In an effort to resurrect an old (and surprisingly popular) tradition, TW Ed will try very hard to dig up some nuggets from the last few weeks’ posts. Feel free to contact him with suggestions
Notable because of the comprehensive reply kindly provided by wamstax to Samson1, a taxi driver who had recently dealt with the initial Business Records Check (BRC) phone call from HMRC.
“HM Revenue and Customs (HMRC) carry out checks on how businesses keep their records. For small and medium-sized enterprises (SMEs) this is known as the Business Record Checks (BRC) programme. This programme broadly aims to support SMEs before they have filed their tax return to ensure they get it right first time.
Since November 2012 BRC has involved an initial ‘triage’ stage which initially assesses record adequacy through a set of standardised questions. This helps to minimise the burden on customers, and filter out as many as possible at an early stage. For those identified by the ‘triage’ as potentially keeping inadequate records, a Visiting Officer from HMRC visits them to discuss their record-keeping practices. Those who are found to have inadequate records at the visit stage are informed of the changes required, and receive a follow-up visit to check if these changes have been made.
In short this is not an enquiry but unfortunately it could lead to one if you have not been keeping reliable records on a regular basis and you have previously filed self employed - SA - tax returns.
If however you have not previously files SA tax returns then you should try to get the visiting officer to point out where your records are inadequate and listen for learning lessons or improvements that you will be able to make.
Please see the following link from the HMRC manuals to their staff regarding business records checks
and the following reading might lead you to understand how others have seen the BRC programme
that might be of use to your understanding as to what is going on.”
When I spoke to wamstax about BRCs, he was in the middle of advising on a COP9 tax enquiry, so our conversation was necessarily brief. He agreed that it was generally advisable for a taxpayer to enlist his or her adviser to deal with the opening call – not least because, as he put it, “the adviser can emphasise that the taxpayer’s books and records are under the adviser’s supervision”. With regard to HMRC’s triage process, (and drawing unscientifically from our own experience), HMRC seems unlikely to be dissuaded from a visit to a cash-based business, which makes one wonder, what is the point of HMRC’s initial conversation in such cases?
AGard’s innocent question about whether or not he had to tell HMRC about his website activity threatened to raise all kinds of technical issues. The “Badges of Trade”, which in aggregate help to determine if an activity is actually trading, are key principles often argued in tax cases to this day. He made the point, however, that
“Overall it's running at a loss, and I don't intend or expect to make any money out of it.”
Here be dragons but Pawncob tried to reassure AGard; however, other contributors took exception to Pawncob’s concise approach. To be fair to Pawncob, the apparent lack of a profit motive or expectation of profit seems to me to be a fairly major stumbling block for something to be considered a trading activity. Its absence is not of course categorically fatal, having regard to other badges of trade but it will almost certainly constitute more than a “flesh wound” in the vast majority of cases. (For the badges of trade in more detail, please see Mark McLaughlin’s 1998(!) article “The Badges of Trade”, and HMRC’s Business Income Manual at BIM20200 etc.
(As an aside, I shared a quite enjoyable meal with a bunch of accountants a week ago. The, er, scintillating conversation turned to those very same badges of trade and one of the accountants did his best to convince me that Rutledge was proof that certain transactions could not be trading due to their subject matter. He did struggle to explain what the purchase of a million toilet rolls might constitute, if not trading, but he got an “A” for effort).
While BIM20090 initially says, “You should be consistent in your approach to transactions that may be trading transactions, irrespective of whether they lead to a profit or a loss”, it then goes on to say, “However, you should examine critically claims that a trade exists where that claim may have been made to get relief... ... for the costs of a hobby...”
And of course the rub for non-commercial trades – such as hobby farms – is the restriction on relief for losses which can be, I hope, neatly summarised such as per ITA 2007 s 66 where loss relief against other sources is prohibited if the trade is not “commercial” – one leg being the trade’s being carried on with a view to the realisation of profits. Happily, ITA 2007 s 83 is there, if there is no other route. (Carry forwards to set against future profits of the same trade)
So, in a nutshell, I’d be prepared to venture that AGard’s apparent lack of profit motive and of commercial organisation, etc., meant that there was no trade to return to HMRC – certainly no net taxable income. With a view to how things might ultimately develop, Pawncob’s advice to keep records in case the activity ultimately turned profitable seems well-intended. While later contributors were right, I think, to point out that a hobby is a hobby and a trade a trade, if the hobby were to develop (as many do) there might at some stage be a tipping point where losses should be claimed. (I think stockpiling pre-trading expenses might be a stretch, where there is an income stream as well, as in AGard's case, but perhaps not in all cases). Returns and claims might then be beneficial. Until then, there will be little interest from HMRC where there is no profit to tax (as per BIM20090).
In law, the obligation lies with the taxpayer to notify HMRC only to the extent that there is a liability to tax – TMA 1970 s 7, noting in particular the exceptions from obligation at (3)-(7) and that there will be no penalty for failure to notify, if there be no net tax liability by the normal Self Assessment filing date.
Much interest and useful debate followed Savoy889’s hypothetical scenario:
“Seller, individual, is selling an Asset, valued at 5,000 pounds to a Buyer. Normally, Sell will be liable for income tax, but he transfers the Asset into a newly formed LTD as a 5,000 pounds non-cash consideration, in exchange for 100% of the shares. From what I was told, this means that Seller will be liable for income tax only if he liquidates or sells the LTD. LTD then sells the Asset to the Buyer for 5,000 pounds. Balance sheet should now be 5,000 pounds cash as Assets and 5,000 equity. Is this correct?
My biggest question is - is the LTD liable for Corporate Tax on these 5,000 pounds? I guess not, but please confirm.”
I think it would be fair to say that there seemed to be some confusion on Savoy889’s part – certainly between Income Tax and Capital Gains Tax. Happily, Loza and BD6759 helped out to ascertain that the Asset in question was a website, and ascribe tax treatments depending on whether the website were held by the Seller as stock in trade, or as a fixed asset of the trade – with Loza summarising:
“This is becoming confusing.
If the asset is an intangible asset then CGT treatment applies as previously stated, TCGA 1992 s 165 would be available providing the OP is disposing of an asset used in his trade, which I assume is the case.
If the sale of the asset does or would result in Income Tax (which I accept is possible) then it cannot be anything other than stock in trade, so the disposal to the company (a connected person) is treated as made at market value, whatever the actual consideration) (ITTOIA 2005 s 177).
The parties concerned can make an election (s178) to value the stock on transfer at the higher of its original cost or the actual sale proceeds.
The disposal to the company results in the asset changing hands, it is not an importation, nor a transfer, it is a disposal for tax purposes and the treatment above applies.”
To which BD6759 agreed – I think to everything, although it could perhaps have been only to Loza’s opening point. We shall come on to the concept of “money’s worth” later. I am not sure that the Transactions in Securities rules can dissuade me from Loza’s approach (I do not discern that there is necessarily an actionable tax advantage), or Employment-Related Securities do more than add a potential reporting obligation. Which HMRC would promptly file and forget, along with 99.9% of all the other Forms 42 ever submitted.
CRG2000 had some questions about the limits to making personal pension contributions, and how tax relief might be restricted. He had made substantial contributions, both personally and through salary sacrifice via his employer and was concerned that, in aggregate, they might exceed his net relevant earnings - sorry, relevant earnings – for the year.
Welshtrustees helpfully made the oft-overlooked point that one can contribute more than one’s Annual Allowance, but you end up with an Annual Allowance tax charge; the true limit (at least on tax-relievable contributions) is one’s relevant earnings in the year – once the basic amount has been breached. (FA 2004 s 190).
It is perhaps worth also mentioning that “relevant earnings” is determined without regard to any losses incurred in the year: FA 2004 s 190(1) stipulates that relief is by reference to relevant earnings “which are chargeable to income tax for the year”, while ITA 2007 s 23 says that aggregate income for the year is “charged to Income Tax for the tax year” at Step 1 – i.e., before losses and reliefs are offset. (But note, for instance, that employment income chargeable to Income Tax is generally net of those deductions allowable under the ITEPA code – see ITEPA 2003 ss 9-12).
Thanks also to Jason13 who pointed out that CRG2000’s employer’s contributions through salary sacrifice did not “count” as relevant earnings, (although they did count towards the total pension input amount for the purposes of the Annual Allowance charge at FA 2004 s 227 – see s 229 onwards), and for explaining the basic principles of how tax relief is actually secured within the fund and by the taxpayer, for private pensions. Assuming of course that pension input periods are coterminous with tax years.
Wooden Spoon goes to Lambs for giving Saphire23 all the career advice he/she (n)ever needed. The querist, an experienced ex-Inspector, was querying whether or not to do the AAT qualification, and probably therefore needed precious little counsel as regards the ATT. Excuses followed (a poor workman blames his/her tools, methinks). Fortunately, Saphire23 was in a forgiving mood. As our website is now mobile-friendly, Lambs will have fewer excuses to hide behind, in future - although he assures me it will not happen again.
An interesting technical query to round off with: PJW11 asked, what would be the tax consequence, if any, if his main client were to pay privately for his surgery? PJW11 was confident that he was self-employed, although he/she admitted to working mainly for the one client. Of course an employer’s provision of medical treatment would normally be taxable on the employee unless necessarily incurred abroad, etc, under ITEPA 2003.
However, if we assume PJW11 is correct about being self-employed, what then? Several contributors saw the absence of money (or money’s worth) as no bar to its being taxable. HMRC will be delighted. I recommend BIM400051 and the nugget which is Tennant v Smith , specifically the issue of trading receipts and “money, or money’s worth”. Google yields some interesting results. The rules are quite different for VAT, of course, which has no issues in principle with determining value for non-monetary consideration. (VATA 1994 s 19). Vouchers are, by and large, a no-no.
Finally – and I realise that this is in no way a recent post but, having stumbled across it one evening, I thought it only right to share. Thank you, Duggy1: you, Sir or Madam, are a star.
That's all for this month: please do feel free to suggest any topics from the last few weeks!