What Can Trigger an HMRC Compliance Check?

One of the most stressful things that can happen to a business owner is an HMRC compliance check. HMRC is coming under increased pressure by the Treasury to ensure that all tax is paid correctly and fairly. Our view is that, in the wake of the economic problems post-pandemic, this pressure will only increase. This will lead to increased compliance checks. In this article, we explain what can trigger an investigation, and what can be done by business owners to reduce the chances of selection.

HMRC Connect

HMRC Connect is a computer system that George Orwell dreamed up before there were computers. According to HMRC themselves, “Connect is a data matching and risking tool that allows HMRC to cross match one billion HMRC and third-party data items. It identifies “hidden” relationships between people, organisations and data that could not previously be identified. Connect has the capacity to highlight patterns in HMRC’s rich reserves of taxpayer and third-party data, allowing HMRC to find anomalies between such things as bank interest, property income and other lifestyle indicators” and can pull data from all manner if databases, such as:

  • Bank accounts and financial institutions (including from 60 other countries and territories)
  • DVLA
  • Land Registry
  • Visa and Mastercard transactions
  • Council tax
  • VAT
  • Previous tax investigations
  • Previous tax returns
  • Earnings (from any employer)
  • Child benefit payments
  • Maintenance payments
  • Ebay, Amazon, Gumtree, Etsy, Airbnb
  • Twitter
  • Facebook
  • Instagram

and uses the data it draws to look for anomalies.

Fluctuating profits

While it’s not unusual for business profits to fluctuate from year to year, it is unusual for large swings. Therefore, if your declared profits suddenly fall without a good explanation, HMRC might look at your business a little more closely.

Margins and expenses are inconsistent with industry standards

Similarly, it’s fair to expect that most businesses operating within a specific sector will have similar profit margins and expenses. If your returns show that your business is less profitable due to lower margins or higher expenses than your peer-businesses, this could be a trigger.

You operate in a high-risk sector

Some types of business are notorious for underdeclaring income and operating off-the-books. Historically, takeaways, taxi-drivers, and tradesmen have been known to be targeted by HMRC for this type of activity but any business who receives payment in cash, either predominately or entirely, is potentially on the radar.

Consistently late filing and payment

Submitting a late tax return will lead to a late payment fine. If it’s a one-off, then that may be all you hear from HMRC. However, if you consistently file your tax returns late or make payments after the deadline, that could trigger a compliance check. This covers VAT, PAYE, Self-assessment and Companies House. HMRC take the view that if you don’t attach enough importance to filing on time, you may not attach importance to filing accurately either.

You’ve been reported

As unsavoury as it sounds, HMRC have a mechanism for anonymous tip-offs and the public are encouraged to make use of it. If a third party contacts HMRC and suggests that you’re not paying the taxes you should be, it may launch a compliance check to dig a little deeper. Old business partners and ex-spouses are common sources of a tip-off.

How to avoid an investigation

The truth is there are no guarantees that you will not be the subject of an HMRC Compliance Check, and some experts reckon that every business will have at least one check in their business lifetime. So, while you can’t be sure of never being checked, there are simple steps you can take to reduce the odds.

Be a good little soldier

The best one is to behave. Keeping off the radar by always meeting your compliance requirements is a good start: always file your accounts and returns on time and always pay your VAT and tax bills on time. If you’re consistently finding it difficult to meets your compliance obligations, you should speak to an accountant to see what can be done to improve your performance in this area.

Keep an eye on your margins and expenses

This is good business practice anyway. If your margins are so far out of the norm that HMRC take a look, then there’s a good chance that there’s something wrong in your business. A simple and up-to-date accounting system will allow you to keep an eye on your margins and make adjustments before things go too far wrong.

Of course, there is always the chance that something has happened in the business which has knocked the margins out of kilter. If you are able to explain these, then you should ensure that the while space on the tax return is used to do so.

If the thought of a tax check give you the chills, talk an expert now on how to bomb-proof your business. In addition to reducing the risk of being selected for a compliance check in the first place, we can also help implement measures which would, if you are selected for a check, make things go much easier. Visit the Contact Us page to, erm, contact us.

5 reasons to file your tax return early

5 reasons to file your tax return early

Do you always leave filing your tax return until the last minute? You really shouldn’t. Here’s why: 

 

  1. Receive your tax refund earlier

Most businesses had a tough 2021. You may have noticed things weren’t really normal for a while there. If your business income was down, chances are so was your personal income. This could mean that your in-year payments were too high and you might be entitled to a repayment. Filing early will ensure this lands in your pocket as quickly as possible. 

 

  1. Reduce your July 2022 payment on account

Similarly, being an early filer will mean that you will have certainty over how much you need to pay at the end of July. If your return hasn’t been filed, HMRC estimates this payment based on last years’ figures, which could be much higher, putting an unnecessary dent in your cashflow.

 

  1. Budget for your tax bill

Regardless of when you file, your tax bill is due on 31st January of the following year. So, if you submit your return in May, you’ll have eight months to provide for the payment due. If you file at the end of January you’ll have days. If your liability is a few grand, you’ll want as long as possible to prepare for it.

 

  1. Have records available for mortgage references

Most brokers and lenders now require, in addition to an accountant’s certificate, proof of your income from HMRC. You are invariably asked to provide your most recent tax statements. If these are out of date, then this could lead to a mad scramble to get these done. Moving house is stressful enough without needlessly adding to it.

 

  1. Identify opportunities to save tax earlier

The quicker you prepare your tax return, the quicker we can identify tax saving opportunities for the future. If you can implement a tax saving measure in April, rather than December, then this can only be a good thing, right?

 

If you want to file earlier, and your current accountant is the roadblock to this, the next step is to book a call with an Acumenica accountant so we can find out a little more about your business and how we can help you. Definitely no hard sell and no obligation. 

 

Visit our Contact Page to get in touch.

Is your company caught up in HMRC’s Managed Service Company net?

Is your company caught up in HMRC’s Managed Service Company net?

It would seem HMRC’s assault on contractors has kicked up a gear and contractors who operate through their own Personal Service Company (PSC) now have another worry to contend with. Not content with changing the so called IR35 legislation a couple of years ago, effectively forcing a good proportion of genuine self-employed contractors into umbrella or PAYE employment, HMRC are now using the largely forgotten Managed Service Companies(MSC) legislation to further reduce the flexible workforce that is the lifeblood of many of the vibrant industries in this country.

 

A Quick History Lesson

 

Most of you will have forgotten what an MSC is, understandable given they’ve hardly been mentioned in a decade or more. An MSC is (usually) a one-man limited company which has been set up by an MSC Provider (MSCP). An MSC Provider is a company that is in the business of promoting or facilitating the use of companies to provide the services of individuals. The basic idea is that the rules should apply to those who are setting up and basically running the service companies on behalf of workers, who enjoy a largely hands-off experience. This is defined as involvement, more of which anon.

 

In 2016, HMRC had a success at the First-tier Tax Tribunal in a case against Costelloe Business Services Ltd (CBS). HMRC won this case because it was found that they were an MSCP because of their “involvement” in the businesses of their clients. This was appealed.

 

In 2019, the Court of Appeal handed down their decision that CBS was an MSCP, and therefore its clients were MSCs.

 

In early 2022, HMRC targeted Churchill Knight and Boox as potential MSCPs and have raised assessments to both them and their clients.

 

What’s “involvement”?

 

For the purposes of the MSC legislation, a service provider is involved in its client’s business if:

 

  • The provider benefits financially when the worker provides a service (a percentage based fee for example)
  • The provider influenced or controlled how the worker received their payment (calculating and instructing payments of dividends and salary)
  • The provider influenced or controlled the worker’s company finances (full access to the bank account, say, or actually making payments from the account)
  • The provider influences or controls the workers’ services
  • The provider underwrites any tax losses

 

Crucially, only one of these forms of involvement needs to be met for an MSC arrangement to exist.

 

The Accountancy Exemption

 

It is not automatically assumed that an accountant, even an accountant specialising only in contractors, is an MSCP.

 

The appeal court observed “an accountant or other support service will not be caught even if some of its customers are PSCs because although in a broad sense it might be regarded as facilitating those PSCs in the running of their business, that assistance is merely a consequence of the services it provides, it is not in the business of doing that.”

 

Most accountants assist their clients in the running of their businesses. Much of the advice provided relates to tax-efficiency. It would be remiss of any accountant not to assist their clients in arranging their affairs in the most efficient manner. This would often extend to advise the tax efficient “salary” to pay, and how much dividends are recommended or advised. This does not mean that the accountant is an MSC Provider.

 

We’ve prepared this risk table for you which might help you:

 

Service Provider  Risk Level
Churchill Knight / Boox HIGH
Nationwide contractor-only service provider who have 3,000+ clients MEDIUM / HIGH
Local contractor-only accountants MEDIUM
Nationwide mixed client accountants MEDIUM / LOW
Local mixed client accountants LOW

 

We’re pleased to say that Acumenica fall into the second lowest category. While we have a particular focus on the contractor market, we also have a thriving general practice looking after many other types of business.

 

Who should be worried?

First and foremost, clients of Churchill Knight and Boox should be paying close attention to this,as these are the primary targets right now. Clients who were involved with some of the larger contractor accounting specialists should also be keeping an eye on the post mat. 

 

If you’re not sure whether your accounting service was potentially an MSCP, here are some of the hallmarks:

 

  1. You were told to form a limited company by your agent and to deal with this service provider

 

  1. The service provider raised invoices on your behalf

 

  1. Your service was “cookie-cutter” in that you had no substantial discussions with them regarding your income and how it should be handled

 

  1. The service provider had control of your bank account

 

  1. The service provider’s fee was based on your income – as a percentage for example

 

  1. The service provider offers a limited company to umbrella and back again option

 

MSC Debt Transfer Provisions

The MSC legislation contains quite brutal debt transfer provisions. Generally speaking, it is the PSC that faces the potential liability if the MSC rules apply. If the company can’t pay then the next in line is the director. However, if the PSC or its director cannot pay, then HMRC can transfer the debt under the ‘recovery from other persons rules’ in ITEPA 2003 s 688A. The first port of call will be the MSC provider and its directors. If the MSCP can’t pay due to involvency, and there is evidence that a referring staffing agency ‘encouraged or was actively involved in the provision by the MSC of the services of the individual’, then there is a risk that the tax debt could be transferred to the staffing agency and its directors. Although less likely, it is also possible that a hirer could face tax debt transfer if they encouraged contractors to work through PSCs and to use certain advisers to effect this. Everyone in the supply chain needs to be aware of their risk.

 

Next steps

 

If you have any concerns about whether you are likely to be caught, we’d advise you to contact your accountant in the first instance. Alternatively, you can contact Acumenica on info@acumenica.co.uk or 03330 166559 for a no obligation consultation.

Another FINE mess

Another FINE mess

There was a time, not so very long ago, where HMRC didn’t issue fines and penalties as a matter of course, and in the rare occasion where one was issued, you could normally ring them up, say sorry guv it was an honest mistake, and they’d tell you to be a little more careful next time, now run along, sonny, there’s a good lad.

Fast forward ten, fifteen years and the average SME can’t turn around without running into another HMRC or Companies House fine. Granted, there are tools that make compliance that much easier now, but still it can be a challenge getting things in on time.

Here is a list the most frequently incurred penalties an SME can face:

Companies House

Private limited companies have, with a few exceptions, nine months from the financial year in which to file their accounts. Normally, that’s plenty time, but not always. If you file late. you can expect a hefty fine.

1 day to 1 month late £150

1 month to 3 months late £375

3 months to 6 months £750

More than 6 months £1,500

If you’re late two years’ running, the fine doubles. So, if you were one day late one year, and seven months late the next, you’d have a penalty of £3,000 to pay in the second year.

Corporation Tax

Late filing of corporation tax return

1 day to 3 months late £100

3 to 6 months late another £100

6 to 12 months late 10% of tax due

More than 12 months Another 10% of the tax due

If you can’t be bothered to do the maths (why would you when I can do it for you), that means that if you’re 7 months late and you had taxable profits of £50,000, then your penalty would be £1,150 plus interest.

Value Added Tax

Everyone know you don’t mess with the VAT man right? This aphorism has entered into SME lore, and for good reason. Ignoring for now the difficulties you can get into when you’re the subject of a VAT inspection, the penalties for late filing are eye-watering: If you’re late filing your return once, you get a slap on the wrist and are put into what’s not as a Surcharge Period which last for twelve months. If you’re late again in that surcharge period – and remember a VAT return is not complete unless you also pay the amount due in full, you will be charged as follows:

Default 2 2% of tax due

Default 3 5% of tax due

Default 4 10% of tax due

Default 5 and beyond 15% of tax due

PAYE

What you pay for late submission of your monthly or quarterly Full Payment Submission report depends on the number of employees you have:

1 to 9 employees £100

10 to 49 employees £200

50 to 249 employees £300

250 or more £400

Self Assessment

Everybody knows you’ve got to file your self assessment by 31st January but if you’re just one day late, there’s an automatic fine of £100. If you still haven’t filed 30 days after the 31 January, then the penalty is £10 per day.

These are the basic fines and penalties you can face for non-compliance. If you are unfortunate enough to be the subject of an investigation, then you face a whole new raft of challenges: Daily fines for failure to produce information and fines of up to 100% of any additional tax found due. But that’s another story for another day.

Be careful out there.

Please pay me, so I can pay her, and she can pay him, then he can pay you.

Please pay me, so I can pay her, and she can pay him, then he can pay you.

“I’ll pay you tomorrow”

“I can’t access my online banking at the moment”

“I never received the invoice” 

“I’m waiting on a big invoice getting paid. Once, that’s settled, I’ll pay you”

Anybody who has been in business for any length of time is likely to have heard at least one of those excuses/reasons for a customer not paying. It’s estimated 84% of small businesses suffer from late payments and often it’s the larger corporate clients who are the culprits.

The problem with late payers:

Cash flow

It goes without saying that late payers can put extreme pressure on the cash flow of a business. Profit’s nice, but unless it’s cash in the bank it’s not going to butter any parsnips come wages day. And it’s not just the staff that will need paid: you landlord, your suppliers and even the VAT man could all be queueing up with their hand out.

Investment

If you’re looking to raise finance for your business, one of the key points any lender or financier will look at is the cash flow. Profitability is all very well but if the cash isn’t there to make your loan payments, you’re going to have problems convincing them to get on board.

Growth

If you’re planning to grow your business, this needs cash. In addition to the problems with finance raising mentioned above, if your cash is in your client’s bank account rather than yours, its going to be very difficult to finance any sustained growth.

You should always aim to have enough cash in the bank to pay for six months’ overheads while in growth mode. 

We’ve seen many businesses have to postpone or even scrap growth plans as there isn’t enough cash in the business to fund them.  This demonstrates the key link between profitability and cash flow.

Time and effort

Generally, it consumes time and resources that could be better spent. Frustratingly, the time and energy that goes into chasing late payments could be spent on so much more, such as services that will benefit your clients.

Take action to overcome cash flow anxiety

It’s crystal clear therefore that cash flow, and getting your invoices paid on time, is vital to the success of your business. Here’s our top five tips to help ensure all payments are made when it suits YOU, not your customer:

 

  • Be clear about your terms from the start (and stick to them)

 

It’s important that your customers know what your terms are. Ensure that payment terms are clear and unambiguous on order forms, contracts, invoices etc. If the customer has signed a document which states the terms, then there can be no discrepancies or excuses later in the process.

 

  • Make it easy for your customers to pay you 

 

Offer as many payment methods as possible. If this article had been written even five years ago, the options would be: cash, cheque, bank transfer, credit cards etc. but now in a business to business environment, cash and cheque payments are all but obsolete.  

You should, at a minimum, accept bank transfer, card payments and/or direct debit. If you’re emailing your invoices our (you definitely should be), then make sure that in the email or on the invoice, there is a link to the various payment methods.  

 

  • Switch up your invoicing and payment systems

 

Evaluate your current systems and make whatever adjustments are needed. Key factors in this:

  • Ensure you prepare your invoice accurately and send it to the correct person
  • Invoice as soon as the terms allow
  • Make sure all payment methods are advised (see 2 above)
  • Set up an automated reminder system to chase the email as soon as it becomes past due

Most accounting systems can be set up to do this automatically if you set the reminders properly.

 

  • Ask for partial or total payment in advance

 

In the consumer world, people are becoming more and more used to paying for an item in advance but it’s taking it’s time to filter through to the B2B world. But, there’s no shame in asking for upfront payment. If you’re embarrassed to ask, then you need to reconsider your career. Remember, big businesses were once small, established businesses were once start-ups. They all appreciate the pain of early stage cash flow and might be quite happy to help you out a little. But be prepared for a little quid-pro-quo. Upfront payment might merit a discount or an improved delivery schedule.

 

  • Be firm, but fair

 

Remember that your customer or client could well be in the same boat as you, and their cash flow, not yours, will be a priority for them. It is important therefore that you are consistent with them and insist on payment within your terms, otherwise they may well decide to delay payment. If a client has the choice of paying either one supplier or the another, then you want to make sure you’re the guy who gets paid: be  persistent and keep on until you get paid – remember you’re not being unfair to expect payment for work done, or goods supplied, within the terms agreed in advance. 

Bonus tip: If you have the margins, and if you can afford it, offer discounts for early settlement. But you need to make it worthwhile. 5% is about the minimum that’s likely to make any odds. Before offering a settlement discount make sure you know the impact of the discount on your profitability. 

If chasing payments is a problem in your business, speak to an Acumenica adviser about how we can help introduce systems into your accounting function to minimise the impact on the business as a whole. Email info@acumenica.co.uk to call us on 03330 166559