businesses to adjust. If your business misses a payment deadline, so long as the payment is made within 30 days, or if you have a ‘Time to Pay’ agreement in place, no penalty will be levied. This familiarisation period extends to December 31 2023.

How penalties are applied

The penalty system applies in two ways:

  • Late VAT submissions
  • Late payments

A new development is that late submissions for zero or even repayment returns can incur penalties under the new system.

One of the likely reasons for the new system is to help HMRC reduce the administrative overheads associated with chasing and processing late filings.

A new points system for late submissions

The new points system applies to VAT submission deadlines. It adopts a scheme similar to a driving licence. The more infractions a VAT payer racks up, the more points you get. Each time you miss a submission deadline, 1 point is added. The threshold at which a penalty is applied depends upon the filing submission period. These thresholds are given as:

  • Annual – 2 points
  • Quarterly – 4 points
  • Monthly – 5 points

If you hit your threshold, you’ll incur a penalty of £200. If you continue to miss deadlines, you’ll continue to receive £200 penalties.

You won’t incur a penalty if:

  • Your business is newly VAT registered and is your first VAT return
  • You have cancelled your VAT registration and this is your business’s final VAT return.
  • Single case VAT returns covering periods of a month, quarter or a year.

Can a business clear its accrued penalty points?

Driving licence points usually expire automatically after 4 years, not so with VAT penalty points.

For penalty points under the VAT system to expire, you will have to meet a test of good compliance. The period of time this applies for depends upon your submission period:

  • Annual submissions: 24 months
  • Quarterly submissions: 12 months
  • Monthly submissions: 6 months

More information about the penalty points system can be found on the Government’s VAT site here.

Penalties for late payment

The new system aggressively targets late payers by introducing a two stage system that uses fixed penalties and then daily penalty charges. If your business has not paid its VAT bill and does not have a ‘Time to Pay’ agreement in place, it’s going to get expensive quickly.

Here’s a summary of how it works:

Up to 15 days overdue

The good news is the system does allow for circumstances where you may encounter some unavoidable delays in submission. So, if you have a problem, talk to HMRC as you won’t be charged a penalty if you pay the VAT you owe in full or agree to a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

If you are late in submission, your first penalty will be calculated at 2 per cent on the VAT you owe at day 15, IF you pay in full or agree a payment plan on or between days 16 and 30.

31 days or more overdue

For circumstances where your submission is 31 or more days late, then your first penalty will be calculated at a rate of 2 per cent on the VAT you owe at day 15 plus 2 percent on the VAT you owe at day 30.

As a further inducement to pay on time, HMRC will levy a second penalty which is calculated at a daily rate of 4 per cent for the duration of the outstanding VAT balance. This is calculated once the outstanding balance is paid in full or a payment plan is agreed.

Don’t forget about interest charges

Receiving a 2% penalty on late payments is only part of the overall costs you’ll incur. HMRC will continue to charge interest on late payments at a rate of 2.5% above the BOE base rate. This is even the case if you have an agreed ‘Time to Pay’ arrangement.

All is not equal under the sun where VAT repayments are concerned though. HMRC will only pay interest at a BOE rate -1% and a minimum rate of 0.5%! It’s probably best to ensure you get your payments correct.

Right to challenge

HMRC VAT right to challenge policy is a policy that allows taxpayers to appeal against HMRC tax decisions. This remains the same under the new scheme in 2023.

It is important for taxpayers to know their rights when it comes to challenging HMRC decisions, as this can help them ensure that they are not paying more than they should be.

Under the policy, taxpayers have the right to request a review of any HMRC decision within 30 days of receiving the decision letter. During this review process, HMRC will consider all relevant information and evidence provided by the taxpayer and make a new decision on the matter. This new decision may result in an increase or decrease in taxes owed, depending on the circumstances.

Taxpayers also have the option of appealing against HMRC decisions in certain cases. This involves submitting an appeal to an independent tribunal which will review all relevant evidence and decide whether or not HMRC’s original decision was correct.

Ultimately, understanding your rights when it comes to challenging HMRC decisions is essential for ensuring you are not paying more than you should be.

How HMRC can use its powers to enforce payment

  • HM Revenue & Customs (HMRC) has a number of powers available to them which they can use to enforce payment and collect any amount outstanding. These include:
  • Taking legal action, including issuing court summonses or seeking orders from magistrates’ courts.
  • Making deductions from a person’s salary or pension payments.
  • Placing a restriction on the bank accounts of individuals or businesses, preventing them from making any further transactions until their debt is paid off.
  • Using third party debt collectors to chase up outstanding payments.
  • Using bailiffs and seizing goods in order to cover the cost of unpaid VAT.

In extreme cases, HMRC may even take criminal action against someone who has deliberately evaded payment of their taxes, leading to potential fines and/or imprisonment. Therefore, it is important for businesses to ensure they remain compliant with all applicable legislation surrounding their VAT payments and make sure that all amounts due are paid on time in order to avoid any of these serious consequences.

Why it makes sense allowing a VAT professional manage your VAT submissions

VAT for all but the smallest VAT registered companies can be a complex affair where mistakes can easily be made. TaxAgility are experts in VAT and can remove the burdens of managing and calculating your VAT liabilities from your daily business management routine. We’ll ensure your VAT returns are accurate and make sure they are filed on time.

If you’d like to simplify your VAT management, call TaxAgility today on 020 8108 0090.


How do CGT Transfers between separating spouses work?

The government recently announced plans to give separating couples a longer period in which to consider and transfer their assets and avoid Capital Gains Tax, as currently, depending when the planned separation takes place, time may be very limited and impractical. This is known as ‘no gain or no loss’ transfers.

How does spouse CGT transfers workFrom April 6th 2023, separating spouses or civil partners, will be allowed up to three years to make any agreed split in assets transferred between each other, after they have split up.

NOTE: These plans are currently only draft legislation, so given how fluid government seems these days, this may or may not happen.

Separating from a spouse or civil partner is one of those events where those involved often fail to consider the immediate tax implications of the event. The overarching financial implication for those involved, i.e. who gets what and in what proportions, can be all consuming. If they are fortunate, their lawyers may suggest that they obtain independent financial advice and tax guidance, which may help them realise that simply dividing assets may not be that simple.

The current CGT position for separating couples

A normal part of being married or in a civil partnership is that you are allowed to transfer assets to one another without consequences and without incurring Capital Gains Tax. This can be cash, investments or any other asset, such as the family home or even rental property. The main consequence is that the transferee becomes responsible for any tax liabilities upon disposal of the asset. For example, if a rental property owned by one partner is transferred legally to the other and they decide to sell at some point in the future, the receiving partner will be required to make the declaration to HMRC.

The cost basis for the transfer while married or in a civil partnership is that of the original purchase, including fees. So if a home was purchased for £200,000 20 years ago and is now worth £500,000, it makes no difference, the transfer is based on the original £200,000. However, if the recipient of the transfer then decides to sell at some point in the future, the actual capital gain is realised (£300,000) and CGT becomes due.

How does the sale of the matrimonial home impacted by CGT?

Sometimes in divorce or separation cases, the family home may remain jointly owned, while the other partner moves out. This might be the case where children are involved and rather than upset their lives further, one parent stays in the family home.

If the family home is sold at a later date, the partner who remained in the home and treated it as their main residence will not be liable for CGT. However, if the sale was made more than nine months after they moved out, the partner who did leave will likely face a CGT bill for the proceeds of the sale of their portion of the home. If it was before the nine months, they will be exempt.

There is still relief available to the leaving spouse after nine months though. This is when the spouse transfers their share of the jointly owned property to the other, prior to the property being sold. However, there are conditions, these are:

The property continues to be the other spouse's main residence.
A Consent Order governs the transfer and a claim is made within two years to HMRC.
The spouse who left does not yet have a new principle residence.

Meeting these conditions will allow the leaving spouse to enjoy relief from CGT for the period of moving out to the point of the asset transfer.

Be mindful of the tax year end date - April 5th

Under current legislation, it’s very important to keep in mind the end of the tax year, i.e. April 5th. Separating couples can continue to transfer assets under a ‘no gain no loss’ basis up to the end of the tax year of separation. After that, the transfer is considered in the same way as if it were a straight property sale and capital gains tax is payable if it is applicable.

Not all separations are straight forward. It may take many months to negotiate and finalise details of an assets new ownership, and for the transfers to actually take place. As April 5th approaches, an unreasonable level of pressure may come to bear on the parties to resolve the issue quickly, possibly in a manner detrimental to one or both parties.

It is for this reason and others that the government has proposed the introduction of the new scheme; essentially to allow a reasonable period of time in which to settle the affairs for the separation and reduce the stress involved.

What are the new rules being proposed for April 6th 2023?

This is what the government have said:

  • Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
  • No gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement
  • A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold
  • Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner

What does this mean in practice?

Year end deadline is no longer a problem. There’s no pressure to complete transfers for separations in a tax year by the end of that tax year.

This applies equally to separating or divorcing for earlier years, so in this case 2019/20 and 202/21. Furthermore, if asset transfers are part of a formal divorce or court separation agreement, it may be possible for the ‘no gain no loss’ treatment to be applied for even earlier years.

Tax implications can be quite complex and require expert guidance

Many divorces or separations are relatively simple because not many assets are involved and may have a simple remedy and tax treatment. However, some divorcing or separating couples have quite complex assets involving not just a family home, but often rental properties, company ownership, income from stocks and shares, pensions, to name a few. In these circumstances, you’re best to proceed under the guidance of a professional tax advisor familiar with such circumstances.

At TaxAgility, we’ve assisted numerous individuals navigate the potential mine field divorce, separation and tax represents. Why not give us a call on 020 8108 0090 and find out how we can assist you.


DIY Self Assessment Tax Return - a good idea?

As we approach the end of the year there’s the inevitable scramble, for those that have to complete an SA100 Self Assessment Tax Return, to either beat the October 31st deadline for paper SA100 returns or the January 31st deadline for electronically submitted returns. The question we ask is: “Should you let an accountant complete the self assessment tax return for you?”. We’ll explore that question in this article.

diy tax returnsCompleting a tax return is something that can be planned for, especially if you are required to do so, such as those with supplementary income, sole traders, directors, etc. However, as an accounting firm, our busiest time always seems to be in the last few weeks before the January 31st deadline.

For some, completing an SA100 is a new experience, and often over trivialised, as reporting additional income from a second job or interest from investments appears straightforward. However, one quickly realises that SA100 actually comprises 18 supplementary pages, around 10 of which may apply to many people.

Tempus fugit - time flies, especially when tax deadlines are concerned

Faced with filling out a supplementary page and pressed for time due to the looming deadline, a degree of panic often sets in. The one thing many of these supplementary pages have in common is lots of boxes to tick, amounts to fill out and somewhat confusing descriptions, although HMRC does provide guidance notes as to how to fill this in. Still, it’s a lot to take on board.

The outcome is fairly typical in these circumstances; mistakes are made, sometimes costly ones.

What are the common SA100 supplementary pages you are likely to encounter?

Here, we will quickly list some of the typical supplementary pages you may come across given your personal circumstances.

SA101 Supplementary Income.

This is used to report less common sources of income, although these days they appear more often than in the past. Examples include:

  • Interest from different types of securities
  • Gains from life insurance policies, annuity contracts, etc
  • Stock dividends, securities issued as bonuses and redeemable shares.
  • Business receipts as income from previous years
  • A range of other tax reliefs, such as venture Capital Trusts shares, EIS share subscriptions, maintenance payments and many others.
  • Married couple’s allowance
  • Income tax losses
  • Pension savings tax charges

SA102 Employment

You’ll want to complete this form to list each of your jobs, including your main job. You'll also report what benefits you have received and the expenses you have incurred as part of the job.

SA103 Self Employment

There are two forms here, ‘short’ and ‘full’, and you’ll need to decide which one applies to you. Essentially, it depends on whether you received £85, 000 or more in income.

The short form asks for basic details as to your income source, the business details, expenses, profits etc. It helps you calculate your profits and tax payable.

The long form version is similar in many ways to that experienced if you ran a private limited company and had an accountant prepare your full company accounts. It’s a complex form.

SA104 Business Partnerships

Again, there are short and long form versions of this. Which one you use will depend upon the Partnership Statement your tax advisor gave you.

SA105 UK Property Income.

In recent years, with the popularity of buy-to-let ownership and more people becoming landlords, this form has become more prevalent.

You’ll need to provide full details about the property, whether it’s furnished or not, the types of income - i.e. income from services provided vs actual rental income. Your expenses and you’ll calculate your taxable profit or loss.

SA106 Foreign income or gains

With an increasingly globally mobile population and more foreign or naturalised residents required to complete a self assessment, many people have investments and income bearing assets overseas that must be reported as part of their ‘world-wide income’.

Use SA106 to report income from:

  • Interest from overseas saving
  • Dividends from foreign companieS
  • Remitted foreign savings income
  • Remitted foreign dividend income
  • Income from overseas pensions
  • Income from land and property abroad
  • Foreign tax paid on employment, self-employment and other income

SA108 Capital gains summary

If you own a second home, whether in the UK or overseas, and decide to sell, you’ll incur capital gains on the profits of the sale. If the property is overseas, then you may have to declare the sale in that country too. SA108 is used to report capital gains on property. Also, if you’ve made gains or losses on shares and securities (listed or unlisted), report them here.

There’s a section for ‘non-residents’ to report capital gains on UK property too.

SA108 Residence, remittance basis etc

Residence and domicile are two fairly complex subjects and you should fully understand your obligations to HMRC in this regard. Your UK tax liability depends on where you’re ‘resident’ and ‘domiciled’ in a tax year. The notes to SA108 help you understand your requirements here.

It applies to UK nationals too, particularly if they are working overseas for extended periods.

Should you complete your own self assessment tax return or let an accountant do it for you?

As we have seen, completing an SA100 is not necessarily a walk in the park. It’s definitely not a task to leave to the last minute, especially if you may have more complex income sources.

More often or not, when clients come to TaxAgility seeking us to complete their returns for them, we hear the words “I wish I hadn’t left this so late”, and “I didn’t realise it was that complicated” or “I underestimated the effort involved”.

From our perspective, having seen and assisted countless clients with last minute returns, the cost of having a professional assess and complete your SA100 Self Assessment Tax Return, is by far outweighed by the potential to make mistakes and be penalised by HMRC for under reporting or miss out on things you could have claimed for. Then of course, there’s the reduction in stress knowing it is being handled by a professional.

What happens if I do make a mistake?

Here’s a list of the most common mistakes we see clients that eventually come to us make.

  • Reporting the wrong NI or UTI number
  • Failing to report all your income
  • Not claiming all your expenses
  • Claiming the wrong expenses
  • Over-claiming expenses
  • Failing to use the appropriate supplementary pages
  • Poorly understanding their tax status and liabilities
  • Not fully grasping the implications of residency and domicile
  • Ticking the wrong boxes
  • Missing the deadlines
  • Poor record keeping
  • Miscalculated or incomplete information

If you’ve made simple honest mistakes, HMRC may just correct them for you and update your return accordingly, and not penalise you.

However, if the mistakes are not so simple and those which may lead HMRC to suspect some form of avoidance or deliberate under reporting, you could find yourself the subject of a tax investigation and stiff penalties.

You can make corrections if you discover honest mistakes after you have filed your return. There is a three days window after the deadline in which to do this. The process to do this depends on how your SA100 was submitted. If you submitted online, you can sign in to your government Gateway and correct it through your online account. If it was a paper return, send the corrected pages to HMRC, but make sure you clearly note on each page that this is an ‘amended page’.

In summary, we do believe it is worth the extra cost to have a professional quickly review your personal tax circumstances and prepare your SA100 Self Assessment Tax Return (and supplementary pages) for you. While you might expect us to say that, we just know from the experience of others how beneficial this is, as you may have underestimated your tax liability or worse still, missed out on an opportunity.

Call TaxAgility today on 020 8108 0090 and tell us about your circumstances and we’ll see how we can assist. The earlier you do this, the less stress there will be for you.


Do I need to complete a tax return this year?

Many workers go through their working life never having encountered HMRC’s form SA100 - Tax Return for Self Assessment. With economic pressures such as growing inflation and the significant impact of the rise in cost of living, more people turn to a second job or turn to other sources to help supplement their income and pay the bills.

In such circumstances, you may well need to file form SA100. Also, many underestimate the complexities of income sources and types that can also affect whether you need to file or not. Here’s why and how to check to see if you do.

The SA100 Self Assessment tax return form

Do i need to complete a tax return this year?Mention form SA100 to an average person in employment and they may have never heard of it. This is because employees are on what’s known as PAYE - Pay As You Earn. Simply put, the taxes and national insurance you owe as a result of being employed are paid automatically to HMRC through your wages. They appear on your wage slip as things like Tax, NI, pension payments and adjustments for personal allowance and benefits in kind.

Those who do need to annually complete an SA100 include:

  • Those who are self employed
  • A company director with income not taxed through PAYE
  • A partner in a partnership business
  • A minister of religion
  • A trustee or the executor of an estate

For the most part, the only encounter the average employee will have with HMRC is through the Notice of Coding you may receive when your circumstances change - such as changing jobs or receiving benefits in kind. However, there are circumstances where you will most likely need to complete and return an SA100 Self Assessment tax return. Here are most of those instances.

Regardless of whether any of the situations below apply to you, HMRC may still ask you to complete a Self Assessment tax return.

If you believe any of the factors below relate to you, the government has an online tool to further help you assess your tax position and the need to fill out an SA100, here.

Circumstances that may require you to complete and return an SA100 Self Assessment tax return

A company director

If you are a company director and receive an income that is not taxed at source, you’ll need to complete an SA100. This typically includes basic salary and any dividends and any benefits in kind.

Sources of untaxed income

This may be from interest on bank accounts, shares, or rental income, for example. If this is below £2500 per year, even though you may not need to complete an SA100, you must still notify HMRC of the income. You can do that here.

Also, if you receive any other untaxed income which cannot be collected through your PAYE tax code, you will have to file an SA100.

Trust or settlement income

Regular annual income from a trust set up for you or from a divorce settlement will need to be reported through an SA100. Also, if you receive income from the estate of a deceased person, that tax has not been paid on.

Foreign sourced income

There are many potential sources of foreign income, including:

  • If you worked abroad and received wages
  • Investment income from overseas share dividends or foreign bank account interest. However, foreign dividends will be covered under your UK dividend allowance.
  • Income from overseas pensions
  • Overseas rental income

Find out more at the government’s site here.

Non-resident and receiving income

You are a non-resident, but that doesn’t necessarily exclude you from paying taxes in the UK. This would include non-resident landlords.

You can find out more here.

Income from savings and investments

If income from these sources exceeds £10,000 before tax, you’ll need to report it.

Annual income exceeds threshold

Report through the SA100 if your annual income exceeds £100,000 before tax.

Child benefit and adjusted net income

You or your partner receive child benefits. The higher income child benefit charge will apply if your adjusted net income is over £50,000.

Other tax charge liabilities

An excess in Gift Aid contributions or pension contributions.

State Pension lump sums

If you deferred a state pension lump sum from April 6 2016, you’re liable to tax on this payment.

Coronavirus payments

If claimed a coronavirus support payment incorrectly and have not already paid this back, you’ll need to report this.

Expense claims

You have claimed £2,500 or more in expenses for the tax year, this needs to be reported.

Capital gains

You’ll need to check whether any of the following is true. However, capital gains calculations can be a little tricky. You can find out more here or call TaxAgility and we may be able to assist.

  • Assets sold or bestowed worth £49,200 or more for the tax period 2022/23
  • Where you have capital losses, but gains net of losses exceeds the 2022/23 £12,300 annual exemption.
  • Gains greater than the annual exemption of £12,300 in 2022/23.

In the case of capital gains arising through a residential property sale, you need to complete a separate return within 60 days of the property’s sale.

How TaxAgility can help

Every year around December and January, we receive many requests for assistance with personal tax returns and filling out the SA100. This is because, every year, people underestimate the implications of their tax situation. Unfortunately many leave it to the last minute to fill out the form believing there’s to be a simple case and realise otherwise.

You can avoid this stress and hassle if you review your sources of income and the factors listed above. Upon doing so, if there are any issues you feel are not so simple, simply call us and ask us to assist with your SA100 Self Assessment tax return. This will help you avoid the potential for penalties for late returns and inaccurate declarations.

Call TaxAgility today on 020 8108 0090 and speak to one of our knowledgeable team members about how we can help you with your SA100 Self Assessment Tax Return.

 

 


Everything you ever needed to know about your Tax Code

A tax code is a little set of numbers and a letter assigned to you by HMRC that appears on your PAYE payslip, which can have a profound impact on your earnings. Its important then, to understand why this is so and how to ensure it is correct. This is what this article aims to achieve, so read on, you may even find out that HMRC owes you money!

First of all, where can you find your Tax Code?

HMRC notice of tax codeThere are usually five sources that provide your tax code. The most obvious one is on your payslip. It will resemble something like “1257L”. Obviously, the code will be representative of your personal tax circumstances.

The second place you’ll find it is in the letter of coding that HMRC issues you by post when your tax code changes.

Third, via your HMRC personal tax account, found at the following link if you wish to register:
https://www.gov.uk/personal-tax-account

Forth, on your end of tax year P60. And Fifth, on your P45 if you change your job.

What is a tax code? Really.

There are two parts to the tax code: the numbers and the letter.

The numbers are there to tell your employer how much tax allowance you are entitled to. This is the amount you can earn before tax is applied at the various tax bands published. Simply multiply the number in the code by 10. So, if your tax code is 1257L, this tells your employer that the first £12,570 of your salary is tax exempt. So, if you earn £30,000 per year, your taxable income is £30,000 - £12,570 = £17,430.

There are various reasons why this number may vary in your particular circumstances and this will be covered later. But for most people with simple tax affairs, “1257L” will be a common tax code through the tax year 2022/2023 as this is the threshold set by the government for the personal tax free allowance.

The letter in the code refers to your personal circumstances and how they affect your personal allowances. For instance:

L - Means an employee entitled to the standard tax-free personal allowance.

0T - Where no personal allowance is available. Perhaps the employee hasn’t submitted a P45 and so there’s no information to calculate a tax code.

BR - For income at the basic rate but used for a second job or pension.

NT - No tax is deducted. Used for occupations that are exempt from PAYE, such as musicians.

W1 or M1 - These are emergency tax codes. They are used to calculate your tax only on what you have paid in the current pay period, not the whole year.

K - If you have this letter in your code, it means you are due deductions maybe because of company benefits, state pension or tax you
owe from previous years and these are greater than your personal allowance. So, for example if your tax code is “K525'' and your income is £30,000, you have a taxable income of £30,000 + £5.250 = £35,250.

There is a much larger list of tax coding letter explanations available on the government’s site here. These detail specific codes for Wales and Scotland too.

If the government sets my tax code, why would I need to check it?

Quite simply, mistakes are made. You may make a mistake in reporting aspects of your salary, pension, expenses, benefits, etc. Only by thoroughly working through your personal tax circumstances, ideally with your employer if you are a PAYE employee, can you be sure your tax code is correct.

The situation can get more complex if you have a second job, as the tax code for that will be different to your main job where your personal tax allowances are usually applied. This is why under some circumstances, it’s a good idea for a tax expert such as TaxAgility to check through your income, expenses and coding to make sure you are paying the correct amount, and if you are due any refunds.

I just received a PAYE coding notice in the post, what does that mean?

Typically, you will receive a notice of tax coding in January or February, to allow time for your employer to update your PAYE ready for the new tax year in April. Saying this, if there are no changes to your code and there is only the uplift to consider for the New Year, HMRC will not send you anything. You could receive a notice of coding at any time if your personal circumstances or the tax rules change, or if HMRC feel there are issues with your tax payments.

This is why it’s really important to check the new coding you receive against what you might expect. If you don’t, you may find yourself having to challenge HMRC and either claim back overpayments or find yourself owing tax. Neither situation is particularly fun.

Note: HMRC will not send you a code via post every year if there are no changes or just the uplift to consider.

Why might my tax code change?

As we mentioned earlier, there are numerous reasons why your tax code may change, these may include:

  • Your tax code has been updated, perhaps because of information you or your employer provided, or the tax rules have changed, as they can do each tax year.
  • You’ve started a new job, but your employer hasn’t received P45 information. This means they cannot calculate your tax payments. HMRC will impose an emergency tax code until this is resolved. If subsequently you find that this means overpayment, you’ll have to claim that back, most likely through your coding, which means your coding may change again until you have reached your regular tax payment band.
  • You receive income from a second job or pension. Where your main job uses up your personal tax allowance, the tax code on your second job will be different.
  • When your income changes, earning more or less can affect the tax you are liable for.
  • Benefits within your job impact coding, so this may change when you begin to receive them or stop receiving them. Benefits include such things as company cars, certain types of expenses, phones, etc.
  • You may be eligible to certain types of state benefits, such as the state pension, widow’s pension, widowed parent’s allowance, bereavement allowance, incapacity benefit, employment and support allowance and carer’s allowance. When these start or stop, your coding will most likely change.

What happens if you’ve paid too much tax?

This can happen, especially if you are moving between jobs, have more than one job, or receive or stop receiving any kind of benefits, state or otherwise.

If you think you may have paid too little tax, you need to let HMRC know as soon as possible. The difference will likely be claimed through your tax coding. However, this is only done for sums up to £3000. More than that and you’ll need to pay them directly. In any case, any tax due will need to be paid fully by 31 January following the end of the tax year in which the income was earned - e.g. if you owe HMRC tax for the 2021/2022 tax year, it needs to be paid in full by January 31st 2023.

If you’ve paid too much tax there is an online tax refund service that can be found here. https://www.gov.uk/claim-tax-refund.

The reasons HMRC cite as possible cause of overpayment are:

  • Pay from a job
  • Job expenses such as working from home, fuel, work clothing or tools
  • A pension
  • A Self-Assessment tax return
  • A redundancy payment
  • UK income if you live abroad
  • Interest from savings or payment protection insurance (PPI)
  • Income from a life or pension annuity
  • Foreign income

Essentially, once complete, they will use the information you provide to perform their own calculations and arrive at a figure, hopefully the same as yours. If they agree, they may issue a cheque or make a payment into your bank account.

I have two jobs and two tax codes, now what?

This also applies if you are receiving a pension as well as working. HMRC will determine which of the two jobs is your main job and use this to apply any personal tax allowances. If you don’t agree with this, you’ll need to contact HMRC and request that your allowances are moved to the other job or the pension if that’s more important to you.

If your primary job uses up all of your tax allowances then your second income employer will most likely be instructed to tax your income at the basic rate or higher rates of tax accordingly. This means that all of this second income will be taxed. This is usually done through the tax codes “BR” and “D0”.

How do expenses from my job affect my tax code?

It’s certainly not uncommon, as an employee, to find yourself having to pay out for things you need in your job. Most of the time, your employer will reimburse you for legitimate expenses and it won’t affect your tax coding.

If you do incur expenses that are not reimbursed by your employer and they are essential to your job, HMRC may include these in your allowance calculation. This might include such expenses as:

  • Traveling costs - those needed to do your job, including food and accommodation. However, traveling to and from work - i.e. the normal cost of computing is considered a private expense and not considered.
  • Professional subscriptions, such as those associated with a professional industry body and that allow you to do your job - e.g. as a lawyer, accountant, surveyor, etc.
  • Clothing, such as safety clothing.
  • You cannot claim for things that your employer may have provided an alternative for and for things that you do not use in your private life.

Claims can be made up to four years of the end of the tax year in which you spent the money. Bear in mind that you will have to keep good records and receipts, as HMRC may challenge the validity of your claim.

If your claim is up to £2,500, you can use form P87. PAYE employees don’t usually have to complete an SA100 Self Assessment Tax Return. However, where you are owed tax through expense claims, you can also choose to submit an SA100 detailing your income and expenses. It’s likely that the amount owed will be paid back through your tax code, either in the current tax year or the next one.

If the amount to be claimed is over £2500, then you will have to use a self-assessment tax return. For those who have not done this before, you’ll first need to register with HMRC.

A full list of allowable expenses can be found on the government site on allowable expense claims here.

Why not let TaxAgility ensure your personal taxation is correct

Most of the time regular employees can most likely work out their tax coding issues through their employer. However, for more complex cases with additional sources of income beyond your day job are concerned or where you may be self-employed. It’s a good idea to let a professional tax advisor assist you.

Mistakes can be costly, as they may represent situations where income from other sources have not been fully taken into account, rendering you liable not just to unpaid taxes, but also penalties too; and these can be substantial.

If in doubt, ask an expert to help. So give us a call today on 020 8108 0090, and find out how we can help.


September mini-budget

September's Mini-Budget

The budget delivered a package of more than 30 measures intended to tackle high energy bills, drive down inflation, and cut taxes to drive growth. However, the abolishment of the 45% tax bracket took many by surprise.

Here's a summary of the main elements of the budget.

Income Tax changes

An 'additional' tax rate of 50% was introduced in April 2010, reduced to 45% three years later but from 6 April 2023 will be no more. The 40% band will now be the highest tax rate such that the 13.7% previously 'additional' rate taxpayers will not only pay less tax but now everyone will benefit from the £500 personal savings allowance. The level of personal allowances remains (for the moment), meaning taxpayers earning more than £125,140 will still have no personal allowances.

The increase in dividend rates will also be reversed from 6 April 2023 such that the tax rates of income tax in England and Northern Ireland will be:

Earnings band (after allowances) On earnings and profits On dividends
Basic rate (0 to £37,700) 19% 7.5%
Higher rate (above £37,701) 40% 32.5%
Additional rate Abolished Abolished

 

This reduction/cancellation in tax rates is pleasing for the individual taxpayer but tax relief given at source (currently at 20%) on pension contributions and Gift Aid donations will be affected. The government has confirmed that there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027 and a one-year transitional period for 'Relief at Source' pension schemes.

NIC changes

The rates of class 1 NIC are reversed back to the levels in place on 5 April 2022 but the rates imposed from 6 July 2022 to 6 November 2022 remain. Therefore for all employees (except directors paying NIC cumulatively) the tax year will effectively be split into two - the first period for the first seven months of the tax year (6 April to 5 November 2022) and a second for the remaining five months (6 November 2022 to 5 April 2023). The calculation means that over the year the main Primary rate payable by the employee will be 12.73% (i.e. seven months at 13.25% and five months at 12%) and the main Secondary rate payable by the employer will be 14.53% (15.05% and 13.8%). Corresponding rates of Class 4 NIC for the full tax year 2022/23 will be 9.73% and 2.73% (a reduction from 10.25% and 3.25% to 9% and 2% respectively).

The figures are as follows:

  • Employees' class 1 NIC
  • 12% on earnings in the band: £1,048 to £4,189 per month (£12,570 to £50,270 per year)
  • 2% on earnings above £4,189 per month (£50,270 per year)
  • Employers' class 1 NIC
  • 13.8% on earning above £758 per month (£9,100 per year)
  • The employment allowance remains at £5,000.

Care will be needed if payroll is run around the changeover date. If the software has not been updated in time payments may have to be made using pre- 6 November percentages and any underpayment sorted out in the following payroll run.

Other key tax announcements

The statement included the reversal of a string of planned tax rises including the intended increase to 25% in the corporation tax rate originally set for 6 April 2023 -- this remains at 19%. Planned beer, wine, cider, and spirits duty rate increases have also been canceled and overseas shoppers can now shop sales- tax free in the UK.

The Annual Investment Allowance is a valuable tax break providing a 100% tax deduction for up to £1m of plant and machinery purchased in a year. This cap was due to be reduced to £200,000 on 1 April 2023 but will now be kept at £1m indefinitely.

Queries remain over the application of the 'super relief'. Under this relief qualifying expenditure on new plants and machinery incurred from 1 April 2021 to 31 March 2023 receives 130% tax relief effectively allowing 24.70% tax relief on expenditure (130% x 19%). Now that the corporation tax rate is being retained at 19% from 1 April 2023, we await further announcements as to whether this relief will remain.

The Enterprise Investment Scheme, providing tax incentives for individuals to subscribe for shares in unquoted trading companies, was due to end in 2025 but has now been extended for an undefined period. The similar Seed Enterprise Investment Scheme providing tax relief for investment in small trading companies also remains in place with increases in the annual investment caps of £100,000 per investor, £150,000 per company.

IR35 reversal

IR35 never really went away - the rules just changed. Now from 6 April 2023, another change means we are back to the original 2017 rules. The off-payroll working variants for the public sector (from 6 April 2017) and for large private sector organisations (from 6 April 2021) are to be scrapped. It will now be up to the directors of intermediary companies to decide whether there would be an employment relationship between the worker and the engager, if all intermediaries in the chain are ignored.

Stamp Duty Land Tax

As from 23 September 2022, the threshold from which SDLT must be paid on the purchase of residential property had doubled from £125,000 to £250,000. This means that the 2% tax rate has been abolished, saving purchasers a potential £2,500.

 


New Trust Registration Service Requirements

Trust Registration Service - Rules extension and deadline

Changes in trust registration requirements - act now!

Did you know that you have until September 1st 2022 to register a trust with the Government’s Trust registration Service (TRS), even if you previously didn’t have to?

Until recently, only thrusts that had a UK tax liability, had to register. This included off-shore trusts, but where they still had a UK tax liability. Now, all Express Trusts need to be registered.

Recent changes in Trust Registration Requirements

The new requirements to register a trust were introduced in 2020. Those trusts created on or before October 6 2020, have until September 1 2022 to register or be faced with a fixed penalty fine of £100 or up to 5% of any tax due (or £300, whichever is greater).

Trusts created after this date must be registered within 90 days of creation.

It is estimated that because of this change, there may be around one million trusts in the UK that are still to be registered before the September 1st deadline.

What trusts now need to be registered?

The Government instructs that the the following types of trust now need to register:

  • All UK express trusts — unless they are specifically excluded
  • Non-UK express trusts, like trusts that:
    • acquire land or property in the UK
    • have at least one trustee resident in the UK and enter into a ‘business relationship’ within the UK

By way of example, trusts that now require registration include those where:

1. A trust holds an offshore or onshore investment that was set up by a financial advisor. Most commonly these include:

  • discounted gift trusts
  • loan trusts
  • gift and loan trusts

2. Property is held and a beneficiary exists but where there was no taxable income or capital gains and therefore no need, up to now, to register with HMRC.

3. Trusts that hold shares in a private company. This includes:

  • a trading company,
  • a family investment company (FIC)
  • a personal investment company (PIC)

4. Any other trusts that hold other assets where a tax liability has not arisen.

Trusts that do not have to be registered.

While the extension of the TRS requirements covers many trusts that previously didn’t have to register, there are a number that remain exempt. A full list of exemptions can be found on the Government’s ‘register a trust page’ here.  Remember, that this only applies if the trust is not liable to UK taxes.

How Tax Agility can help

While you can do this yourself through your own Government Gateway account, it’s really important that you get it right the first time. Mistakes in any reporting to HMRC can be very costly. This is why Tax Agility offers a simple service to ensure your Trust is reported correctly. First, we will make sure your trust isn’t exempt. Then we will ensure the correct information is reported through the TPS service and that it is up to date - another requirement, even if you have previously registered your trust.

Contact Tax Agility today on 020 8108 0090 and enlist our assistance in registering your Trust - time is running out.


paying tax on cryptocurrency profits

Cryptoassets - what are they and what are the tax implications?

Many ordinary people and businesses, and by that we mean people who don’t usually engage in financial trading, have tried their hand at investing in crypto currencies. Some have fared well, but many over the past year have suffered significant losses, due to recent crashes in this space. As with any traded asset one may make a financial gain or a loss, but the question arises as to how one reports such gains or losses to HMRC. This is especially poignant if as an individual you’re not usually reporting via an SA100, as maybe the case with employees on PAYE, or perhaps exploring their use in your business.

This article explores the world of cryptocurrencies (and NFTs) and explains how HMRC treats them, how to report them to HMRC and what taxes you’ll be expected to pay.

Cryptocurrencies in the news

paying tax on cryptocurrency profitsOver the past few years cryptocurrencies have made the headlines, sometimes because of meteoric price rises and at other times catastrophic crashes. Some have been caught out in what appeared as the new ‘gold rush’ - investing heavily and initially seeing significant gains, but then very quickly watching the currency crash, wiping out almost everything. In short, if you invest in cryptocurrencies you need a strong stomach as you’re in for a wild ride.

That doesn’t deter everyone though, to the point where significant numbers of people not accustomed to financial trading have put their toe in the crypto ocean - and it’s a very large ocean indeed. By March 2022 there were over 18,000 different cryptocurrencies in existence.

What is a cryptocurrency?

The definition given by Wikipedia is this: “A cryptocurrency, crypto-currency, crypto, or coin is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.”

But why is there such an interest in cryptocurrencies? Here is a summary of the main reasons:

  1. It is not a ‘fiat’ currency. This means that it is not a currency controlled by a government - i.e. legal tender, like the Dollar, Pound or Euro. This of course means that because it isn’t backed by a government institution like the Bank of England, its value can vary wildly, as indeed it has recently, just like stock prices. This is why it is considered a more risky form of investment, and some would say a form of gambling. So, in short - it’s owned by everyone and no one: it is decentralised. HMRC refers to cryptocurrency as “DeFi” - Decentralised Finance.
  2. It is almost impossible to manipulate or forge. Unlike centralised ‘fiat’ currencies, which can be forged and manipulated because of a ‘centralised ledger’, crypo’s decentralised basis means there is no central ledger, as it is ‘distributed’, in fact, it’s part of each transaction.
  3. The power of the Blockchain. It’s worth spending a little time understanding the blockchain if you’re considering investing in crypto currencies. A good summary can be found here.

 In short though, the blockchain is a powerful piece of mathematics that encrypts and keeps track of each transaction. Every transaction has a unique code called a ‘hash’ and forms a ‘block’ of information. The block is added to the chain, which is the public database where all blocks are stored. Blocks are added to the chain chronologically and distributed worldwide among millions of computers.

This is why it is almost impossible to forge or manipulate, because someone would have to control a majority of those computers in order to change the blockchain. This would also take an enormous amount of computer resources. The bigger the block chain becomes over time, the harder it is to crack.
  4. Privacy. While cryptocurrencies use mathematics to track transactions between parties, powerful encryption keeps personal information private, in this case the identities of the parties crypto ‘wallets’. This is one reason why cryptocurrencies have drawn bad press because it is the favoured currency of criminal gangs, money launderers and extortionists.
  5. Reduced reliance on the banking network. We’ve all experienced at one time or another, the problems traditional financial institutions have. This ranges from account access issues to network outages, hacked accounts and of course, bank failures, although thankfully less common. Basically, banks are a single point of failure in a system millions of people rely on daily. Cryptocurrencies were intended as a way to move away from this centralisation, making the transaction between two parties, just between the two parties - no middle men. This is another reason why governments and banks are concerned about the rise of crypto.
  6. Money transfer. Sending money to somebody internationally can be a real pain. Even though it is an electronic exchange processed in milliseconds, the institutions still want to charge an ‘arm and a leg’ for the service. Once you understand the process, crypto transfers are very smooth, and you don’t have anyone looking over your shoulder at the amounts or where they came from - no freeze on funds while the bank checks authenticity or reports high value fund moments to the government.

This all makes cryptocurrencies look like fantastic monetary vehicles, and they are, but they’re not without downsides. The main ones are these:

  1. It’s still early days and governments still have the ability to impose regulations over their use.
  2. If you lose your virtual wallet or accidentally delete your currency, game over. For instance the story in the press about a man whose hard drive with £210 million worth of cryptocurrency ended up in the local landfill.
  3. Volatility. The value of a crypto currency can change dramatically quickly.
  4. There’s no regulation in the crypto market, e.g. the FCA and therefore no comeback if a currency disappears or is withdrawn. Your investments are like stocks, can go up or down and are not insured like money in the bank.
  5. The crypto exchanges - the places where currencies are bought and sold, are not immune from hackers. Wallets stored online (hot wallets) can be lost. This is why many investors prefer ‘cold wallets’ - those stored offline - like the man in the press.
  6. Crypto currencies are often the target of scams on social media, with fraudsters trying to trick people into investments using crypto - precisely because they can be traced.

What are NFT’s and are these the same as crypto currency?

We won’t go into detail here as NFT’s are another deep subject to explore, but here’s a quick answer to this question.

NFTs or ‘non-fungible’ tokens are digital assets. This asset represents a real-world object, such as an image, a video, a music file. The digital files that carry the ‘work of art’ are encoded using the very same technology as crypto currencies, but that’s where the similarity ends - they are not currencies. NFTs use crypto currencies to facilitate the sale and purchases of the assets.

Fungible vs non-fungible

Simply put, fungible assets are divisible and non-unique. Cryptocurrencies like BitCoin are fungible as they can be sold in increments. Non-fungible assets are unique items and can’t be divided, like image or video or digital artwork.

NFT’s can be bought and sold just like any other form of investment asset and through exchanges just like crypto currency. Buying and selling NFT’s will however be treated the same way for tax purposes as cryptocurrency.

Should you invest in crypto currencies?

Firstly, Tax Agility is not an investment advisor and so no guidance should be inferred here, what follows is just for interest. 

The relative newness of crypto makes some nervous about significant investments. That said, some of those who dipped their toes in early in this market made absolute fortunes. There are still a lot of opportunities to potentially experience significant gains (and losses), sometimes in the 000’s of percent.

However, like any investment strategy, one should maintain a healthy spread of investments to help offset losses in any one asset. Crypto could be a part of a broader investment strategy, perhaps your more risky investments with potential for high upsides and losses. In short, make sure your eyes are wide open when considering this investment.

The other key point to make here and the original reason for this post, are the tax implications of cryptocurrencies. If there’s a sudden rise or fall in a crypto asset and you decide to exit, you’ll be liable for any gains made. Depending on the value of the crypto asset, this could seriously impact your personal tax circumstances. While this is also true of assets in the form of stocks and shares, the extreme volatility experienced in crypto markets is less frequent in regular investments and so allows for at least some planning or recovery time, and generally allows you to plan a more regimented exit with tax planning considerations. Dumping a large crypto asset in panic, simply because there’s little history in this market, is potentially a different proposition for some.

How are cryptocurrencies and crypto based assets taxed in the UK?

The government’s Cryptoassets Manual provides very clear guidance as to how taxes will apply depending on the circumstances and whether it’s a business or individuals involved.

At the core of this is whether or not a ‘trade’ is being carried on. Profits arising from cryptocurrency asset transactions will be considered as either income or capital gains or for a business, a chargeable gain.

HMRC’s Cryptoassets manual can be found here.

Cryptoasset taxation for individuals

Income from cryptocurrency trading

HMRC makes it clear that only in exceptional circumstances would individuals buying and selling cryptocurrency tokens (such as BitCoin) be considered trading. This would mean that an individual would need to be trading at considerable frequency and be using a degree of sophistication in the tools they use. This is more akin to a financial trading company than an individual, although some day traders may fall into this bracket.

HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.

If the individual can prove that they are indeed trading, then the profits arising from the activity would be considered ‘trading profits’ and be considered as regular income, and therefore subject to income tax.

Most scenarios involving crypto currency trading are likely to be treated similarly to a trade in shares (investments) and therefore profits arising would be treated as capital gains and incurring capital gains tax.

In what other situations would crypto assets be considered as personal income?

Cryptoassets earned through employment

If an employee receives crypto assets as employment income, HMRC considers this as “money’s worth”. As such, this income is subject to both income Tax and National Insurance Contributions based on the value of the assets.

What happens if the employee then sells the asset acquired as employment income?

Profit arriving from the disposal of a cryptoasset token is treated as a capital gain(or loss) and subject to Capital Gains Tax.

Tokens earned through mining activities

Yes, you read that correctly - ’mining’. BitCoin, for instance, has to be ‘dug up’ or mined. This is way beyond the scope of this article, but in simple terms: each ‘coin’ is based on a unique identifier ID derived from a complex mathematical calculation. It’s rather like looking for prime numbers, the bigger they are the harder they are to find and the more computing power it takes to find them. Crypto miners invest significant sums of money in mining equipment - basically very fast, powerful computers used to crunch the numbers. These are not only expensive, but power hungry too and so the rarer a coin - such as BitCoin which has a finite number of 21 million coins (not reached yet), the greater the potential value.

However, many private individuals have tried their hand at crypto mining and need to understand how profits from this activity may be taxed.
As stated earlier, even if you consider your mining activities as ‘carrying on a trade’ and expecting profits to be treated as income rather than capital gains, HMRC will look closely determine this based upon a range of factors, including:

  • Degree of activity
  • Organisation
  • Risk
  • Commerciality

In reality, to show that a trade is being carried on, you’ll need to show significant investments in computing equipment and organisation around it, rather than the activity being based on your home computer being used in its spare time for mining activities.

If you can show a reasonable basis for trading, then any profits will be treated as regular income, otherwise CGT will be applied.

How do you report profits made from the sale of Cryptoassets?

For individuals, this will be reported through the SA100 Self Assessment tax return, specifically supplementary pages SA108 which is used to report capital gains.

Cryptoasset taxation for businesses

Even though cryptoassets may be referred to as ‘currencies’, HMRC does not regard them as such. Instead, HMRC treats cryptocurrency as a traditional asset for tax purposes.

Whether or not the sale of a crypto asset is deemed profit from a trading activity or simply a chargeable gain (or loss) from the sale of an asset, will depend on how HMRC views your firm’s activities. So, the same ‘badge of trade’ tests will be applied.

To trade or not to trade

HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.

For most businesses, it’s likely that the sale of a cryptoasset will be treated as a chargeable gain (or loss), just like regular assets, rather than income from a trade. As such, any expenses associated with the asset may be set against the profit, or indeed any losses incurred in the sale.

More information can be found in the Government’s Cryptoassets Manual for businesses.

Reporting gains made from the sale of cryptoassets is exactly the same as that of the sale of a regular asset and would be shown in your year end company accounts as such.

Whether you’re an individual selling crypto assets or a business trading in business assets, Tax Agility can help

The tax regimes around cryptoassets are still in relative infancy. HMRC, as indeed are many tax authorities around the world, is continually reviewing the development of this new area of finance. If and when HMRC begins to treat cryptocurrency like other fiat currencies is anyone’s guess.

For many, how investments like crypto are taxed can be a little confusing, but rest assured that if you have made investments in crypto, either as an individual or a business, and have received profits or losses from trading them, Tax Agility can help you in reporting them in the correct manner. Just give us a call today on 020 8108 0090 to discuss how we may assist.