In a recent case heard by the Upper Tribunal, Interfish Ltd were denied tax relief for sponsorship payments made to a local rugby club, Plymouth Albion.

The sponsorship payments were significant; over £1.2m over a number of years. The payments were used to fund the purchase of players as well as propping up the club’s finances.

During the hearing it became apparent that Mr Colam, the managing director of Interfish Ltd, was a staunch supporter of the club and had personally purchased shares that allowed him a measure of influence at board level.

In their judgements both the First Tier and Upper Tribunal panels held that the payments had been made with a duality of purpose and not, as the law demanded, wholly and exclusively for the purposes of the company’s trade.

Accordingly, the payments to the rugby club were disallowed for corporation tax purposes. Readers who may be contemplating large sponsorship payments should ensure that they take advice before signing the cheque!
 

In March 2012 George Osborne and his Treasury advisors took a risk. They announced that on 6 April 2013 they would be reducing the additional rate of income tax from 50% to 45%. The Treasury was criticised at the time because the expected tax take from higher income earners was expected to fall in line with the reduction in the 50% rate. What the pundits underestimated was the incentive that the rate reduction offered to release bonuses that were not taken in the 2012-13 tax year.

Official figures for the growth in annual earnings shows that in April 2013 bonuses were up over 60% on a year earlier. Additionally, receipts from income tax and capital gains tax in the first quarter, April – June 2013, increased from £30.8bn (April – June 2012) to £33.6bn.

A significant proportion of this increase can be attributed to income shifting – delaying bonuses for the 2012-13 year until the rate dropped on 6 April 2013.

This would seem to demonstrate that high income earners have far less resistance to paying tax at a marginal rate of 45% than 50%. It also lays the ghost that rails against tax decreases on the basis that this will inevitably lead to a reduction in taxes collected.

The Government have launched yet another consultation, this time they are considering changes to the way in which loans to directors and shareholders of small companies are taxed.

Currently, if these loans are unpaid at the end of the company’s accounting year, an additional corporation tax charge equal to 25% of the loan outstanding will be payable unless the loan is repaid within nine months of the accounting year end date. If a loan is repaid after nine months the 25% tax will be refunded – although the refund process can be a drawn out affair.

One alternative now being considered is to increase the 25% rate to 40% and levy an additional permanent charge of 5%, on either the balance outstanding at each year end or on the average loan balance over the year.

The intention would seem to be to discourage these types of loans and instead increase remuneration in the form of salaries or dividends.

Any changes are likely to be included in the Finance Bill 2014.

MPs have been criticising the Treasury regarding their handling of the compensation scheme for Equitable Life policy holders. On its own admission the Treasury estimates that between 17% and 20% of eligible policy holders may not receive the compensation they are due as they cannot be traced.

The current Equitable Life Payment Scheme is due to close March 2014. Any policy holders who have not been compensated by this date will lose out.

MPs were particularly annoyed that the Treasury had not taken advantage of data offered to them by the Equitable Members Action Group. They had provided contact details for 350,000 policy holders. The data was not used due to concerns about Data Protection.

Further, the Treasury does not intend to publicise the formal closure of the scheme until September 2013, which limits the time for unpaid policy holders to respond and file an application for compensation.

If you have had a qualifying policy and have received no compensation as yet, take a look at the Equitable Life Payment Scheme website at http://equitablelifepaymentscheme.independent.gov.uk

 1 August 2013 – Due date for corporation tax due for the year ended 31 October 2012.

 19 August 2013 – PAYE and NIC deductions due for month ended 5 August 2013. (If you pay your tax electronically the due date is 22 August 2013)

 19 August 2013 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2013.

 19 August 2013 – CIS tax deducted for the month ended 5 August 2013 is payable by today.

 1 September 2013 – Due date for corporation tax due for the year ended 30 November 2012.

 19 September 2013 – PAYE and NIC deductions due for month ended 5 September 2013. (If you pay your tax electronically the due date is 22 September 2013)

 19 September 2013 – Filing deadline for the CIS300 monthly return for the month ended 5 September 2013.

 19 September 2013 – CIS tax deducted for the month ended 5 September 2013 is payable by today.

We thought readers might be interested to see how well HMRC have done in the last year, collecting our taxes and tackling fraud.

The following statement is reproduced from Parliament’s website and was made by The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, on 2 July 2013.

 “These accounts give us a mixed picture. One of the most startling figures is the tax gap for VAT, which HMRC estimates at £9.6 billion. That is a huge amount of money – 10% of the VAT that should be collected and a third of the overall tax gap. Yet despite some progress, HMRC still does not comprehensively check all VAT returns and its response to the emerging threat from online trading has been far too slow.

I welcome the progress HMRC is making in tackling fraud and error in the tax credit system, but with £2 billion in overpayments last year it still has a long way to go.  And the personal tax credit debt balance is going up, not down. It now stands at £4.8bn, over £1bn greater than the target HMRC hopes to meet by the end of March 2015.

HMRC met its target to operate a normal PAYE service by March 2013, following previous problems. But it had to forego £953.3 million of tax in the process and there remain questions about its capacity to handle in year changes to taxpayer records. I also have concerns about HMRC’s Real Time Information system (RTI), which has been rolled out before being fully tested. HMRC has chosen not to add in contingency for significant extra costs or measures to deal with major technical failure. This is worrying as the current cost of RTI is already expected to be £115.5m more than originally planned. HMRC is leaving itself exposed, which could be a real concern for DWP as Universal Credit relies on RTI.

HMRC is responsible for collecting all the tax due. It must do more to crack down on tax avoidance. And it needs to put taxpayers – the customer – at the heart of its services.”

Holiday businesses in Devon, Cornwall, North Wales, the Lake District and Blackpool area beware: the taxman has set up a further task force to seek out and bring to account business owners who are not declaring the correct information on their tax returns.

 The taskforces are trained to focus on particular business sectors and may have some flexibility regarding the level of penalties they levy – this is likely to depend on how co-operative the defaulting tax payer is during their investigation.

 It would be sensible for holiday businesses to get their house in order.

 HMRC will be interested in a range of compliance activity and taxes. For example:

1. Payroll and PAYE compliance – particularly adherence to the new Real Time Reporting system. For businesses affected they will no doubt be asking questions about tips and gratuities and how these are treated for tax purposes.
2. VAT
3. Record keeping – this will include evidence of income and how this reconciles with booking diaries and systems. Do the numbers add up?

 If your business operates in one of the targeted areas you would be well advised to review your systems, be prepared. Don’t wait until the brown envelope drops through your letter box.

Generally speaking, debts of a person’s estate are deductible for IHT purposes – though there are some circumstances where specific debts cannot be deducted such as where the deceased had previously made a gift to the person who made the loan. Following this year’s Finance Act, which became law on 17 July, there are several changes affecting deaths on or after that date.

 The changes will affect deductions for debt in the following ways:

1. Generally, a deduction will be denied unless the debt is repaid on or after death out of the estate.  However, a deduction may still be permitted where the debt has been retained for sound commercial reasons, and gaining a tax advantage was not one of the main purposes for keeping it.

2. Debts will not be taken into account as deductions for IHT purposes if they were taken out to purchase, maintain or enhance property excluded from IHT. If, however, the amount of the debt exceeds the value of the excluded property, and is not perceived to have a tax avoidance motive, then the balance may be allowed as a deduction.  This will affect relatively few people.

3. Debts taken out to acquire property which benefits from business property relief or agricultural property relief must first be deducted from the value of that property with only the balance being deductible from the chargeable estate.  Previously, debts were deductible from the value of the property on which they were secured (which was usually chargeable) rather than from the property they were used to acquire, so this change means that such debts may no longer obtain the IHT savings they previously did.  However, following a change to the original Finance Bill, this particular rule only applies to debts incurred on or after 6 April 2013 – so arrangements existing at that date remain effective.  Even so, this change will affect many who are farmers or run their own businesses (whether as sole traders, partnerships or companies) and take out new finance or possibly reorganise existing finance.

These changes could have a significant impact on estate planning. We recommend that any individual who is relying on a debt reduction to minimise future IHT payments should seek advice.

If you have been sent a tax return for any tax year up to 5 April 2012, and it has not been submitted, you may want to consider taking part in this campaign.

 In a nut-shell HMRC are offering to look kindly on any penalties chargeable, as a result of late filing or late payment of any taxes due, as long as you submit all outstanding returns and pay any taxes shown to be payable.

 To take part in this offer is fairly straight forward:

1. Firstly, you need to advise HMRC that you want to take part in the campaign – we can do this for you.
2. Secondly, you will need to complete and submit all the outstanding returns – again we can help.
3. And last, but not least, you will need to pay any taxes due.

 There is a deadline you need to consider; you must complete all of the three stages set out above by 15 October 2013.

 HMRC have offered to consider extended payment plans if your individual circumstances warrant this requirement.

 Of course it may be that you are due tax refunds for certain years, and this will be determined when your returns are completed, in which case HMRC will make appropriate refunds to you. However, any refunds of tax for 2008-09 and earlier are time barred and cannot be repaid unless you have received an estimated determination of taxes due within the last twelve months, and this is greater than the tax found to be due.

HMRC’s Connect software system provides data to underpin efforts to tackle tax fraud. It cost a mighty £45m to install in 2009 and by 2011 it had contributed to the assessment of £1.4bn in additional tax revenues.

Connect is purported to have more data at its disposal than the British Library. It is not restricted to taxpayers’ details held in tax records; data is also searched from other Government departments: DVLA, Land Registry and so on.

Connect looks for inconsistencies. For example does the volume of sales on a taxpayer’s eBay account suggest a trade rather than sporadic house-hold disposals; has a property owner bought or sold a number of properties and no property related information declared on their tax return; are taxpayers on declared low incomes purchasing high value motor vehicles?

HMRC can apply a number of diagnostic techniques to the data they collect. Have you heard of the “Chi-squared” test, also known as Benford’s Law? Apparently the number “1” appears as the first digit of smaller numbers approximately 30% of the time – larger numbers less frequently. Traders who fabricate numerical data, for example daily takings, would not observe this random pattern. HMRC inspectors would use this technique to highlight data that appears to be suspect.

The age of data transparency is upon us. If data is recorded it can be linked to systems like Connect and “mined” to highlight likely tax avoiders.