New Reasonable Excuse guidance for CIS penalties

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New Reasonable Excuse guidance for CIS penalties

April 03, 2012 2012

Google the term "reasonable excuse" and nearly 55,000 entries will come up. We've not checked (lack of time and inclination !), but we would make an educated guess that the vast majority of these hits will be related to recent tax arguments around penalties being imposed by HMRC for late employer or CIS (Construction Industry Scheme) returns. The main crux of which is usually whether a reason, or "excuse" as HMRC calls it, for late filing of statutory tax returns is "reasonable".

Anyone who has followed, or had the need to investigate the Tax Tribunal's stance on such arguments in recent cases will know that there is no clear definition of what a "reasonable excuse" actually is. Just when it looks like HMRC's view is rendered irrelevant, i.e. because most "excuses" are being passed as okay by the Tribunal, HMRC gets a second wind and come away with a number of victories by the very same Tribunal.

So it was interesting to see HMRC's CIS Reform Manual being updated recently to expand on their definition of what constitues a "reasonable excuse".

The key question is though whether this will make HMRC easier to reason with when a CIS return is filed late, and consequently whether fewer cases will end up at the First Tier Tax Tribunal. over the months ahead.

First glance shows that there is considerably more guidance within the CIS manual than there used to be on this issue which can only be a good thing surely. There does appear to be much more clarity around some common areas of doubt, e.g. HMRC goes into a lot of detail here about what illnesses, and for whom, will be accepted as relevant to the late filing as well as some of the issues behind cashflow problems that are often debated and they also provide more information about what is NOT an acceptable "excuse" here which includes such things as an incompetent agent, a nil tax liability or even being too busy running the business.

We have said before that, not only is it often difficult to see what precisely has been changed whenever an HMRC manual is updated, we prefer not to get too bogged down with what HMRC guidance says in any event as it is only guidance after all, and only HMRC's view on things (which isn't necessarily the correct, or only view). So we won't get too worked up about these CIS manual changes at this stage unless and until we have to consider a client's specific situation when late filing penalties are being applied. Hopefully this guidance will change things on a practical level for the better but only time will tell. We will of course keep you posted on developments.

For those of you interested in keeping up to date with such matters though the index to the published changes is here

 

 

Cheap often means costly for PAYE tax advice

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Cheap often means costly for PAYE tax advice

March 14, 2012 2012

Things are fairly quiet from HMRC and others this week on the PAYE front in the run up to next week's Budget so this is as good a time as any to share a couple of recent experiences as a cautionary tale for any employers out there looking to cut some corners on tax compliance.

Now we all know that things are tough out there and we are all looking at ways to save a few extra pounds here and there and things are no different when businesses are looking at consultancy spend on things like tax advice. BUT, as these two clients can testify, cut too many corners and it could come back to bite you somewhere painful !

In the first case, the client asked us to quote a fee to prepare a staff travel guide, mostly around the Permanent v Temporary Workplace rules and the interaction with claims for accommodation and meal costs. Fairly straight forward stuff. So we quoted a sensible fee assuming that the client would just give us the nod to get started. The client actually notified us to say that, to keep costs down, they would prefer to draft something themselves and for us to have a "quick" check over it before everything is finalised. Fair enough we thought.

As it transpired however, the guidance document that the client prepared was (we better watch what we say here as we know the client often reads our blogs !!) not very good (!!), and we had to spend a fair amount of time knocking the document into shape so that it could be used as intended. Re-doing the client's own work was actually more time consuming than doing something from scratch and it ended up costing the client more in fees than we originally quoted.

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The other case we should mention is a business who came to us more than a year ago shortly after a PAYE audit had been completed by HMRC. Apparently HMRC were challenging some potential errors and the employer was looking for some assistance in going back to HMRC.

Often with this type of scenario, it is "how long is a piece of string" when trying to estimate fee costs but we outlined our daily rate for the work with a reasonable estimate of total costs given that none of the issues seemed too problematic to us. We don't know what this business was expecting, especially as our fees are an awful lot less painful than any other firm claiming to have PAYE expertise, but after much sucking through teeth they decided to "go it alone" in dealing with HMRC.

Fast forward to a few days ago when we got a call out of the blue from this same business who have been unable to bottom things out with HMRC and are now being asked to make a settlement of tax, NI, interest and penalties for the amounts HMRC believe to be due. Once again we have been asked to assist this business in "making the problem go away". We are still trying to ascertain exactly what has been said and by whom, and whether there is any technical basis for HMRC's stance, before we consider fee costs but it is almost certain that our costs will be far more than what we quoted a year or so ago, especially if, as we suspect, things have been left so late that we will have to prioritise the work ahead of everything else. If the potential client is reading this, you have been warned !

So, the moral of the story here is, by all means be cash savvy when spending any of your business's money but be very careful when it comes to cutting corners when it comes to PAYE tax advice as too many cuts could cost more in the long run. It's not like DIY where a lopsided shelf or an ill fitting door isn't the end of the world. DIY'ing on PAYE can cost real hard cash!

IR35: where is this going ?

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IR35: where is this going ?

March 02, 2012 2012

We normally try to steer clear of subjects that are covered by every man and his dog but IR35 is a subject that is not going to go away so we thought we should throw our 'tuppence worth' into the hat given that it is such a topical issue just now.

Most readers will surely have seen all the hoo hah in the press in recent weeks around public departments paying senior staff through their own limited companies in order to (illegally) avoid PAYE and NI (amongst other advantages). It all kicked off with the Student Loans Company (a Government quango), then the Department of Health was 'outed' and lo and behold, even HMRC have been found to be 'at it'.

Most of the headlines around this have been screaming about "IR35 avoidance" or whatever. However, technically speaking, most if not all of the above cases may have nothing whatsoever to do with IR35 - for the simple reason that these posts are Offices of Employment and automatically fall within PAYE and NI legislation anyway and so the use of a limited company, and IR35 legislation, is mostly a red herring. However, what it has highlighted, is that the issue of PAYE and NI being avoided through "disguised employments" is a huge issue across the country both in the public and the private sectors. Some of this is done legally (although you have to question whether it is right morally) by taking advantage of the vague legislation that is IR35, whereas others, such as the ones we mention above, are illegal in that they clearly go against tax law and have no technical basis whatsoever.

There has been much debate over many years on how and if IR35 legislation can be improved to reduce or remove the current uncertainty and unfair advantages around the use of Personal Service Companies. Whilst the recent public sector 'errors' are nothing new, in that the private sector has been doing this type of thing (legally and illegally) for years, it has infuriated Joe Public that well paid senior civil servants are "dodging" tax so blatantly and there is now an even greater pressure on HMRC and the wider Government to fix this issue once and for all.

So, are we really going to see any changes coming through as a result of this and, if so, what might change ?

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Well, the current focus of the IR35 Forum, set up some time ago by HMRC, has been two fold: 1) to refocus HMRC efforts on high risk cases and 2) to tighten up the tests to make it clearer whether a worker is inside or outside of IR35. It appears that good ground has been covered by the Forum in the last year or so and HMRC did announce a few months ago that new procedures will probably be introduced this April around this.

The Office of Tax Simplification has also been making noises about an overhaul of the legislation in this area, some of which is linked to a more ambitious proposal to completely align NI with tax which may be some years off yet.

But is this going to be enough ? We don't think so !  Making a few tweaks here and there is never going to make much of a difference in our opinion and as long as it is still a possibility that PAYE and NI can be avoided by manipulating contracts or working arrangements, many workers and employers will continue to do so as the rewards can be significant. No, we believe that a more radical approach is needed to sort the issue once and for all, e.g. removing ALL tax and NI advantages or differences between the employed or self employed and/or a complete overhaul of the IR35 'tests' to make it impossible for ALL one man band companies to avoid PAYE and NI on earnings that they are effectively generating as an individual.

Whether HMRC and the Government can make this happen soon is the big question mark but we do believe that there is a growing realisation that a major change is not only needed but is also being demanded by the public and so there is a reasonable chance that more fundamental proposals may be tabled over the months ahead, even possibly as early as the Budget in a few weeks time, as a taster in getting this thorny issue finally nipped in the bud. And not before time we say !

As to the finer detail of how this will be achieved, we just do not know at the moment. As with most things to do with tax law though, a significant change in legislation is not easy to do and so there will undoubtedly be tears and tantrums from many along the way before we see light at the end of the tunnel.

There will be LOTS more to come on IR35 over the next while so we will, as always, keep you posted.

 

 

Some harsh lessons in employment tax

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Some harsh lessons in employment tax

February 22, 2012 2012

A couple of recent First Tier Tribunal tax cases have caught our eye this week. Not because they were particularly interesting or controversial but more because each case involved some typical errors of judgement around employment tax issues and served notice, yet again, that foolish/ naive behaviour around tax compliance will almost always end in tears.

As always, we try to inject some humour into these blog postings but there is usually a serious message in there as well.

Harsh lesson No 1 - Victor Baldorino v HMRC

Trying to be clever about paying for a car through your own limited company whilst attempting to avoid the company car BIK rules is doomed to fail.

If a car is leased by the company, paid directly by the company, and used by the director or employee for private use, it is very very unlikely that a company car BIK charge will not apply, even where the director or employee "repays" the company for the car payments in some way.

Mr Baldorino obviously thought that he was more "clever" than all the other directors who have failed this test over the years.


Harsh lesson No 2 - Victor Baldorino v HMRC

Trying to justify the claiming of business related mileage expenses, or as in this case trying to stop a company car fuel scale charge applying, is never going to be successful if no mileage records are kept. Basic stuff Mr Baldorino....


Harsh lesson No 3 - Victor Baldorino v HMRC

Poor Mr Baldorino (?!), we seem to be picking on him today !

Failure to bring any evidence or documentation to the First Tier Tax Tribunal to support your claims means that, in the words of the Tribunal,  you are "almost bound to fail". It's like those old school playground arguments where one child argues against something with the words "just because" without any substance.


Harsh lesson No 4 - Jonathon Paul Lindsay Cobb v HMRC

Denying all responsibility on YOUR tax affairs, and trying to blame everything on your employer and/or HMRC is not clever. In fact, it's the opposite and likely to earn you no sympathy when you have failed to declare your correct income details.

Instead of sympathy, Mr Cobb landed himself a 15% penalty amounting to about £26k for blaming his employer for not declaring Payments In Lieu of Notice on HIS tax return.


Harsh Lesson No 5 - Jonathon Paul Lindsay Cobb v HMRC

If a situation appears to be completely unbelievable, it usually is ! C'mon Mr Cobb, you received a termination settlement from your employer of over £1m yet you only declared £133k of income on your tax return. Did you SERIOUSLY think that the Tribunal would believe you were THAT naive not to at least speak to HMRC to raise your concerns about what you should be reporting ??

 


FAQs on employment status following Weightwatchers

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FAQs on employment status following Weightwatchers

February 08, 2012 2012

We have had a number of calls and emails in recent weeks asking what impact the recent Weightwatchers case (which you will recall was a victory for HMRC to the tune of around £23m) will have or is having in how HMRC approach situations where workers are being paid as self employed.

We seem to be repeating ourselves quite often at the moment when responding to queries so we thought it would be a good idea to flag up some typical concerns/questions around employment status on the website for all to see, together with our informed response and comments.

Q1. Does the victory against Weightwatchers mean that HMRC will win every status case now ?

A: Definitely not !  Although this case has provided yet more important precedent for HMRC to use as ammunition in the courts in future cases, there will be many situations where the Weightwatchers judgement is not relevant or helpful and so  each case will still be judged on its own merits. That said though, those organisations that are run in a similar way to Weightwatchers should be fearing the worst just now !

Q2. Are advisors just scaremongering about the Weightwatchers case or should engagers of self employed workers REALLY be concerned ?

A: Aside from collecting a huge sum of money, the Weightwatchers victory is significant for HMRC as it demonstrates (yet again) that they WILL pursue cases where the self employed argument is weak no matter how long it takes or who the taxpayer is. We have said many times before, employment status is THE biggest risk area for PAYE compliance and so ALL businesses paying workers on a self employed basis should take note of this recent case and not be blind to the potentially significant risk that their business is exposed to in paying workers in this way.

Q3. Will HMRC come after every business paying workers gross now that they have won the Weightwatchers case ?

A: No. For a start, it is not physically possible for HMRC to identify and pursue every business with self employed workers as they just do not have the resources to do so. But, more importantly, employment status has been a huge issue for as long as we can remember (which is a long time !!) and, in all honesty, the Weightwatchers case does not change anything at all. For many years, HMRC has had specialist teams targeting what they call "false self employments" and it has always been a major part of their tax compliance and collection strategy. Things will be no different going forward. Those businesses with regular self employed workers will be on HMRC's radar the same as they always have been.

Q4. Is HMRC only interested in large companies like Weightwatchers in tackling employment status ?

A: Absolutely not. For every large case that hits the headlines there are a dozen small businesses being challenged both in and out of the courts that do not come to most people's attention. HMRC's continued focus on IR35 is a very strong message that no business is too small for them to target. It's rich pickings for them whenever they get a result.

Q5. What was the main technical sticking point(s) in the Weightwatchers case to be aware of ?

A: The main crux of the case was that the level of control by Weightwatchers over how the work was done, and by whom, and the obligations on both sides to provide work and do the work were so great that the relationship was, to all intents and purposes one of employer and employee. Importantly, the "self employed" contracts in existence bore no resemblance to what actually happened in reality so the contracts were not useful evidence in this case. The key message we would stress again, therefore, is NOT to over rely on contractual terms. It is the actual working practices that are more important in tax law.

Q6. What next ?

A: It's business as usual as far as we are concerned. HMRC still focusing very much on identifying self employed workers who may be employees, lots of cases going through the courts and Optimum PAYE working with many clients in either proactively addressing the issue or in "firefighting" if HMRC have already mounted a challenge.

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