Tax Briefs

Now is the time to be thinking about some key issues related to the filing of the 2009/10 Employer’s end of year PAYE returns. What about any ‘off payroll’ transactions that might need to be included in the PAYE returns? This might include casual labour, paid through the purchasing, petty cash or employee expense claims systems. Is there a need to include any of these payments on the payroll, or do we need to complete a P38A Employer Supplementary Return for 2009/10?

Casual labour is a different and more dangerous issue in the Construction Industry. Any payments to workers that are included on the CIS300 monthly returns (there are no annual CIS returns) need to pass several tests. Firstly, we have to confirm that the worker is not an employee; we have to verify the worker to determine whether the individual is to be paid gross or taxed at 20% and if the worker is not registered or his details are not matched on the HMRC system, we have to deduct 30%. We also have to decide if the work is within the scheme (construction operations) or excluded from the scheme e.g. the professional consultancy work of a Quantity Surveyor, or an Architect. If the latter, is the worker self-employed, or employed under a contract of service?

What about other payments made gross to individuals treated as self-employed? Has somebody checked this out and perhaps used HMRC’s Employment Status Indicator (ESI) tool to confirm self-employed status is correct? Is there a copy kept on file to show the HMRC employer compliance or status officer when they cals? Have any payments been made gross to a Non-executive director, which HMRC might challenge at a future date?

We are experiencing the worse recession since the 1930’s and a lot of people have lost their jobs. Are we satisfied that any tax-free termination payments made in 2009/10 were dealt with properly, or do we need to check this out? Genuine statutory redundancy payments will be exempt for tax purposes and will not be earnings for Class 1 NICs. Some employers pay more than the statutory amounts, such as one week’s basic pay for each year of service and any such non-statutory redundancy payments will be exempt from tax, subject to the £30,000 exemption limit. There is no limit for NICs and the payments will not be earnings and not liable to Class 1 NICs.

Genuine payments of compensation or damages will be exempt, subject to the £30,000 limit and not earnings for NICs, but should we check that the payments were compensation and not dressed up as such. Payments in lieu of notice and ex-gratia payments will come under scrutiny at any HMRC inspection and care needs to be taken before making such payments gross, without deducting income tax and NICs. Has professional advice been obtained or was clearance sought from HMRC?

Well that’s all for now folks, but thank you for reading my March 2010 Blog.

HMRC’s latest tax “amnesty”, the Tax Health Plan for medical professionals, is the third in less than a year. These are not strictly amnesties as the individual still has to make full restitution of tax due with interest and a penalty. The attraction is a penalty restricted to 10% and a “lite touch” disclosure framework.

The first amnesty, the Offshore Disclosure Facility, was announced in 2007 following receipt by HMRC of the names of foreign account holders from the High Street banks. The ODF was on similar terms as the THP and enabled the taxman to collect tax of £400m at a cost of £6m. HMRC then tackled over 300 other financial institutions and armed with further information launched the New Disclosure Opportunity in 2009. The NDO recently came to an end with the 12 March 2010 deadline for all filing and payment.

The number of NDO registrations, at 10,000, is disappointing for HMRC. One reason for this was the announcement of the Liechtenstein Disclosure Facility shortly after the NDO and giving the lie to the claim that the latter was the last beneficial opportunity to come clean. Taxpayers who can qualify will naturally choose LDF because of the relatively generous terms on offer: the LDF permits registration until March 2015 and will collect tax calculated at a composite rate, for only ten back years compared with the twenty of the NDO.

Having said that, those who are affected by the LDO are advised not to take too laid back an approach as there is always the possibility that HMRC will amend the terms to be less favourable. Although the clock starts ticking once registration is made - the taxpayer will have either seven or ten months to make a report of the irregularities, depending on the tax rates adopted - best advice is to register now to take advantage of the offer on the table. More information can be found at http://www.hmrc.gov.uk/disclosure/liechtenstein-disclosure.htm.

HMRC’s announcement that further amnesties will be forthcoming for other professional groups confirms their appeal for the taxing authority, regardless of uptake. The formulaic self-assessment approach with HMRC rubber-stamping the vast majority of disclosures is very attractive to an authority whose ongoing cuts in resources is at odds with its increasing need for revenue.

Medical professionals wishing to make a disclosure under the THP should register before 31 March 2010. Following registration, all duties must be paid and forms submitted by 30 June 2010. Further details can be found at http://www.hmrc.gov.uk/tax-health-plan/index.htm. Those who feel “left out” as they have not yet qualified for an amnesty can beat HMRC to it – a voluntary disclosure will still offer the chance of significantly reduced penalties.

Background

I am afraid that here will be increasing numbers of redundancies and job losses in the foreseeable future and the subject of lump sum termination payments and the pitfalls of not deducting income tax and/or Class 1 NIC is a difficult one. I want to be absolutely clear that it is wrong to assume that someone is automatically entitled to a tax free payment when they leave or lose their job. This is a mistake made by many employers.

The exemption and the pitfalls

For income tax purposes, there is a limit of £30,000, but only for payments that fall to be taxed under Section 401 ITEPA 2003. To come within s401 the payment must not be otherwise chargeable to tax and this is where HMRC starts asking a lot of questions; officers seeking first to establish if the payment is taxable as earnings under S62 ITEPA 2003, or as a restrictive covenant payment under S225 ITEPA 2003.

HMRC guidance at EIM 12850 indicates that taxable amounts within Section 62 include a payment received under the terms and conditions of service. HMRC will want to see the contract of employment, staff handbook or any letter or other documentation that will indicate whether there is a contractual entitlement to the payment to bring it within Section 62. In my experience too many employers fall foul of the desire to say “thank you and goodbye” when perhaps “cheerio and good luck” is enough. Careless words cost money. Paperwork that might indicate to HMRC that the payment was a termination bonus or payment for past present or future service should be avoided like the plague.

Garden leave payments, made when the employee is sent home instead of the employment being terminated are earnings within Section 62. PAYE and Class 1 NIC deductions should continue to be deducted in the normal way. Restrictive covenant payments, usually provided for in the contract of employment or a compromise agreement, are liable to income tax and Class 1 NIC under s225.

Payments in lieu of notice cause most problems, HMRC seeking income tax by virtue of Section 62 if the terms and conditions of employment are the source of the payment or if there is a custom or practice of making such payments.

Genuine compensation payments for loss of office or employment will come within S401, but HMRC will scrutinize such payments and may need some convincing that they are compensation, not earnings within Section 62. We may need to establish that the payment is rooted in the termination of the employment, as opposed to coming from the employment.

Statutory redundancy payments are exempt but at £330 per week will not exceed the £30,000 exemption limit. Non-statutory redundancy payments should fall within Section 401 and be exempt within the £30,000 limit, but HMRC will check that the payments are what they are called.

Taxable amounts

Payments of salary, bonus, commission, arrears of pay and holiday pay should be taxed in the normal way and Class 1 NICs should also be deducted, as should contractual payments in lieu of notice or any contractual compensation. If income tax is due and the payment is made before the employee leaves it should be included in gross pay and PAYE operated in the normal way. When a taxable payment is made after the employee has left and been given form P45, tax should be deducted at the basic rate. The employer should write to HMRC to advise of the amount and date of the lump sum payment and the amount of tax deducted. The employee should be provided with a copy of the lette

NIC

There is no equivalent exemption limit in the NIC regulations, which means that a payment is either fully liable as earnings or the payment is not liable if it outside the definition of earnings. This is irrespective of the amount paid. A payment is within S401 and exempt (up to £30,000) will not be earnings for Class 1 NIC purposes. HMRC guidance for Class 1 purposes is limited, but note what is said on “ex-gratia” payments to employees/directors on leaving a company:

“Be careful if a payment to a director of a small company is described as ‘ex-gratia’. If the director receives such a payment while in office, it is unlikely that you can accept the payment as anything other than earnings.

Before reaching any conclusion you must find out:

• the reason behind the payment
• what happened to the normal remuneration (salary, fees, bonuses)
• if the company is paying normal remuneration and, if not, why not
• why the company regard the payment as ex-gratia
• if only selected directors get these payments, why the others are treated differently.”

I have recently seen HMRC arguing that an ex-gratia payment is liable to income tax and Class 1 NICs because it has had its source in the employment. Be warned and ensure that there is documentation to support the argument that the payment stems from the termination, not from the employment.

Remember, you cannot assume that a termination payment is exempt. Check the facts and the documentation. There is no formal clearance procedure, apart from redundancy payments, so again be warned!

Since the merger of the Inland Revenue and HM Customs and Excise we have been interested to see how their combined powers have been used on businesses subjected to VAT audits

Background

We are acting for a number of clients who own retail outlets and with whom HMRC have taken a particularly aggressive approach. Following a VAT Tribunal ruling that found in favour of HMRC regarding the liability of certain products. HMRC then began to conduct unannounced invigilation visits to the premises of the businesses concerned.

During the visits they interviewed members of staff, demanded the production of till receipts, oversaw the ringing up of products and monitored the tax settings in the till which determined the liability of goods as they were sold.

Invigilation is a methodology usually adopted by VAT officers when they are suspicious that takings are being suppressed but HMRC admitted there was no such allegation in this case. It was our concern that they were merely on a ‘fishing trip’ to see what information the unannounced visits and interviews with staff produced.

Wide ranging powers

Most advisers are aware that VAT officers have wide ranging powers in relation to entry into business premises and the inspection of business records. But there are limits placed on officers under the legislation and it was these limits that were brought to a head in this case.

At first reading the legislation relied upon by HMRC appears quite draconian. The VAT Act 1994, Schedule 11 deals with administration and enforcement and section 7 (2) relates to the furnishing of information and production of documents.

‘(2) Every person who is concerned (in whatever capacity) in the supply of goods or services in the course or furtherance of a business or to whom such a supply is made, every person who is concerned (in whatever capacity) in the acquisition of goods from another member State and every person who is concerned (in whatever capacity) in the importation of goods from a place outside the member States in the course or furtherance of a business shall -

a) furnish to the Commissioners, within such time and in such form as they may reasonably require, such information relating to the goods or services or to the supply, acquisition or importation as the Commissioners may reasonably specify; and

b) upon demand made by an authorised person, produce or cause to be produced for inspection by that person –

i. at the principal place of business of the person upon whom the demand is made or at such other place as the authorised person may reasonably require, and

ii. at such time as the authorised person may reasonably require, any documents relating to the goods or services or to the supply, acquisition or importation.’

As can be seen from this extract an officer can demand the production of ‘any documents’ by ‘any person’ who is involved in the supply of goods and services but these demands must be ‘reasonable’.

Agreement reached with HMRC

In our client’s case when the officers visited their outlets unannounced, the officers demanded the
immediate production of documents from the staff. What the officers had not done was advise our client that their obligation was to produce documents that were reasonably required and within a reasonable time – not necessarily on demand. Another concern was there were no independent witness present when the staff were being interviewed. In our opinion the officers were not acting reasonably.

HMRC officers explained that their internal guidance states that to make such demands during the trading hours of a business is ‘reasonable’. However, we took a different view and suggested it was not reasonable in this type of case, to interview staff and demand the production of records from them particularly without the ‘officers’ of the business being present. The staff have no responsibility in the business for such matters and may not understand the relevance or importance of the questions being asked.

Providing the information required

We therefore required HMRC to stop making unannounced visits and agreed to provide them with the data they required within a reasonable timeframe. Staff were also instructed not to provide any documents nor answer any questions in relation to the business if further unannounced visits took place.

Of course HMRC were not happy with our intervention but we reminded them of something we are sure they already knew, the failure to comply with Schedule 11 section 7 (2) has no immediate consequences. Unlike most legislation where there is a penalty for failing to comply, for example a fine, in the case of section 7 (2) there are no such consequences. Only when a written notice to produce is ignored can HMRC impose a fine for failure to comply.

Criminal matters

HMRC do have the powers of arrest under the Customs and Excise Management Act for obstruction of an officer but this is most unlikely to be enforced in relation to a civil matter. If HMRC really had cause to exercise their powers to demand immediate entry and production of documents they could of course have obtained search warrants, but that is a whole new area of discussion, and not relevant to the issue being discussed.

One final comment, the VAT Act gives officers the right to inspect, which is very different to search. Inspect means ‘look not touch’ so if the officers are not handed a document they cannot search for it by opening drawers or cupboards so be wary as they may try to get you to open drawer or cupboard for them.