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NEWTH TALKS TAX - AUGUST: Tax writer of the year John Newth solves your tax questions

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29th Aug 2006
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**For more of John Newth's exclusive contributions, visit the Newthwire archive***
https://www.accountingweb.co.uk/newthwire

HMRC investigation query
Clint Westwood, on 8 August 2006, introduced the scenario of a self assessment
enquiry for 2003/2004, where the tax return included self-employment pages in respect of a business with a year end of 30 June 2003. No faults have been found in the business records, but HMRC contend that there is an issue over private means.

Does this entitle HMRC to go back to the period 1 July 2002 to 5 April 2003 in respect of private means, as this period is part of the accounts period disclosed in the return?

Andrew Meeson considered that the reply was 'yes' in principle. The purpose of a self assessment enquiry is to enable an HMRC officer to satisfy himself or herself that the return in complete and correct.

As the self employment pages are part of the return, the fact that the business basis period is not completely within the year of assessment is irrelevant. If the inspector can demonstrate insufficiency of private means as a potentially relevant issue during that basis period, then he or she has the necessary 'reasonably required' grounds for calling for details under section 19A, Taxes Management Act 1970.

This analysis is undoubtedly correct. Section 9A, Taxes Management Act 1970 regarding the notice of enquiry states at para. 4(a) that an enquiry extends to 'anything contained in the return, including any claim or election included in the return'. In the current case, the inspector could also bring into play section 29A, TMA 1970, as he or she may consider that a discovery has been made of insufficiency of means.

If the taxpayer considers that the investigation into private means for the nine months before the year of assessment in the current case is unjustified and merely an attempt at a 'fishing expedition' by HMRC, then he or she has the right to appeal to the General Commissioners under section 28A, TMA 1970 for the closure of the enquiry. This is unlikely to succeed unless he can substantiate sufficiency of means before the Commissioners, as otherwise the Commissioners are almost certain to find in favour of HMRC.

* * *
Pool cars
The employer of J D Fortune (
11 August 2006) wants to acquire a new car and designate it as a pool car. What are the rules about pool cars and what records would the business need to keep?

Paula Sparrow replied to this one and referred the querist to sections 167 and 168, ITEPA 2003. I would add that additional information can be obtained from the HMRC Employment Income Manual at EIM 23800 ' EIM 23815, and there are also some paragraphs in Tolley's Income Tax dealing with the subject.

The basic conditions set out in the legislation, which must all be satisfied as regards any one tax year, are:

  • The car or van must be made available to, and be actually used by, more than one employee.

  • It must be made available by reason of the employee's employment.

  • It is not ordinarily used by certain employees to the exclusion of others.

  • For employees who use the vehicle, any private use of the vehicle must be merely incidental to the business use in the tax year. This will be discussed further below.

  • The vehicle must not normally be kept overnight on or in the vicinity of any residential premises where any one of the employees resides, except while being kept overnight at premises occupied by the person making the vehicle available to the employee(s).

    Incidental private use might include an occasion where the employee took the car home so that he or she could depart direct from home early the next morning. However, this should not happen regularly as the vehicle would then fail the test of not being kept at an employee's home. A rule of thumb tests in this respect is that the vehicle should only be kept at an employee's home less than 60% of the nights for the period under review. Garaging of the vehicle at the employee's home on a large number of occasions would also disqualify the vehicle form being a pool car.

    Incidental private use should not exceed 5% of the annual mileage and could also include a visit to a restaurant while away on business, use of the car where a family member has suddenly been taken ill, and taking employer provided equipment to a business sports facility. It must not include use during the annual holiday of any employee.

    It should be noted that the status of a pool vehicle may be checked regularly by HMRC to ensure that it still qualifies.

    Another relaxation of the rules concerns a chauffeur who drives a pool car. The fact that he or she keeps the car at home or near the residence will not disqualify it from qualification, but use at weekends or for holidays would. Carrying secret, classified or confidential papers will not exempt a chauffeur-driven car from the provisions, and neither will use of the vehicle to carry employees between their permanent workplace and home or railway station. One wonders about the status of chauffeur driven cars used by royalty and government ministers.

    As regards records to be kept Paula Sparrow suggests that the employer has a written policy that the vehicles(s) concerned are not to be taken home or used for private purposes without authority. A mileage log would be ideal, but everyone knows how difficult this is to maintain in practice. Concrete evidence of where a vehicle is on any particular night would be very difficult to obtain ' either way.

    * * *
    Self-employment start-up
    Stephanie Naylor mentioned, in her
    query of 27 July 2006, that a friend was embarking on self-employment for the first time, having previously been employed all his working life. Income will come from more than two separate sources and will be commission based. His expenses will be, inter alia, motor and travelling, use of home, stationery, telephone, computer hardware and software and internet charges etc.

    The friend requires straightforward advice on the main issues and Stephanie will help with record-keeping. HMRC refuses to supply advice, and suggests that the friend attends two three hour courses, which he does not have time for.

    Dean Shepherd stated that Business Link have published a book of 100 pages on the subject. Nicola suggests that the individual should engage an accountant. HMRC are a tax collection body and it is not their function to give advice. Stephanie has been out of practice for some years.

    I would underline Nicola's advice. There are numerous issues to consider when starting out in business. Every accountancy practice should produce an aide-memoire for clients contemplating a new business setting out the relevant issues in a form that is intelligible to the layperson. Some of the relevant issues are:

    • Do you intend to trade as a sole trader, partnership or through a limited company? This needs discussing with your accountant.
    • Have you sufficient capital available to finance initial expenditure and your personal drawings for the first few months? If not, you need to arrange finance facilities.
    • Has your bank been informed of your plans, and have you opened a business bank account? Because of money laundering legislation, this will involve some administrative hassle.
    • You must decide on a business year-end, in conjunction with your accountant. This need not be 5 April.
    • You will need to register with HMRC to pay Class 2 national insurance contributions and let them know your plans for direct tax purposes. Class 4 NI contributions will be paid as part of the half-yearly tax bill.
    • It is important that correct business books of account are kept, whether computer generated or not. This should be agreed with your accountant. Business and private expenditure should be kept quite separate, although there may be some 'dual purpose' expenses such as motor expenses and use of home for business.
    • Tax and Class 4 NIC will be paid half-yearly, but in the first year or so there could be a bill for more than one year's tax. It is important to estimate your net income, and make provision for anticipated tax payments, preferably by paying a monthly or quarterly sum into a separate deposit account.
    • If your commission turnover exceeds the VAT exemption limit you will have to register for VAT, even though commission is normally VAT exempt. This should be discussed with your accountant.
    • You will need to file a self-assessment tax return each year, which includes details of both your business and private income.
    • You will have no employment rights, and the Class 2 NI contributions limit the availability of some State benefits.
    • You should consider, once the business is 'up and running', whether you should take out a personal pension policy. You may have benefits from a previous employees' scheme that will be available at retirement age.
    • Office equipment and stationery will have to be obtained. Assuming you need a business vehicle, you will have to decide whether to purchase or hire, with your accountant's advice.
    • If your spouse/partner does not work currently, it may be possible to involve them in the business and pay them a modest salary. Later on a pension scheme could be provided.
    • Business insurances should be arranged, and possibly professional expenses insurance to cover you in the event of an HMRC enquiry.
    • Due observance needs to be made of other government regulation such as health and safety and data protection.
    • You will have no holiday entitlement or holiday pay, and will have to make space and save funds for any time off.

    This list is not exhaustive, and it can be seen just how many issues intending self-employed business people have to consider.

    * * *
    Divorce and separation
    Gareth Jones queried the application of HMRC Extra-Statutory Concession D6 regarding the family home when a married couple divorced, in his
    query of 26 July 2006. It is clear that there is no capital gains tax to pay where the former matrimonial home is transferred to the wife on divorce. But, what is the position if the former matrimonial home is sold as a requirement of the divorce, and the proceeds divided between the two parties. Is the Concession extended to such a transaction?

    Assuming joint ownership, the concession should continue to apply, and both Nick Farrow and Angela Williams commented on this. If there was delay in sale the parties should be able to call on the final 36 months' exemption when not resident in the property. If one or other party to the former marriage was the previous sole owner of the property, and the proceeds are divided, the same principles should then apply.

    It is worth commenting on some other aspects of divorce and separation, which I have discussed in more detail in Newthwire No. 101.

  • Capital gains tax
    Following divorce the inter-spouse CGT exemption is lost. Apart from the family home, other situations affected by that fact could include personal shareholdings and shares in a family company or shares of a business partnership of which the couple were previously members. It is extremely unlikely that any business sale or transfer could be completed by the time of the decree absolute, so that capital gains implications and share valuation calculations must be looked at very carefully. The implications of the divorce on the couple working together after the divorce must also be addressed, whether that involves a family company, partnership or employment of one party by the other.

  • Inheritance tax
    The inter-spouse exemption for inheritance tax purposes will be lost on divorce. It will therefore be necessary for each party to the divorce to make a new will and review existing IHT planning.

  • Value added tax
    If the former married couple had been in business partnership together, and that partnership is now dissolved, it is important that the VAT registration is altered. Otherwise the 'leaving' partner will remain jointly liable for any VAT payable in the future.

  • Childrens Tax Credits
    If there were children to the former marriage and a claim for Child Tax Credit was relevant, the Tax Credits Office must be notified as soon as the couple cease living together. The original Tax Credit claim would have been made on the basis of joint incomes, and must now be re-assessed on the basis of the new circumstances, and which former partner has custody of the children.

    Failure to inform the Tax Credits Office will result in an incorrect claim continuing to be made, which would have to be repaid. There are also penalties arising for non-compliance, and the 'new' applicant could be out of time for a new application in the current year.

  • Pension sharing
    In order to facilitate a 'clean break' divorce, and following The Welfare Reform Act 1999, from 1 December 2000 the concept of pension sharing has now emerged. Its complicated provisions are beyond the scope of this short resume.

  • General
    A married woman is treated as 'living with her husband' unless they are:

  • Separated under a court order or separation deed; or
  • In fact separated in circumstances which render permanent separation likely.

    Case law has determined that a husband and wife may be separated although living under the same roof.

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