Undisclosed profits/sec 455/penalties

Undisclosed profits/sec 455/penalties

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HMRC Enquiry into a company has resulted in undisclosed profits, added back. Therefore, corporation tax underpaid. HMRC say the funds should be debited to director's loan (arguable in this particular case, but assume this is accepted). Therefore, sec 455 tax underpaid (an accumulation over several years, so well past 9 month limit).

Inspector wants to impose penalty of 35% on both the corporation tax AND the sec 455 tax.

Is this right?

Thanks.

Replies (8)

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By User deleted
01st Jun 2015 19:51

Please can you explain what all makes up undisclosed profits and how that becomes a loan to a participator?

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By johngroganjga
01st Jun 2015 22:54

Double entry
Presumably because the diverted sales are assumed to have been taken by the director.

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Stepurhan
By stepurhan
02nd Jun 2015 08:44

What arguments against?

What arguments do you have against these penalties?

You seem to have accepted there are undisclosed profits and that those profits have gone to the director. You say the latter is arguable, but I'm not sure on what basis, the undisclosed profits have to have gone somewhere, and DLA is the most obvious candidate. These profits have been discovered by the enquiry, so prompted disclosure. Are they alleging deliberate and concealed, or just deliberate? Simple carelessness seems to be off the cards, as the penalty is above the maximum level for that already. If deliberate and concealed then you are right at the low end and should probably take the offer now.

 

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By JulieY
02nd Jun 2015 09:26

Thanks for the answers.

I was more concerned with whether the penalty could be imposed on BOTH the corporation tax AND the sec 455 tax.

Any advice?

 

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By User deleted
02nd Jun 2015 10:33

So it's pretty clear now - what was the company's income has been, well ..... by the director/participator, and Almighty HMRC are arguing that it's s.455 payment. 

Not necessarily.

You could argue applying s.62(2)(b) ITEPA/03 that it was gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth or c) anything that constitutes an emolument of the employment. The argument is that he got this money by virtue of the employment!!! 

On that basis claim a deduction from the undisclosed profits! However, before you go down this route make sure that, the sums do add up, and it doesn't push the director in to the 45% band.

Edit: If still you can't get out of s.455 then return the money and claim the s.455 tax back. Penalties may apply by virtue of s.455(2) and Sch 24, Para 2(3)(c) FA/07

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Stepurhan
By stepurhan
02nd Jun 2015 09:57

s455 penalties

I've not come across penalties for unpaid s455 before, but they are apparently possible.

That being the case, I cannot see a reason for them both not being subject to penalties. The fact is that the undisclosed profits have led to both being underpaid. You are not being penalised twice for the same thing. You are being penalised for two separate things, undisclosed profits and an undisclosed overdrawn loan account.

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By JulieY
02nd Jun 2015 10:49

Thanks again.

Is there any chance of arguing that the sec 455 tax underpaid was a "careless error" because this is just a knock-on effect from the main issue? Even if the main error was deliberate but not concealed?

Careless errors can perhaps be suspended?

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Stepurhan
By stepurhan
02nd Jun 2015 10:57

Slim

They deliberately failed to disclose profits, then they only "carelessly" took the money themselves? You can try, but I don't fancy your chances.

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