NEWTH TALKS TAX - JUNE: Tax writer of the year John Newth solves your tax questions
AccountingWEB's tax writer of the year, John Newth, gives the definitive answer to your tax queries.
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PAYE and P11D penalties Angel, on 20 June 2006 raised the issue, of P35s submitted late, but where no tax or NIC was due. However, £100 penalty notices had been received. Were there any grounds of appeal against the penalty determinations? Is the penalty tax-geared? Both Andrew Meeson and Rob referred to an unpublished concession. Where the P35 is strictly a 'nil 'return', with no PAYE or Class 4 NIC due for the year, then the penalty is reduced to nil. However, where the PAYE and Class 4 NIC for the year exceed £100, although no tax is due at the year end, then the penalty still stands. If the amounts due for the year are between nil and £100, then the penalty is limited to that figure. Although employers are 'doing the government's work for them', nevertheless a strict penalty regime encourages (or forces) them to comply. It is worth highlighting this regime. P35s Where an employer files P35s late, there is a late filing penalty of £100 per month for each group of 50 employees for a period up to 12 months. These penalties continue, where relevant, for a further 12 months, after which the penalty becomes a mitigable amount of up to the tax due. Submission of a supplementary Form P35 by an employer with less than 250 employees is regarded as 'negligence', and the employer may be charged a mitigable penalty equivalent to a figure up to the PAYE and Class 4 NIC due. Where a company with over 250 employees is part of a mandatory e-filing process, but files a hard copy P35 return, then a mitigable penalty of £100 per month for each 50 employees is imposed. A similar penalty applies to an employer with less than 250 employees whose hard copy return 'fails to meet quality standards'. P11Ds There is a similar draconian regime in connection with Forms P11D. Where an employer submits the forms to HMRC after 19 July, a mitigable penalty of up to £300 per form may be imposed. Serious continued delay in filing P11Ds can result in an application to the Commissioners, who may impose a penalty of up to £60 a day for each form. Similar penalties apply in connection with the late supply of copy P11Ds to employees. The penalty for the supply of an incorrect or negligent Form P11D is a mitigable amount of up to £3,000 for each form. In connection with Forms P11D(b) a monthly penalty for late filing of up to £100 for each group of 50 employees may be imposed, but the penalty cannot exceed the liability due to HMRC. The penalty for an incorrect or negligent P11D(b) is a mitigable amount of up to the figure of NIC liability due. * * * I would mention at this early stage that delay in providing information will adversely affect the penalty discount when this point is reached in the investigation. It will be seen as lack of co-operation. HMRC could also issue a section 19A notice formally requiring production of documents and information. Three other main points were highlighted. The tax return had been prepared by the subcontractor from sparse accounting records, such as CIS vouchers, expenses from receipts and estimates. The client has stated that the bank statements hold no dark secrets, but he has lost what receipts he had for expenses. Will the inspector disallow all unvouched expenses or will he allow a reasonable estimate? I would state first of all that, by losing the expenses receipts, the client has not observed the provisions of section 12B, Taxes Management Act 1970 regarding record-keeping. In theory a penalty could be imposed under that section. The Inspector will certainly try and allow as little expenses as possible, but if 'push came to shove' the Commissioners might be a little more reasonable, as presumably the original return was prepared when the receipts were available and before they were lost. Loss of the documents, however, will not be a factor in favour of the taxpayer. The Inspector is also threatening to open prior years due to non-compliance with the current investigation. In order to do this HMRC must make a 'discovery' under section 29A, Taxes Management Act 1970. It is questionable if they have really done that in this case. Non-co-operation for one year does not, of itself. constitute a discovery into previous years, and good advocacy on behalf of the client is needed here. However, if HMRC were able to 'make a discovery' for previous years, lack of some of the expenses receipts for previous years would also be a factor. In the unlikely event that HMRC wanted to go back more than six years, they would have to establish 'fraudulent or negligent conduct', under section 36, Taxes Management Act 1970. Fraud is unlikely, but the views of inspectors as to what is negligent conduct and those of the general public and accountancy profession do not always merge. Some inspectors take the view that the slightest (innocent) error by a taxpayer constitutes negligent conduct. Such is the atmosphere that now inhabits tax compliance. The accountant has consistently told his client to comply with the investigation, retain his expanses vouchers and sign off his 2004 accounts. If the investigation spills over into prior years, then S James feels that a specialist in investigations should become involved. This may well be correct, but the difficulty could be cost. This sort of case underlines the need for professional expenses insurance, although some insurers exclude subcontractor cases. * * * TN asked the following three questions: # Is this likely to happen? I would comment first of all that it may not be wise to take on a new client who is in the middle of what could be quite a serious tax investigation. We are not told about the facts of the case, and what evidence HMRC have that has enabled them to go back even six years. To answer question 3 first, the client could engage a tax investigations specialist at this juncture who might be able to perform some damage limitation, even at this late stage. Because of the lack of additional facts, it is not possible to judge whether HMRC are likely to extend their investigation from six to 20 years. All that I can do is to emphasis some statutory principles. The 'normal' date for instituting a self-assessment enquiry under section 9A, Taxes Management Act 1970 is 12 months after the filing date for the return. For the year ended 5 April 2006, the normal filing date is 31 January 2007, and the 'enquiry' window closes on 31 January 2008. However, if HMRC make a 'discovery' in respect of previous years under section 29, Taxes Management Act 1970 then, under section 34, the 'ordinary' time limit for making additional assessments is five years after 31 January following the end of the year of assessment. For the tax year 2005/2006, an assessment would have to be made by 31 January 2012 (five years after 31 January 2007). One assumes that in the case mentioned the Inspector has been able to make a discovery. This time-limit is extended to 20 years after 31 January after the end of the tax year by section 36, TMA 1970 where it can be established that the taxpayer has engaged in 'fraudulent or negligent conduct'. The distinction between what the taxpayer may regard as a simple error and what the inspector of taxes may regard as negligent conduct is a fine one, and this is an area where taxpayers and their agents often need specialist help. It should be emphasised that the law is not wholly slanted one way, as taxpayers may make an 'error or mistake' claim within five years after 31 January following the end of the tax year by virtue of section 33, TMA 1970. A claim for 2005/2006 would need to be made by 31 January 2012. Various conditions apply to error or mistake claims, which must be made in writing and will lead to a tax repayment. * * * What used to be a concessionary allowance is now statutory, and is set out in section 264, ITEPA 2003. The main points are: # An eligible staff function must be available to staff generally, and not just to certain groups, departments or the board of directors. # The tax-free amount that a company may claim is £150 or less per employee, or £300 or less if a partner is invited. # The figures quoted above are inclusive of VAT, transport, accommodation, suit hire, table gifts, raffles and entertainment. # In theory at least the total cost must be divided by the number of people who actually attend. What had started out to be a tax exempt event could turn into one where each employee was charged a benefit if a number of people failed to turn up, and the average cost per employee exceeded £150 per person or £300 per couple. One wonders exactly how this is audited in practice, and who in the business is responsible for taking a 'head count' on the day. One has visions of surreptitious HMRC staff counting the number of revellers at an office party at 2am! # The allowances of £150 and £300 may cover more than one event. For instance if a company held a Christmas party costing £100 a head and a summer function costing £50 a head, then both would be exempt. However, if the Christmas event cost £125 a head and the summer event £50, only the cost of the Christmas event would come within the exemption. Where two or more events occur during the year, and the total cost comes to a figure over the exemption limit, then the allowance is given against the most expensive function(s). One has to comment that this whole scenario could be a nightmare for financial controllers and employees of the business if things go wrong. An exact record of all the costs in connection with the function(s) has to be kept, and then divided by the number of employees who actually attend. And what if employees were not expecting to find a P11D entry for the staff party if things go wrong and the monetary limit(s) are exceeded? One can envisage some very angry employees unless the company reimburses them by a grossed up amount equivalent to their benefit. That would then make the whole exercise very costly for the business. One has to advise businesses to be very careful over this small part of the tax function. I am sure that it is well on the list of Inspectors conducting Employer Compliance Reviews, and the HMRC website reference by Frauke Golding confirms this. Previous answers
It's that time of year, when HMRC come looking for penalties and interest, either rightly or wrongly, in connection with Forms P35 and P11D.
Tricky investigation
S James outlined details of a tricky tax investigation in a query dated 13 June 2006. His self-employed subcontractor is having his 2004 tax return investigated, and has consistently ignored demands for information for the last six months. The client is now finally collating all available records.
How far back can the taxman go?
TN posed this question (2 June 2006) in considering a new client who had been 'dealing' with his own tax investigation. HMRC had already looked at one year's figures and had intimated that they will go back six years. The client is worried that if he agrees six years figures, then the Inspector will go back 20 years.
# Under what circumstances can the taxman actually go back 20 years?
# Is there any way that the client can actually guard himself against the taxman going back further than six years?
Staff functions
Russell Eisen drew attention to what one can only describe as a local HMRC interpretation of tax law in his query of 22 May 2006. An inspector of taxes had initially disallowed a staff trip to a spa resort under the exemption for staff functions rules. The inspector's point was that only functions 'with music' applied. The costs were eventually allowed, but the inspector would be unlikely to have received the support of his manager had things progressed further.
May
