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Clients are often tempted to extract funds from their own companies as loans. That can make sense on a temporary basis, but if the director’s loan account (DLA) is not cleared by the corporation tax payment date, a charge under CTA 2010 s. 455 is due at 32.5% of the loan.

HMRC has noticed that some company directors are trying to avoid the section 455 charge by moving the debt around their associated companies.

Example 1

Sam owns all the shares in Alpha Ltd which in turn owns all of Beta Ltd. Sam has an overdrawn DLA with Alpha of £1m. Just before the section 455 charge bites, Sam borrows £1m from Beta and clears his loan from Alpha.

In a year’s time, to avoid the section 455 charge due to be paid by Beta Ltd on his overdrawn DLA, Sam borrows a similar amount from Alpha, pays-off the Beta loan and so the debt circles round and round the group.

HMRC is clear that this circulation of the debt doesn’t avoid the s. 455 charge, as the substitution of a fresh debtor, for the original debtor, does not constitute repayment (Corporation Tax Manual CTM 61602).

In Example 1 the section 455 charge is payable by Alpha Ltd as the debt has not been repaid. If the debt has grown while held by Beta Ltd, then Beta will be due to pay the s. 455 charge on the additional amount.

An alternative way to clear the DLA is to transfer an asset from the director to the company, but as this is a connected party disposal the asset must be transferred at open market value.

Example 2

Jo is the only shareholder of Gamma Ltd, and has an overdrawn DLA of £2m. Jo also owns shares in Delta Ltd which she claims are worth £2.5m. Jo transfers her Delta shares to Gamma and this transfer clears the overdrawn DLA.

However, HMRC discovers that the Delta shares are only worth £250,000. This means the overdrawn DLA was only reduced to £1.75m on the transfer of the Delta shares to Gamma, and a s. 455 charge is due.

Written by the Tax Advice Network

An ‘umbrella’ company may act as an employment agency in sourcing workers, but its core role will normally be to pay the contractors or temporary workers.

Businesses that hire temporary labour either directly from umbrella companies or employment agencies need to be aware of potential tax avoidance in the supply chain. The umbrella may quote a price for the work which seems unreasonably cheap, because it is not deducting all the tax required from the worker.

We advise clients to educate their workers about possible tax avoidance schemes operated by umbrellas. One way to check for a tax scheme is to compare the payslip the worker receives with the pay details provided by the umbrella to the hiring company.

Look out for elements of the pay described as:

• loans
• grants
• salary advances
• capital payments
• credit facilities
• annuities
• profit shares
• shares and bonuses
• amounts held in a fiduciary capacity

These could all be indicators of untaxed pay and the operation of a tax avoidance scheme.

Workers and businesses can both get scammed by clones of legitimate umbrella companies. The clone company is set up with a very similar name to a legitimate company. It then attempts to convince the hirer that the legitimate Co has changed its bank account so it can receive misdirected payments.

If a company is a clone company set up only to commit fraud is unlikely to have:

• Companies House history– check exact company number and names of directors
• Filed accounts
• Website or social media presence – check physical address and contact details
• Membership of professional bodies or trade association – check with the bodies for the exact company name
• VAT registration – ask to see registration certificate

The clone company is also likely to have:

• Directors based outside of the UK
• Directors who hold multiple positions in many companies
• An address at a residential property that has many companies registered there.

Written by the Tax Advice Network

If you have underclaimed furlough pay for employees this can be corrected by amending the CJRS claim within 28 days of the end of the calendar month the claim relates to, so by 28 October 2021 for September 2021 claims.

What if the employer used the wrong reference pay to calculate the claim, and has underclaimed for earlier months? In most situations you are too late to amend the CJRS claim, but if the employer has also over-claimed furlough pay for a particular month it may be possible to set-off the over and under claimed amounts.

HMRC has just agreed with the professional accountancy bodies that off-sets are possible, and has updated its guidance on this point. In summary the correction of CJRS over and under claims must be made as follows:

• An under-claimed amount needs to be actioned as an amendment an existing claim within 28 days of the month it relates to.
• Over-claimed amounts need to be repaid to HMRC within 90 days of receiving the funds to avoid a penalty being imposed.
• Set-off of under-claims against over-claims is only possible within the same claims period – ie the same calendar month.

It appears from the new guidance that if the under-claim exceeds the amount of over-claim for the month, then the excess cannot be claimed from HMRC.

Where the employer has under-claimed for furlough pay, he must ensure that the correct amount is paid to the employee. If the employee doesn’t receive the correct amount of pay the entire CJRS claim for that employee for that month could be invalidated, and the employer will have more to repay to HMRC.

HMRC are now actively pursuing fraudulent CJRS claims.

Written by the Tax Advice Network

The Fifth Money Laundering Directive (5MLD) was been implemented in the UK on 6 October 2020. This means that all UK express trusts, both taxable and non-taxable, now need to be registered in the Trust Registration Service (TRS) unless they are specifically excluded.

Non-UK trusts must also be registered in the TRS if the trust:

• Acquires land or property in the UK; or
• Has at least one trustee resident in the UK and enters into a business relationship in the UK.

The limited exclusions to the requirement to register non-taxable trusts are set out in the Trust Registration Service Manual (TRSM23000).

The TRS opened for registration of non-taxable trusts on 1 September 2021.

Where a non-taxable express trust is not excluded it must be registered in the TRS by the following deadlines:

• Trusts in existence on or after 6 October 2020 – register by 1 September 2022.
• Trusts created after 1 September 2022 – register within 90 days of creation.

When the trust’s circumstances or details are changed, those changes must be amended in the TRS within 90 days of the change.

Written by the Tax Advice Network

The VAT default surcharge system can create some very unfair charges for late payment where the delay in getting the money to HMRC is as little as one day. The new late payment rules may be fairer, but they could hit small businesses much harder as there will be no easement where turnover is low.

• All businesses will get a 15-day grace period to pay their VAT bill. If the VAT arrives with HMRC within 15 days there is no penalty at all.
• VAT unpaid after day 15 triggers an automatic penalty of 2% of the unpaid amount – no warning notices, no default periods, a flat 2% charge.
• VAT unpaid after day 30 triggers another automatic penalty made up of the over 15-day 2% penalty plus an over 30-day 2% penalty, which together amount to 4% of the late paid tax.
• Any VAT still outstanding at day 31 creates a daily penalty that increases at 4% per annum of the outstanding debt.

HMRC is planning to beef-up its automatic Time To Pay (TTP) offering. If a TTP agreement is reached the clock stops at the rate of penalty in force when the TTP agreement starts.

For example if a TTP agreement is reached within the first 15 days, no penalty is levied at all. Also for the first 12 months of the new regime taxpayers will have up to 30 days to agree a TTP with HMRC, and accrue no penalties.

If the taxpayer has a reasonable excuse for late payment, they will be able to communicate this excuse to HMRC (presumably through the MTD compatible software), and the penalty will not be assessed. All penalties can be appealed.

In addition to the late payment penalty the taxpayer will also be charged interest on any tax paid late at the rate of 2.5% plus the Bank of England base rate. This is in line with other taxes.

This new late payment regime will apply to income tax payable under self assessment form 6 April 2024, for taxpayers within MTD, and from 6 April 2025 for all other income taxpayers who are in self-assessment.

Written by the Tax Advice Network

The VAT default surcharge system, which applies to late filing and late payment, doesn’t fit with the structure of penalties for other taxes. HMRC has been planning to reform VAT penalties for some years, and the shake-up in VAT reporting under MTD seems an ideal time to bring in this change.

For VAT periods beginning on and after 1 April 2022 the taxpayer will only be subject to a financial penalty for late filing if they have accrued sufficient points for being tardy with a certain number of returns. The points threshold depends on the submission frequency of the return:

Submission frequency	Penalty threshold	Period of compliance
Annual	2 Points	24 Months
Quarterly	4 Points	12 Months
Monthly	5 Points	6 Months

Where the business is submitting quarterly VAT returns, it can submit up to three late VAT returns with no penalty, but on the fourth late submission an automatic financial penalty of £200 is triggered. Also every late submission after that threshold has been breached will trigger another £200 fine, but those additional penalties will not add points to the points slate.

Each point will expire after two years, and this lifetime clock starts running from the month after the month in which the late filing occurred, not the month when HMRC tell the taxpayer the point has been levied. HMRC has 11 weeks to levy points after the quarterly filing deadline is missed, 48 weeks for annual filings, and just two weeks to monthly filings.

The points slate can only be wiped clean when the taxpayer achieves both of:

• No late submissions for a period of compliance; and
• All returns filed for the previous 24 months, even if they have been filed late.

The period of compliance varies with the submission frequency of the return as shown in the table above.

Where the VAT return is a one-off form to report a particular transaction, this will not accrue a late-filing point.

All points and penalties can be appealed.

This system of “points means penalties” for late filing will also apply to MTD ITSA submissions from 6 April 2024.

We have just over two years to get used to this new system before it expands to cover the majority of our clients under MTD. Clients who fail to file quarterly under MTD ITSA will soon be hit with high penalties.

Written by the Tax Advice Network