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What can a tax investigation cost my business?

Tax investigations can be incredibly costly, with various elements adding up to create a financial headache for small business owners.

We explain where the different fees can come from, and how your business can protect itself from running into financial difficulty as a result of a tax investigation.

What can a tax investigation cost my business?

Time

While it might not seem like a financial cost at first, a tax investigation can eat up a large portion of your time which will have a cost implication.

You will often be called upon to provide additional information during the investigation, working alongside accountants and other financial specialists to respond to requests. Completing these tasks  can keep you away from your business.

If you’re part of a small team of salespeople or a sole trader for example, this could severely hamper your business and your ability to work -  your ability to sell, offer services to customers and, ultimately, make money.

Putting steps in place to help protect your business can help you get through this process smoothly and help to keep your business afloat during a tax investigation.

Tax repayments

A tax investigation is carried out to  calculate if  you owe any money to HMRC and how much that is. That repayment can vary depending on the findings of the investigation.

You  should also be aware that any repayments you make could be subject to additional fines – especially if the errors in your original tax return were found to be avoidable or deliberately misleading.

Penalties are based on the reason for the error occurring, such as late or inaccurate payments. More serious reasons can incur a much  higher penalty.

For example, if you have provided a tax return that contains a deliberate error, you could be asked to pay a penalty that ranges between 20 and 70% of the extra tax you are required to pay.

This is why accuracy is so important when reporting your finances. Should you owe a large amount in back taxes, then be required to pay a large additional penalty on top of that, because of providing inaccurate information, this could potentially cause problems with your business’s finances.

Additional fees

On top of back pay and penalty fees, you should also take into consideration the additional cost of getting help to deal with your tax investigation.

You might need a specialist to help you work through financial issues in a certain area. This could include a VAT specialist to help you calculate whether you made accurate payments or not.

You should also factor in the general accountancy bills that might build up through the investigation. In some cases, these additional fees can be significantly more than the amount you’re being asked to pay HMRC.

These additional fees, penalties and back payments can mean that your business stands to take a significant financial hit at some point. This can cause a great deal of stress, especially in a lengthy investigation where you’re waiting on a final fee from HMRC, all the while utilising an accountant who has on-going fees to be paid.

VAT implications of paying for staff gym memberships and subsidised healthy meals

Q. My client is a new social media enterprise company and the directors are keen to encourage a healthy lifestyle amongst staff.

To capitalise on all the good intentions and resolutions of January they are to pay for a corporate membership to a local gym and are offering subsidised healthy meals and snacks in their office café. Please could you advise of the VAT implications of these initiatives.

A. Employee rewards and perks are dealt with in HMRC’s manual VAT Input Tax (VIT43700). Here it explains that services provided to staff can be a legitimate business expense, if they are provided mainly to reward or motivate staff.

If so, the VAT incurred is all input tax. No apportionment under s.24(5) of the VAT Act 1994 (VATA1994) is necessary. In some cases, a charge to output tax for private use may have to be made under the Supply of Services Order.

However, HMRC said: ‘Where facilities are provided to all employees strictly for the purposes of the business it is generally not our policy to apply such a charge.

‘But perks provided to specific individuals within a business should generally be subject to an output tax charge to reflect private use.’

Specific guidance on recreational facilities can be found at VIT43950 and here it is confirmed that where sports and recreational facilities are available to all employees, the VAT incurred on the cost of providing the facilities is input tax.

Again it is not HMRC’s policy to apply the Supply of Services Order. If any charge were to be made, then output VAT would be due on that amount.

With regard to staff meals, HMRC’s manual VAT Food (VFOOD5060); paragraph 10 of Schedule 6 of the VAT Act 1994 specifically refers to the provision of food and drink in the course of catering by an employer to an employee.

Where such supplies are made, the value of the supply is the monetary consideration alone, if any, paid by the employee. So where an employee pays for a meal, snack or drink, the supply is standard-rated and the value of the supply is the amount paid.

Where an employee is not required to pay for a meal, snack or drink the value of the supply is nil and no VAT is due.

Additionally, for completeness, following the judgment of the Court of Justice of the European Union (CJEU) in Astra Zeneca (Case C-40/09), where employees pay for benefits under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are exempt or zero-rated.

Subject to the normal rules, the employer can continue to recover the VAT incurred on related purchases. Equally where deductions are made from salary for the benefits, the value of the supply is the amount deducted.

BUYING PROPERTY THROUGH A LIMITED COMPANY: THE PROS AND CONS

It's become quite a trend (and for very good reason). But is it right for you?

The biggest trend that's taken place during my time in property is the huge and sudden shift to people buying properties within companies.

Up until 2015, it was very much a minority choice: there was no compelling need for many people, and mortgages for companies were much less competitive.

But then the changes to the treatment of mortgage interested introduced in the summer 2015 budget happened – which made the company route far more appealing. According to brokers, up to 80% of new mortgage applications are now for limited companies.

It still won't be for everyone, but it's now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let's take a look at the pros and cons…

ARE YOU A TRADER OR AN INVESTOR?

The first important distinction to draw when making this decision is whether you’re a property trader or investor.

If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company.

Why? Because when trading properties as a limited company you will pay corporation tax on your profits – you can find the current rate here. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be a whole lot more (current rates here).

(As an individual you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it, but let’s park that one for now.)

If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

WHY MIGHT INVESTORS WANT TO USE A LIMITED COMPANY?

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. TAX TREATMENT OF PROFITS

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company (which we'll come to later), but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.

2. TAX TREATMENT OF MORTGAGE INTEREST

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.

(The change is being phased in from April 2017.)

The post I've linked to goes into how it all works, but the upshot is that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX

Property held within a company gives more options when it comes to planning for Inheritance Tax. It's all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because of course, there are downsides too…

WHY NOT INVEST THROUGH A LIMITED COMPANY?

1. MORTGAGE AVAILABILITY

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction, lenders are following in order to win their business.

You will still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a dealbreaker than it once was.

2. DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.

But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a hefty whack in dividend tax on what's left (current rates here) in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. EXTRA COST AND HASSLE

Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

HOW TO DECIDE IF USING A LIMITED COMPANY IS RIGHT FOR YOU

Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on three factors:

HOW MUCH INCOME DO YOU HAVE?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

DO YOU WANT THE PROPERTY INCOME TO LIVE OFF?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

DO YOU USE MORTGAGES?

The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.

WHO ARE YOU BUYING PROPERTIES FOR?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

SO THE ANSWER IS, OF COURSE…”IT DEPENDS”

Phew…1,300 words in and we’ve still really only scratched the surface of this whole debate.

If there's one thin we've learnt, it's that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.

Before doing so, you should absolutely speak to us at Cloud Accounting LLP rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.

Going to work in the UK? Tax refunds explained

If you're going to the UK to work it's important to know a few UK tax facts to make sure you don't end up losing your money.

When you start work in the UK you need to make sure you give your employer your National Insurance Number so you avoid paying emergency tax – which is much higher than the normal UK tax rates. Your National Insurance Number (NIN) is the unique number allocated to you by the Department for Work and Pension in the UK. It allows you to work, pay taxes and access public services in the UK.

PAYE and Self-employed tax

Once you start working you will need to pay UK tax either as a PAYE employee (if you're a receptionist, nurse or a teacher for example) or as self-employed person, such as a construction subcontractor.

If you are PAYE your employer should deduct tax from your earnings each time you get paid. If you are self-employed you are responsible for your own UK tax return called a self-assessment tax return. As a self-employed in the UK you can claim back work-related expenses such as work tools, transport and dry cleaning your work uniform.

If you've started work already in the UK you will be paying 20% income tax on earnings above £1830 and 40% on any earnings over £36,401.

Claim your UK taxes back

If you do end up on the wrong tax code and overpay tax in the UK, you can claim this money back once you leave the UK or when the tax year ends on April 5th. You have up to six years to claim any overpaid UK tax.

If you want to find out how much you could be owed, you can use a free online tax refund calculator. To claim your UK tax refund, you need to file a tax return. A tax return is the annual submission of tax forms documenting your earnings, taxes paid, deductable expenses and benefits that you send to the HM Revenue & Customs for review. From this information it is determined whether you have overpaid tax and are owed a tax refund.

The amount of your UK tax refund depends on factors like:

  • Your earnings
  • Your expenses
  • Whether you worked the whole tax year
  • If you had more than one job at a time or changed jobs
  • Whether you have children
  • If your circumstances changed, eg: you became self-employed
  • If you took a break during or between employments

When choosing a tax return company, we recommend that you select companies which:

  • Are HM Revenue & Customs registered agents
  • Have an office in the UK
  • Can guarantee that your tax refund will be 100% legal and safe

Cloud Accounting LLP

Cloud Accounting organises tax refunds for non-residents who work in the UK. We specialise in UK tax returns for PAYESelf-Employed and construction workers.

If you haven't set up your National Insurance Number yet, we can also help you with this.

Cloud Accounting customers get average UK tax refunds of £963 for PAYE and £1453 for construction workers' tax refunds.

How much Income Tax and National Insurance you should pay

As an employee, you pay Income Tax and National Insurance on your wages through the PAYE system. It’s important to check you have the right tax code and are paying the right amount.

  • Do you need to pay Income Tax and National Insurance?
  • How much can you earn before you need to pay Income Tax?
  • How much can you earn before you need to pay National Insurance?
  • What’s the difference between gross and net pay?
  • How is tax and National Insurance paid?
  • How PAYE works
  • What is a tax code?
  • What is an emergency tax code?
  • Tips and bonuses
  • Benefits in kind

Do you need to pay Income Tax and National Insurance?

You can earn a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 0800 138 1677.

In general, not everyone may get the same Personal Allowance of £12,500 for the tax year 2019/20. A tax year runs from the 6th April to the 5th April.

The personal allowance is a fixed amount set against your gross income (your income before tax or any other deductions are taken) that allows you to receive that much income free of tax in a tax year.?

Received a loan from your employer?

This could be seen as tax avoidance and subject to a loan charge. HMRC have asked people who have been part of disguised remuneration schemes to come forward and provide information.

Further support is available on a dedicated HMRC helpline on 0300 0534 226.

However, you might get a smaller personal allowance if your income is over £100,000 or if you owe tax from a previous tax year. You might also get a larger Personal Allowance if you have overpaid tax from a previous tax year.

The Personal Allowance will also be set at £12,500 for 2020/21 and then indexed with the Consumer Price Index (CPI) from then onwards.Find out more about How Income Tax, National Insurance and the Personal Allowance work

How much can you earn before you need to pay Income Tax?

In the UK, the tax system is based on marginal tax rates. That means it’s worked out as a percentage of income you earn inside certain thresholds – you don’t pay the same amount of tax on everything you earn.

As an employee:

  • you pay 0% on earnings up to £12,500* for 2019-20
  • then you pay 20% on anything you earn between £12,501 and £50,000
  • you’ll pay 40% Income Tax on earnings between £50,001 to £150,000
  • if you earn £150,001 and over you pay 45% tax.

*This assumes you have the standard Personal Allowance of £12,500 which is the amount you can earn before paying tax. Your Personal Allowance might be higher, for example if you’ve claimed certain allowances or if you’ve paid too much tax. It could also be lower for example, if you earn over £100,000, the standard Personal Allowance of £12,500 is reduced by £1 for every £2 of income.

For example, if you earn £52,000 a year, you pay:

  • nothing on the first £12,500
  • 20% (£7,500.00) on the next £37,500
  • 40% (£800) on the next £2,000.

You can use GOV.uk’s tool to estimate how much Income Tax and National Insurance you should pay for the current tax year. It can help work out your take-home pay if you don’t have any other deductions, for example pension contributions or student loans.

If you’re self-employed, the self-employed ready reckoner tool can help you budget for your tax bill.

From 6 April 2019 income tax rates will be set by the Welsh Government. These are currently the same as for England and Northern Ireland for the 2019/20 tax year.If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

How much can you earn before you need to pay National Insurance?

National insurance contributions (NICs) are taken from your earned income and essentially help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

If you’re an employee, you’ll need to pay Class 1 NICs on your earnings. In addition, your employer will be required to make a secondary contribution of 13.8% of earnings above £166 a week. There is no upper limit on employer’s National Insurance (NI) payments.

As an employee:

  • you pay National Insurance contributions if you earn more than £166 a week
  • you pay 12% of your earnings above this limit and up to £962 a week (for 2019-20)
  • the rate drops to 2% of your earnings over £962 a week.

For example, if you earn £1,000 a week, you pay:

  • nothing on the first £166
  • 12% (£95.52) on the next £796
  • 2% (£0.76) on the next £38.

If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

What’s the difference between gross and net pay?

Gross pay is the income you receive before any taxes and deductions have been taken out. Your annual gross pay is what’s often referred to as your annual salary.

Net pay is what’s left over after deductions like Income tax and National Insurance have been taken off. It’s what’s often referred to as your take home pay.

You can see what your gross pay was and how much has been taken off (if anything) on your payslip.

How is tax and National Insurance paid?

If your income is more than your Personal Allowance in a year, you have to pay tax.

In general, your Personal Allowance is spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay.

They know how much to take out through a system called PAYE (Pay As You Earn). If it turns out at the end of the year you have paid too much tax, you can get a refund; too little and you will have to pay extra.

Your employer will also make National Insurance deductions from your pay.

This is worked out on a weekly or monthly basis, or however frequently you get paid. Unless there has been a mistake, you cannot get back any of the National Insurance you pay, even if your earnings fall later in the year.

How PAYE works

When you start work, you’ll either need to hand in a P45 form from your last job, or complete HMRC’s new starter checklist, which you get from your employer.

These forms both tell HM Revenue & Customs (HMRC) you’ve started work and will be used to create a tax code.

Your tax code then tells your employer how much tax to take off your pay. The P46 form is no longer used.

PAYE might be used to collect tax not just on your earnings from this job but also on other income you have.

What is a tax code?

The amount of tax you pay depends on:

  • how much income you have
  • how much tax you’ve already paid in the year
  • your Personal Allowance.

Different people have different tax codes, depending on their circumstances.

Every year, HMRC sends out a Coding Notice telling you what your tax code is and how much tax you’ve paid.

You can also find your tax code on your payslip. It’s usually made up of a few numbers and a letter.

How is my tax code worked out?

Your tax code is normally the amount you can earn without paying tax, divided by 10, with a letter added.

For example:

Tax code: 1250L

1250 becomes £12,500 earned before tax.

My tax code starts with BR

You are not getting your tax-free basic personal allowance which means all your income is being taxed at the basic rate of 20%.

This can occur if your employer doesn’t have all the information it needs to work out your tax code.

It doesn’t always mean you’re paying the wrong amount of tax. For example, you may have two jobs and HRMC has allocated your personal allowance against one of these.

My tax code has no number, or starts with D followed by a number

This is usually because you have more than one source of income.

Your Personal Allowance is used up on your main income source, and you pay tax on everything you earn from your second income source.

For example, you might work a main job during the day and do shifts in a pub or work in a factory in the evenings.

If you earn more than £12,500 a year in your main job, your second job will be taxed at the basic rate. This can also apply to pensions or money paid out by investments (dividends).

My tax code starts with K

This means you have tax from the past you still need to pay, or you get money or benefits that can’t be taxed before you receive it, like a State Pension or company car.

From this, your employer can work out how much should be paid towards what you owe.

The amount you pay will never be more than half the amount you’ve earned or received during the pay period (whether that’s monthly, weekly or another period).

What is an emergency tax code?

Sometimes your tax code isn’t right for your circumstances and you might be given an emergency code.

An emergency tax code assumes that you’re only entitled to the basic personal allowance. It’ll mean you’ll pay tax on all your income above the basic personal allowance (£12,500 for 2019-20).

It won’t take into account any allowances or reductions and reliefs you might be entitled to.

This could mean you pay more tax than you should be for a short period of time.

For 2019-20, the emergency tax codes are:

  • 1250L W1
  • 1250L M1
  • 1250L X.

You may be put on an emergency tax code if you’ve started a new job, started working for an employer after being self-employed or are getting company benefits or the State Pension.

If your tax code is one of these, HMRC will automatically update it, but it might mean that for one or two months your pay won’t be the same, so be careful with your budgeting.

How do I check my tax code?

To make sure you’re on the right tax code, check your code matches the Personal Allowance you should be getting.You can check your Income Tax for the current year by using the GOV.UK service.

What do I do if I think my tax code is wrong?

If you think your tax code is wrong, or if you’re in any doubt, contact HMRC.

It’s important you give HMRC all the information they ask for so you don’t end up on the wrong tax code and pay too much or too little tax.Contact HMRC to sort out a tax problem.

If you think you’ve paid too much tax

It’s worth checking how much tax you’ve paid on your wages.If you think you’ve overpaid tax, you can check if you’re due a refund on the GOV.UK website or use the HMRC online tax checker.

Depending on your circumstances, you might be able to ask for a refund using a form, or you might need to contact HMRC directly.Contact HMRC to ask for a tax rebate.

If you think you haven’t paid enough tax

If you think you’ve underpaid tax, then you might have to complete a tax return.

If this is the case, normal self-assessment time limits apply.

To pay an amount up to £3,000 through an adjustment to your tax code for the following year, you should file a return by 31 December following the end of tax year.

Otherwise, tax still due for the last tax year must be paid by 31 January following the end of the tax year in which the income arose.

If you think you haven’t paid enough tax, contact HMRC.

You might be asked to complete a tax return. Be aware if you don’t do this, you will normally have to pay penalties and interest once the underpayment does come to light.Contact HMRC to sort out a tax underpayment.

Tips and bonuses

If you get money through your job that’s not part of your usual wages, like an annual bonus or tips from customers, you’ll have to pay tax on it, and usually National Insurance too.

  • Your annual bonus, if you get one, is treated as if it’s part of your normal wages. You’ll pay tax and National Insurance on it through PAYE, in the usual way.
  • If you get cash tips direct from customers or through a ‘tronc’ system (where tips are pooled and shared between staff members of the pool), you also need to pay tax on them, but not National Insurance, provided the amount you get in tips does not involve your employer. It’s your responsibility to tell HMRC about these tips. They will then give you a new tax code estimating how much you get in tips each pay period, and taxes you on that amount. Find out more about troncs from HMRC (PDF)opens in new window.
  • If a customer gives you a tip via their bank card when paying for a meal or service, and your employer decides whether to share it with you, they are responsible for sorting out the tax and National Insurance. If the employer passes such payments to a tronc, then the rules above apply and no National Insurance is due.
  • A service charge is not the same thing as a tip, because the customer doesn’t choose to pay it. A tip is a payment that’s given freely.

Benefits in kind

Sometimes your employer will offer benefits like a company car or health insurance as part of your remuneration package.

These are known as ‘benefits in kind’.

You might need to pay tax on the value of these benefits.

  • Some benefits are always tax-free, such as employer contributions into a pension scheme for you, or childcare vouchers up to a limit.
  • Some benefits are always taxable. For example, goods that your employer lets you have for free or below cost price.
  • For some benefits it depends. For example, season-ticket loans are taxable if the value of all employer loans you get is more than £10,000 for the year.

CLOUD ACCOUNTING LLP

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