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Month: September 2024

Court of Appeal rejects HMRC’s argument for special treatment in winding-up dispute

Written by admin on . Posted in Bankruptcy, HMRC Investigations, Insolvency, Winding Up Petitions. No Comments on Court of Appeal rejects HMRC’s argument for special treatment in winding-up dispute

There’s a new government in Westminster and a “black hole” in the public finances so, HMRC might be forgiven for feeling under pressure to increase its recovery of unpaid taxes. But what is unforgivable is the heavy-handed way it seems to be going about it, particularly when it comes to winding-up petitions.

However, a welcome decision from the Court of Appeal in HMRC and Payroll & Pensions Services (PPS Umbrella Company) Ltd. shows that HMRC isn’t getting it all its own way.

Background

HMRC vs Payroll & Pensions Services (PPS Umbrella Company) Ltd [2023] EWHC 3308 (Ch) (9 Nov 2023) is a difficult and complicated case in which HMRC argued PPS should be wound up because it owes millions in national insurance contributions due to a “labour supply fraud” (i.e. treating workers as self-employed rather than employed).

At the original hearing to decide whether a provisional liquidator should be appointed, the Court also considered whether HMRC should give a cross-undertaking to pay damages to the company, if it turned out the order should not have been made.

While this may have appeared to be an uncontroversial issue, HMRC argued that they should not be required to give the undertaking, because they are “the Inland Revenue”.

But the Court disagreed: “If they are so highly confident of their position as they contend, it may be thought HMRC will have little difficulty in giving that undertaking.”

The High Court decided that an undertaking should be given by HMRC, and that it should be unlimited.

Court of Appeal decision

When the case came before the Court of Appeal in August 2024, it was asked to decide on the key issue of whether HMRC needed to provide a cross-undertaking in damages when applying for the appointment of provisional liquidators without notice?

The Court of Appeal upheld the High Court’s original decision that it should give an undertaking to safeguard directors’ interests if they successfully challenge the winding-up position.

In its reasoning, the Court emphasised:“[T]he importance of the court’s duty to prevent individuals from being wronged by the state…”

What’s the significance of this?

The Courts have a duty to ensure a fair balance between the interests of the parties. Companies and individuals are entitled to protection against unfairness by the State – and this includes HMRC, which is not entitled to behave as if the rules do not apply to it!

Being presented with a winding-up petition by HMRC can feel like a David and Goliath situation for many businesses, especially when HMRC takes a “computer says no” approach to reasoned arguments for compromise. But businesses should not be intimidated; it is in their interests to insist on due process being followed, and the courts have shown they are receptive to taxpayers who argue their case.

We say…

In an ideal world, just like other creditors, HMRC would negotiate with businesses and be prepared to collaborate with insolvency practitioners to ensure survival and the re-payment of debts.

Unfortunately, as many accountants and lawyer will attest, HMRC demonstrates a rigidly inflexible approach, fixated on the technical definition of insolvency to justify provisional liquidation proceedings at the drop of a hat, seemingly with very little consideration of the bigger picture.

Liquidation is an extreme response which can involve dawn raids on business premises and directors’ homes and draconian restrictions. It is a power which should be wielded with care but, it seems that HMRC doesn’t see it that way – in our recent experience it is currently very actively and aggressively pursuing these types of actions.

How can we help?

We have lots of experience and plenty of success stories when it comes to helping our clients negotiate with HMRC. We can advise you on the best steps to protect your business if you are facing insolvency issues, investigations or liquidation or other proceedings by HMRC.

Contact us today for a no obligation chat: 07867 795 439 (Femi) or 07713 564 324 (Jikoa)  or contact femi@femiogunshakin.com

Further reading

HMRC v Payroll & Pension Services (PPS Umbrella Company) Limited [2024] EWCA Civ 995 | Pump Court Tax Chambers (pumptax.com)

Umbrella fraud obscures employment status dispute | AccountingWEB

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Student loan threshold frozen

Written by admin on . Posted in Student Loans. No Comments on Student loan threshold frozen

The student loan repayment threshold for England and Wales has been frozen at £25,000 until 2027, to the detriment of many new university students this September.

Increased numbers of UK students are going to university due to good A-level results and fewer international students, which means this freeze will now affect even more people.

Repayment

Repayment starts the April after a graduate has left university. So, with a three-year course, this year’s cohort of students will not start repaying loans until 2028 at the earliest:

  • Freezing the £25,000 threshold – rather than increasing it in line with inflation or wages – brings graduates into the repayment net earlier than would otherwise be the case.
  • After 2027, the government may increase the threshold in line with inflation, but this will still mean a few years of fiscal drag.

Under the new repayment rules introduced in 2023, students do not start to repay their student loans until they are earning over £25,000 a year (£2,083 monthly).

Once earnings exceed £25,000, repayment is at the rate of 9% on the excess. Interest is added to the loan from day one, with the potential repayment term running to 40 years.

Self-funding

Wealthier parents will want to know whether they should be self-funding their child’s university fees and living costs, rather than taking out a student loan. However, the decision is far from straightforward given that the normal debt rules do not apply here.

For example, parents might pay the full cost of university education of approximately £60,000, but if their child never earns more than the repayment threshold then self-funding will have been a massive mistake. The problem, of course, is estimating earnings for up to 40 years into the future.

A compromise strategy is to take the full student loan, and then for parents to look at paying the loan off early after graduation. They would only do so if it looks like their child is going to have a high-earning career. However, this is a complex area of pros and cons, depending very much on personal circumstances.

Guidance on repaying student loans can be found here.

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Can you spot a fake HMRC letter?

Written by admin on . Posted in Income Tax. No Comments on Can you spot a fake HMRC letter?

Unfortunately, scam warnings have become a regular occurrence. The latest scam highlighted by HMRC is rather ‘old school’, involving letters posted to companies instead of the more usual digital communication.

The scam letters being sent out are quite convincing. They come with a genuine-looking HMRC letterhead, and purport to come from the ‘Indv and Small Business Compliance’ team.

Targeted companies

The scam focuses on the claim that a targeted company is required to verify their income in order to identify any business not declaring their full income. They then request:

  • business bank statements for the past 13 months;
  • the latest set of filed accounts, including information which – for smaller companies – would not be available from Companies House;
  • VAT returns for the last four quarters; and
  • for each director, a copy of their passport or driving licence.

Scammers can easily use copies of a director’s passport or driving licence to steal their identity for fraudulent purposes, possibly even accessing the company’s bank account.

The scam letter uses intimidation tactics, threatening an investigation and a potential freeze on business activity if a response is not received.

Spotting the scam

These scam letters use correct technical legislation and avoid obvious spelling and most linguistic mistakes that are usually clear giveaways. Two things to bear in mind when looking out for such frauds:

  • HMRC does usually request information from companies by letter or via a business tax account, rather than by email. However, HMRC email addresses end @hmrc.gov.uk, while the email address used in these fraudulent letters is: companies-review@hmrc-taxchecks.org.
  • A legitimate HMRC letter will include the company’s unique tax reference (UTR).

HMRC has published a list of their recent letters to help you confirm if a letter is genuine. The list can be found here.

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Dividend allowance cut doubles taxpayers

Written by admin on . Posted in benefit-in-Kind, Company Director, Dividends, self-assessment. No Comments on Dividend allowance cut doubles taxpayers

With the dividend allowance now cut to just £500, the number of taxpayers paying tax on dividend income for 2024/25 is expected to be double what it was three years ago.

Previously set at £2,000, the dividend allowance was reduced to £1,000 for 2023/24, and to £500 from 2024/25 onwards. This reduction has had the biggest impact on basic rate taxpayers. Just under 700,000 basic rate taxpayers paid tax on dividend income for 2022/23, but this number will leap to nearly 1.7 million for the current tax year.

Tax liability

A modest share portfolio of just over £10,000 yielding 5% will now use up the dividend allowance, leaving the investor with a tax liability notifiable to HMRC. Consider this:

  • Notification requires either contacting the HMRC helpline, asking HMRC to collect tax through a tax coding change (if employed), or completing a self-assessment tax return.
  • With a basic rate of 8.75% on dividend income, the amount of tax due will often be frustratingly low given the inconvenience involved.

The average amount of tax due from basic rate taxpayers is estimated to be £385 for the current tax year; down from £780 three years ago.

Even worse will be where an investor opts for script dividends. These are still taxable despite no cash being received, so tax will have to be funded from other sources.

At the same time as the dividend allowance has been cut, the level of dividend payouts by companies has generally recovered to pre-Covid levels.

Mitigation

If dividend income exceeds the £500 allowance, some mitigating steps might be possible. The obvious move is to make full use of Independent Savings Account allowances for some current, and all future, share investments. Another approach would be to invest for capital growth rather than dividend income. Making use of the dividend allowance of a spouse, partner or an adult child by spreading a share portfolio across the family is another possibility.

HMRC’s guide to tax on dividends can be found here.

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HMRC launches VAT registration estimator

Written by admin on . Posted in VAT. No Comments on HMRC launches VAT registration estimator

HMRC has launched a new digital tool to help businesses estimate the potential impact of their VAT registration. This will be useful for established business owners and those planning to start a business.

VAT registration

Registration for VAT is required if a business’s taxable turnover (including zero-rated sales) exceeds £90,000 for the previous 12 months or is expected to exceed this threshold in the next 30 days.

For a business that only makes sales to the general public, the cost of VAT registration can be particularly onerous if it is not possible to increase prices to cover the VAT charged while the cost of VAT on sales becomes an additional cost for the business.

However, a business supplying VAT-registered customers may find it beneficial to register voluntarily even though turnover is below £90,000.

Using the estimator

The estimator tool can be used as many times as needed, with HMRC suggesting it will take around 20 minutes to complete on first use. To use the estimator:

  • Select the time period – in months – for the VAT estimate.
  • Enter business income for the period, excluding any income from employment.
  • If any income is exempt from VAT, zero-rated or at a reduced rate, estimate the appropriate proportion in each case.
  • Enter business costs, including those outside the scope of VAT such as salaries.
  • Remove the proportion of costs outside the scope of VAT, exempt from VAT, zero-rated or at a reduced rate.
  • Then a final, but very important question, about how VAT will be accounted for – added to selling prices or absorbed into current prices.

Running the numbers for a VAT-registered business that has gone £10,000 over the registration threshold (standard rated sales of £100,000) with £10,000 in standard rated expenses, and with all sales to the general public, results in the business being £15,000 worse off annually compared to not being VAT registered. Take into account the extra tax and NICs due on the £10,000 of additional income, and it is clear the business would probably have been better off trying to stay within the £90,000 threshold.

HMRC’s VAT registration estimator tool can be found here.

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Unveiling plans for the Renters’ Rights Bill

Written by admin on . Posted in Budget. No Comments on Unveiling plans for the Renters’ Rights Bill

While only briefly mentioned in the King’s Speech, the government has now revealed more details of the Renters’ Rights Bill. The Bill will overhaul the private rented sector in England, with some elements also applicable to Wales.

Labour’s election manifesto promised to immediately banish no-fault evictions, but this hasn’t happened. Instead, no-fault evictions will be abolished under the Bill with no changes likely until autumn 2024 at the earliest.

The government has promised expanded possession grounds for landlords to reclaim property, but this won’t help when repossession involves a lengthy court process. This is likely to mean that the requirement for a rent guarantor will become more widespread.

Changes include:

  • Tenants will be given the power to challenge a rent increase if it is a means to eviction.
  • Landlords will not be able to unreasonably refuse a tenant having a pet. This is an important issue for many landlords, because it can subsequently be difficult to relet a property where there has been a pet. Even though landlords will be able to request pet insurance, this is unlikely to be a satisfactory solution.
  • Landlords will have to fix damp and mould issues within strict time limits – known as ‘Awaab’s Law’. There will be clear legal expectations about the period within which homes must be made safe from serious hazards.
  • Landlords will not be able to discriminate against tenants who receive benefits or have children.
  • The practice of rental bidding wars by landlords and letting agents will be stopped, although this practice seems much less prevalent than the government thinks.

Although many of the changes will be unwelcome, Scottish and Welsh landlords have seen more radical measures introduced in favour of tenants. There is also no mention of rent controls.

The government’s background briefing on the Renters’ Rights Bill can be found here starting at page 68.

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Fiscal Drag: Caught in the 60% tax trap?

Written by admin on . Posted in Budget, Employment Tax, self-assessment. No Comments on Fiscal Drag: Caught in the 60% tax trap?

The number of taxpayers caught in the 60% tax trap has increased by nearly 25% over the past year. More than 500,000 people are now affected by higher tax rates due to their income exceeding £100,000.

The 60% rate applies to income between £100,000 and £125,140. This is the tranche of income which sees the £12,570 personal allowance tapered away.

Fiscal drag

There has been no change in the £100,000 income limit since the withdrawal of the personal allowance was introduced in 2010, a classic case of fiscal drag. Once the personal allowance is fully withdrawn, higher earners pay the additional rate of 45% on income in excess of £125,140. However, the 60% charge still applies to income between £100,000 and £125,140.

The past year has seen a particularly high increase in individuals caught by the 60% tax trap due to inflation driving up salaries. The government is unlikely to fix the problem by reinstating the personal allowance for higher earners – the cost would be prohibitive. However, smoothing the transition is a possibility. For example, tapering the personal allowance by £1 for every £4 (rather than £2) that income exceeds £100,000 would reduce the 60% tax rate to a rate of 50%.

Planning measures

Measures that can be taken to mitigate the 60% tax trap vary from individual to individual:

  • Pension contributions are particularly attractive if the government is funding 60% of the cost. Be warned, however, that the October Budget might see the tax relief given on pension contributions restricted to a flat rate.
  • Some income reallocations might be possible between spouses and civil partners, especially if they are in business together.
  • Make the best use of tax-free investments to turn taxable investment income into non-taxable income.
  • Be mindful of the timing when cashing in investment bonds or making pension withdrawals.

Employees should consider using a salary sacrifice arrangement for pension contributions or low-emission company cars.

Details of income tax rates and personal allowances for the current tax year can be found on the government website here.

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