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Clients who have undeclared tax that they owe to HMRC and who do not qualify for a current campaign, such as the Let Property Campaign, can make use of HMRC’s Digital Disclosure Service (DDS). It is always better to tell HMRC about undeclared income and gain than to wait to be found out.

The DDS can be used by individuals and companies to tell HMRC about income tax, capital gains tax, National Insurance or corporation tax that is due. To make a disclosure, a client must:

• notify HMRC that they want to make a disclosure by completing the DDS form;
• disclose details of undeclared income and gains within 90 days of notifying HMRC that they want to make a disclosure;
• make a formal offer; and
• pay what they owe.

HMRC have produced an online calculator which can be used to work out the interest and penalties that will be payable in addition to the undeclared tax. The maximum penalty that may be charged in 100% of the tax liability of the income and gain arose in the UK and 200% of the tax liability for offshore income and gains. The penalty may be reduced to take account of circumstances. Penalties are not charged if the client took reasonable care to ensure that their tax affairs were correct. However, if HMRC do not think that the right penalty has been included within the disclosure, they may reject it. Interest is not charged on penalties unless they are paid late.

When making the disclosure, it is important that the client completes the declaration. As part of the disclosure, the clients makes an offer to pay their outstanding liabilities. The acceptance of the offer by HMRC creates a legally binding contract between the client and HMRC. Payment must be made, using the payment reference number (PRN) given to the client when they made their disclosure, no later than the 90-day deadline given on the notification acknowledgement letter.

Written by the Tax Advice Network

Since 6 April 2019, VAT-registered clients whose VATable turnover is above the VAT registration threshold, currently £85,000, have been required to comply with MTD for VAT. This means that they must keep digital records and provide their VAT return information to HMRC via MTD-compatible software. Once a client has joined MTD for VAT, they must remain within it even if their VATable turnover falls below the VAT registration threshold.

Hitherto, MTD for VAT has been optional for VAT-registered businesses whose turnover has remained below the VAT registration threshold. However, once a client has opted to join MTD for VAT, they must continue to comply with the requirements.

The next stage of MTD for VAT is its extension to VAT-registered businesses with VATable turnover below the VAT registration threshold who have not opted to join MTD for VAT voluntarily. From their first VAT period starting on or after 1 April 2022, such clients (which may include self-employed clients and landlords) will be required to operate MTD for VAT.

VAT-registered clients not already within MTD for VAT will need to prepare to join. This will include maintaining digital records if they do not already do so and, where they file their own VAT returns, sourcing MTD-compatible software.

Clients who have chosen to register for VAT voluntarily and whose turnover is likely to remain below the VAT registration threshold may wish to assess whether, in light of the obligations imposed by MTD for VAT, this remains beneficial. If they decide that remaining VAT-registered is no longer worthwhile, for example, where the costs of complying with MTD for VAT outweigh the VAT recovered as a result of their registration, they should de-register prior to the start of their first VAT period starting on or after 1 April 2022.

Written by the Tax Advice Network

On 8 September 2021, the Prime Minister outlined the Government’s plans for health and social care, including a new funding strategy designed to meet social care costs. The plans include increasing National Insurance for employers, employees and the self-employed by 1.25% for 2022/23 only, before launching a new social care levy of 1.25% from April 2023, and raising the dividend tax rates by 1.25% from April 2022.

For clients with personal and family companies, extracting profits as dividends once a small salary has been taken is a tax-efficient strategy. One of the advantages of taking dividends rather than a higher salary is that dividends do not attract National Insurance. As the salary level is typically set at a level such that little or no National Insurance is payable, the planned increase in the dividend tax will have the effect of collecting a social care levy from clients who effectively pay for themselves in dividends. However, it will also affect clients with share portfolios, who may also be paying higher National Insurance contributions on their salaries or self-employment profits.

As the planned increase in dividend tax does not take effect until April 2022, it is possible to plan ahead. Clients with profits to extract may wish to take dividends before 6 April 2022 to take advantage of the current dividend tax rates. This may be particularly advantageous where the client has not used all of their basic rate band. Where an alphabet share structure is in place, dividends can be tailored to utilise the basic rate band and dividend allowances of family members who are also shareholders, providing other options for extracting profits prior to April 2022. If there are significant retained profits to extract and it is likely that the basic rate band will be used for the foreseeable future, again it may be worthwhile extracting profits prior to 6 April 2022 to save tax of 1.25%, even where the dividends are taxed at the higher dividend rates. This may be worthwhile if the funds are likely to be needed outside the company.

When planning ahead, clients should also be mindful of the corporation tax changes that will apply from 6 April 2023, increasing the rate of corporation tax payable where profits are more than £50,000. As dividends are paid from post-tax profits, a higher rate of corporation tax will reduce the profits available for distribution as dividends.

Written by the Tax Advise Network

HMRC believes there is a high level of VAT fraud by firms that supply temporary workers or site labourers. Recently there have been a number of reports of HMRC blocking VAT recovery on the grounds that the invoice was invalid, which is often for the supply of staff or labour.

What must be included on a VAT invoice is set out in reg 14(1) of the 1995 VAT regs. Most of the requirements are straight forward, but there is room for HMRC inspectors to quibble about the details required in subsections (g) and (h):

(g) a description sufficient to identify the goods or services supplied,
(h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in sterling,

There needs to be enough detail in the description for an independent observer (eg HMRC inspector) to identify and quantify the service provided, so the invoice needs to say a bit more than just ‘labour supplied’ or ‘staff supplied’.

An invoice for labour should as a minimum give the number of workers, number of hours (or days) worked, the dates of the work and the site address. The HMRC guidance says it may not be reasonable for invoices to include details of the nature of the work undertaken, but it does expect the invoices to cross reference to other documents that may show this detail, such as timesheets that show the workers’ names, or supporting schedules detailing what was done.

In practice HMRC officers may appear to be ignorant of this advice, so its worth pointing it out where an invoice is queried.

However, to avoid HMRC raising questions about invoices we advise our clients who supply workers, to populate their invoices with a little more detail and cross reference where possible to contracts or timesheets.

Written by the Tax Advice Network

We outlined the new provisions that allow income tax trading losses to be carried back up to three years (instead of just one), on 11 March 2021. This law has now been enacted in FA 2021, Sch 2 and HMRC has updated its guidance on how to claim those losses.

Only trading losses can be carried back up to three years, and they must arise from a commercial trade which was carried on with a view to a profit. Farmers and market gardeners must not have made a loss before capital allowances in any of the preceding five tax years.

The loss must be set against trading profits in the preceding three years, using profits of the most recent years first. One claim can cover all three years.

Before opting for the three-year loss carry back, check whether a claim under ITA 2007 s 64 to set the loss against the taxpayer’s other income of the same or previous year would be more appropriate. Note the s 64 claim may waste personal and saving allowances.

Carrying back the loss does not actually reduce the tax payable for the earlier years, but instead creates a stand-alone tax credit, which is reflected in the calculation of tax for the later year when the loss arose.

This means the re-calculation of the tax liability in the earlier years is purely notional, carried out to find the difference between the tax as per the tax return filed and the new notional tax liability based on the loss carry-back claim. The tax return figures for those earlier years are not altered at all. Any interest charges raised on late paid tax in 2018/19 and 2019/20 are unaffected by the loss carry back claim as the tax due for those years has not been amended.

The class 4 NIC due for the earlier years is not refunded, but the loss is carried forward for the purpose of class 4 NIC only. This NIC relief is claimed in box 102 of the SA tax return.

Written by the Tax Advice Network

The hospitality and tourism sector has been enjoying a reduced rate of VAT (5%) since 12 July 2020. It applies to most supplies made by hotels, tourist attractions, members’ clubs and most places that host events. It also applies the food and drink served in those premises, hot takeaway food and drink, but not alcoholic drinks.

This 5% VAT rate will increase to 12.5% on 1 October 2021, to apply until 31 March 2022. This rate rise provides hoteliers and event organisers with an opportunity to promote advance payment for events, hotel rooms and even meals.

Any advance payments, or non-returned deposits, must carry VAT at the rate applicable when the payment is taken. This is confirmed in section 7 of VAT notice 709/3: Hotels and holiday accommodation.

For example, a members’ club which is hosting a fund-raising dinner in October at £180 per head (including VAT), could offer a £12 discount for those who pay in full for their tickets before 1 October.

Ticket net of VAT: £160, including 12.5% VAT = £180, including 5% VAT = £168

The same principle applies to Christmas events booked in advance. If you are planning to offer party events or hotel rooms over the winter holiday, suggest they get their advertising campaigns up and running now with a discount option for early booking.

Written by the Tax Advice Network