Crackdown on abuse of UK businesses

Reforms are being considered that will ensure that Scottish Limited Partnerships continue to be used as a legitimate vehicle for investment in the UK.

Measures to crack down on the abuse of a specialised financial arrangement to launder foreign money through the UK was unveiled at the end of April 2018. This is part of a package of government reforms.

Scottish Limited Partnerships (SLPs) and Limited Partnerships (LPs) are used by thousands of legitimate British businesses, particularly the private equity and pensions industry, to invest more than £30 billion a year in the UK. SLPs and LPs are business entities created by two or more partners where at least one partner is liable for what they invest.

However, evidence published shows the growing evidence that SLPs have been exploited in complex money laundering schemes, including one which involved using over 100 SLPs to move up to $80 billion out of Russia. They have also been linked to international criminal networks in Eastern Europe and other locations and have allegedly been used in arms deals.

Figures published, as part of the launch of the government consultation on this issue, show that just 5 frontmen were responsible for over half of 6,800 SLPs registered between January 2016 and mid-May 2017. By June 2017, 17,000 SLPs, over half of all SLPs, were registered at just 10 addresses.

New proposals would make it clearer who runs limited partnerships to enable British investors to continue to use them legitimately and invest in the UK, while cracking down on their use in unlawful activities. These include:

  • Requiring a real connection to the UK, including ensuring SLPs do business or maintain a service address in Scotland.
  • Registering new SLPs through a company formation agent, this will ensure that frontmen will be subjected to anti-money laundering checks.
  • New powers for Companies House to remove limited partnerships from the company register if they are dissolved or are no longer operating.

The reforms being proposed will apply to all limited partnerships in the UK and will also include new annual reporting requirements for limited partnerships in England and Wales and Northern Ireland, all of which will help Companies House ensure they comply with the law.

Last year, the government introduced laws requiring SLPs to report their beneficial owner and make their ownership structure more transparent, this resulted in an 80% reduction in the number of SLPs registered. Recent, additional reforms seek to raise standards further.

Thousands receive back pay

In a recent press release, HMRC urged underpaid workers to complain as figures show that the number of workers getting the money they're owed by employers has doubled after interventions by HMRC.

According to latest figures, in 2017-18, HMRC investigators identified £15.6 million in pay owed to more than a record 200,000 of the UK’s lowest paid workers.

HMRC launched its online complaints service in January 2017, and this has contributed to the 132% increase in the number of complaints received over the last year and the amount of money HMRC has been able to recoup for those unfairly underpaid.

The figures are published as the government launches its annual advertising campaign designed to encourage workers to act if they are not receiving the National Living Wage or the National Minimum Wage.

Industries most affected include restaurants, bars, hotels and hairdressing.

Further information:

  • People not receiving at least the minimum wage can fill in an online pay and work rights complaints form.
  • It is the responsibility of employers, no matter how big or small, to pay the correct wage to their staff, and failing to do so can result in fines of 200% of the arrears, public naming and, for the worst offences, criminal prosecution.

From 1 April 2018, the government’s National Living Wage rate increased by 33p to £7.83 per hour for those aged 25 and over.

The National Minimum Wage increased:

  • by 33p to £7.38 per hour for those aged 21 to 24;
  • by 30p to £5.90 per hour for those aged 18 to 20;
  • by 15p to £4.20 per hour for those aged 16 to 17;
  • by 20p to £3.70 per hour for apprentices.

Premium rate fraudsters

There seems to be an endless growth in illegal sites who aim to make money by claiming to be associated with HMRC.

The Government announced recently that it had scuppered one of these schemes.

According to HMRC:

Scammers create websites that look similar to HMRC’s official site and then direct the public to call numbers with extortionate costs in comparison to the low cost and no cost service HMRC provides. These sites promote non-HMRC premium rate phone numbers as a means of reaching HMRC, but these are merely call forwarding services which connect callers to HMRC at a significant price. HMRC’s own 0300 numbers are mostly free or charged at the national landline rate.

In other cases, sites charge for forwarding information to HMRC which can be provided free of charge through hmrc.gov.uk.

Hapless taxpayers caught by these websites will find themselves with hefty phone costs for being routed to “free” HMRC helplines. The specific tactics and costs on each site vary, but the maximum cost of a call is £3.60 a minute, capped at £36 per call. Anecdotal reports show the average victim reporting a cost of around £15 per call.

 

To counter this activity, HMRC has successfully challenged the ownership of these websites, masquerading as official websites, and taken them out of the hands of cheats. Analysis has shown that had HMRC not taken this action then the public would have lost £2.4m to these phone scams.

This announcement comes at the start of scam awareness month organised by Citizens Advice which is running throughout June 2018. In 2017, HMRC took a formal approach to denying others ownership of misleading domains, so far 105 domains have been recovered which were being used to host a range of misleading content.

Readers who need to contact HMRC can find the official contact numbers at https://www.gov.uk/contact-hmrc.

Tax free home rentals

Since April 2016, the amount of tax-free income you can earn from letting a room in your home has increased to £7,500 per annum, or £3,750 if two persons own a property jointly.

You can use the scheme if:

  • you let a furnished room to a lodger
  • your letting activity amounts to a trade, for example, if you run a guest house or bed and breakfast business, or provide services, such as meals and cleaning

You can’t use the Rent-a-Room Scheme if:

  • not part of your main home when you let it
  • not furnished
  • used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
  • in your UK home and is let while you live abroad

 

If your gross receipts from letting aren’t more than the Rent-a-Room limit of £7,500 (or £3,750 if jointly owned), you don’t pay tax on your profit. If they’re more than the limit, you may still be able to benefit under the Rent-a-Room Scheme.

 

Gross receipts include:

  • rental income (before expenses)
  • any amounts you receive for meals, goods and services, such as cleaning or laundry
  • any balancing charges

 

If your gross receipts are less than £7,500 (or £3,750), you are automatically exempt from tax on that income.

 

If you’ve made a loss, however, it may be better for you to pay tax in the normal way – that is, on your receipts less expenses.

 

If your gross receipts are more than £7,500 (or £3,750), you can choose how you want to work out your tax. It can be the actual profit made (rents less expenses) or the gross rents received less the £7,500 (£3,750) allowance; whichever produces the better result.

Problems paying your tax on time

You would be hard pushed to find a tax payer who was happy to pay tax. Whatever the economic benefits of taxation, we would all prefer that someone other than ourselves paid the bill.

Companies are obliged to disclose their corporation tax liabilities in the year in which they are charged. Profits are stated net of tax due and any retained profits are available for the shareholders to draw as dividends.

Sole traders and partnerships do not have to disclose current year’s taxation in current year’s accounts. Therefore, conversations about profitability and income tax can be separated.

Hopefully, readers who are self-employed will have settled any income tax due 31 January 2018. If not, HMRC’s debt collectors will no doubt be calling in their dues. There is also the second payment on account for 2017-18 which is due 31 July 2018.

If you have difficulty paying your tax? What is the best strategy?

Without a doubt, it is not burying your head in the sand. HMRC are quite clear in their advice:

Contact HMRC as soon as possible. You will have to pay interest if you pay tax late and you may avoid penalties by contacting HMRC.

If you can’t pay before the deadline, call the Business Payment Support Service. Anyone can use this service, not just businesses.

 

Business Payment Support Service
Telephone: 0300 200 3835
Monday to Friday, 8am to 8pm
Saturday and Sunday, 8am to 4pm
 

Nominated partners in business partnerships can negotiate time to pay with HMRC on behalf of the partnership or individual partners.

So, if you’ve missed your payment date, or if you’ve received a payment demand, like a tax bill or a letter threatening you with legal action, call the HMRC office that sent you the letter.

Call the Business Payment Support Service if you haven’t received a bill or letter about payment yet.

You will need to convince the person you speak with at HMRC that you have genuine reasons for late payment, so it pays to get your ducks in a row before you call.

Green vans to get tax boost

The government is looking at ways to incentivised users of vans to go green. According to the statistics, less than one in every two hundred vans (0.4%) bought in 2016/17 was an ultra-low emission model.

To tackle this issue, the government is seeking views on reforms to vehicle excise duty, currently charged at a flat rate of £250 for all vans, to make it more affordable to buy greener models.

In a related matter, the reduced duty rate for red diesel – believed to be holding back the use of cleaner fuels by non-road vehicles and machinery in towns and cities (for example cranes or generators used on construction sites) – is also under the reform microscope.

Red diesel, which accounts for 15% of all diesel consumption in the UK, currently benefits from a reduced rate of 11.14p per litre compared to the standard charge of 57.95p.

A government spokesman is quoted as saying:

“We want to help ‘white van man’ go green. We appreciate that buying a new van is a major investment for small businessmen and women and want to help make environmentally friendly choices more affordable.”

It will explore creating a graduated first year rate for vans, as is already in place for cars. Most van purchases would pay less tax in the first year as a result of the change.

These proposed changes are part of wider proposals to improve air quality in our towns and cities.

For example, red diesel contributes to air pollution by producing nitrogen dioxide, a toxic gas that inflames the lining of the lungs. It is particularly harmful for the most vulnerable in our society, such as children with asthma living in urban areas where it is used by non-road vehicles and machinery.

The reduced rate of duty for red diesel costs around £2.4 billion a year in revenue compared to if duty was charged at the main rate. Red diesel for agricultural use, fishing vessels, home-heating and other static generators, will be out of scope.

IR35 to get a facelift in the private sector

HMRC is launching a new consultation to make sure that people who effectively work as employees pay the right amount of tax.

As announced at the Autumn Budget, the consultation will look at how to increase compliance with the existing ‘off-payroll’ working rules. These rules mean that contractors such as IT and management consultants who work through their own company, but are in practice employed by a third party, pay the right tax as employees.

Evidence suggests that the tax will be lost of up to £1.2bn a year by 2023 as a result of people getting the rules wrong, and incorrectly paying tax as if they were self-employed. The consultation will look at how to make these rules work better. The genuinely self-employed will not be affected.

Last April, the government reformed off-payroll working in the public sector, successfully increasing compliance. The change has meant £410 million in additional revenue. This new consultation includes the option of extending those reforms to the private sector, although no decisions have been made. It draws upon the lessons from the public sector change, by consulting on how the rules can be improved for the private sector and includes alternative options for addressing non-compliance.

Existing off-payroll working rules (IR35) were introduced in 2000 and are intended to stop individuals avoiding employment taxes by working through their own company. IR35 affects contractors including IT consultants, management consultants, and project managers.

HMRC estimates that in 90% of cases within the private sector, the IR35 rules are not applied correctly and we should probably expect that this consultation will result in tightening of the IR35 regulations.

Genuinely self-employed persons will not be affected.

Readers may remember that in April 2017, the government reformed the off-payroll working rules for engagements in the public sector. Public authorities are now responsible for determining whether the rules apply and deducting and paying the appropriate taxes.

Apparently, external research on initial implementation shows that the reform has had relatively little impact on projects or vacancy filling in the public sector.

The consultation will close on 10th August 2018 and we will add further commentary on this topic as and if changes are subsequently made.

Are you due a tax refund

There is something uniquely satisfying about a tax refund. Of course, you must first overpay tax before it can be refunded, but there is a universal joy in receiving a cheque or direct payment to your bank account from HMRC.

Occasionally, HMRC will volunteer the information, they may even send you a formal assessment and advise you that a refund can be claimed. A more likely prompt will come from your accountant as we have an eye for these things…

A selection of situations that may lead to an overpayment are published on HMRC’s website, and we have to say, the list is not complete. They include the following.

You may have overpaid tax if you:

  • are employed and had too much tax taken from your pay, perhaps due to inaccurate coding of your tax allowances, benefits or expense claims;
  • have stopped work;
  • have submitted a tax return that discloses that too much tax has been paid;
  • have paid too much tax on pension payments you have received;
  • or if you have bought a life annuity.

You may also be able to reclaim tax if you have:

You may also have been entitled to claim an allowance, say the Marriage Allowance, and were slow to make the claim – in our experience HMRC will advise you that such allowances exist, but not that you could make a claim.

More of HMRC’s systems are being computerised, and surprise, surprise, accidents do happen. Without the watchful human touch, it is down to taxpayers or their advisors to spot the faux pars.

If you have that itch, that maybe you have paid too much tax, we would be delighted to cast an eye over your numbers and fire off a few pointed questions to narrow down the possibility that maybe you too have paid too much tax.

Stop the Loan Sharks

We have all heard of individuals who have been affected by the nefarious antics of loan sharks, lenders that breach the normal fiscal rules by taking advantage of needy persons who do not qualify for support from mainstream banking sources.

The government has announced additional funding to crack down on this activity. Their announcement, published 25 April, is worth a mention.

Loan sharks face a fresh crackdown today (25 April), with more funding to tackle unlawful lending, and an increase in the amount of money seized from loan sharks to support those most vulnerable to their nasty tactics.

  • over £5.5 million will be spent to fund the fight against loan sharks, helping to investigate and prosecute illegal lenders, and support their victims
  • £100,000 of money already seized from loan sharks will also be spent to encourage people in England at risk of being targeted by loan sharks to join a credit union, helping them to access a safer form of finance and get their lives back on track
  • and for the first time in Northern Ireland a new education project will be created to raise awareness of the dangers of loan sharks and to support vulnerable communities

In total, £5.67 million of funding will be provided to Britain’s Illegal Money Lending Teams (IMLT) and bodies in Northern Ireland to tackle illegal lending – a 16% increase compared to the previous year. The money will be used to investigate and prosecute illegal lenders, and to support those who have been the victim of a loan shark.

Since the Illegal Money Lending Team was established in England in 2004, they’ve made over 380 prosecutions, leading to 328 years’ worth of sentences, and have written off over £73 million of illegal debt, helping over 28,000 people to escape the jaws of the loan sharks. Similar teams operate in Scotland and Wales.

In Northern Ireland, the Consumer Council will lead its first ever education and awareness campaign to help prevent the most vulnerable from being bitten by loan sharks, and the Police Service of Northern Ireland (PSNI) will get funding for a specialised officer who will lead on illegal lending within the Paramilitary Crime Task Force.

Whilst government action in these areas is to be applauded, there seems to be no concerted action to assist organisations that do provide credit to individuals who would find it difficult to obtain credit from a High Street bank or other regulated sources.

When child benefit becomes a liability

A typical two parent, two child family can claim £34.40 per week in Child Benefit (CB). In a tax year this would amount to £1,789.

Often, this becomes part of the family housekeeping and is spent.

Consider Mary and John and their two children. John collects the CB, it is paid into his current account and used to fund the household budget. John elected to stay at home and look after the management of the family. Mary is a solicitor and has a full-time job in a local practice.

In the current tax year, Mary will receive bonuses that increase her salary to £60,000. This is £10,000 more than her previous year’s salary which amounted to £50,000. After a 40% income tax deduction, Mary will receive an additional £6,000. Mary and John decide to use the extra cash to part finance a holiday in Florida and top up their ISAs.

Imagine their surprise when Mary discovers her self-assessment tax bill is £1,800 more than she expected. The culprit, the High Income Child Benefit Charge (HICBC).

The HICBC levies an additional tax charge on families that claim CB and where one of the parents earns more than £50,000 in a tax year. Effectively, CB must be repaid at the rate of 1% of CB received for every £100 the highest earner’s income exceeds £50,000. In Mary’s case, this excess income was £10,000 and therefore 100% of any CB received will have to be repaid. Accordingly, Mary’s self-assessment included a £1,789 HICBC.

Reluctantly, Mary and John had to withdraw the £1,789 from their ISAs.

Mary thought that receiving just £6,000 of her £10,000 bonus was bad enough, but she now realises that the true “tax” cost was £5,789 (£4,000 income tax and £1,789 HICBC). The combined tax hit was not 40% of her income but 58%.

Parents who exceed the £50,000 income limit for the first time and draw CB will find themselves in a similar position to Mary and John and will need to plan accordingly.