Skip to main content

Side hustles and tax obligations

Written by admin on . Posted in HMRC Investigations, self-assessment. No Comments on Side hustles and tax obligations

HMRC has recently launched their Help for Hustles campaign to help people earning extra income to understand their tax obligations.

Online platforms, such as eBay, are now required to report users’ income to HMRC. Anyone who is selling goods or services online therefore needs to be aware of their tax reporting requirements. Many regular activities that might have been considered a lucrative hobby now fall into the ‘trading’ category:

  • Buying or making things to sell: Activities such as selling things that you have made, upcycling furniture to sell, or buying items with the aim of reselling them at a profit. All count as trading.
  • Side gigs: Even if carried out in your spare time, a side gig such as tutoring or gardening counts as trading. Using an App to pick up work will almost certainly mean trading.
  • Multiple jobs: Working many different side hustles, without having a main source of income, means you are trading.
  • Content creators and influencers: It is likely to be trading if you are paid to make sponsored social media posts for a brand or are earning income from advertisements on your online videos or blog.
  • Property income: This might be from renting out a spare room in your home, a holiday letting, or renting out property using an App such as Airbnb.

You will not normally be treated as trading if you are just selling off some unwanted personal possessions online after clearing out your loft or garage.

Exemptions

If you are trading, no tax will be due if your income is £1,000 or less for the tax year:

  • If income exceeds £1,000, you will need to inform HMRC and complete a self-assessment tax return.
  • Although everyone with income of less than £100,000 is entitled to a personal allowance of £12,570, this allowance is particularly relevant for those with multiple jobs, but no main source of income.

Those renting out a spare room can benefit from a tax-break of up to £7,500 a year. Other property income doesn’t need to be reported to HMRC if less than £1,000 for the tax year.

Details of HMRC’s side hustles campaign can be found here.

Photo by Justin Veenema on Unsplash

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

Photo by Jason Rosewell on Unsplash

Sales suppression one-to-many letter

Written by admin on . Posted in HMRC Investigations, Litigation & Dispute Resolution, VAT. No Comments on Sales suppression one-to-many letter

HMRC has launched a campaign of one-to-many letters given its increasing concern surrounding the electronic suppression of sales (ESS). The campaign targets businesses that might have unpaid taxes due to misuse of their till systems.

ESS allows a till system to hide or alter the value of individual transactions, while producing a credible audit trail. For example, only one out of every four sales might be recorded, resulting in lower reported turnover. Lower reported turnover means income tax or corporation tax is underreported, along with VAT.

One-to-many letter

The letter provides an opportunity for a business to get its tax affairs in order by making a voluntary disclosure of underreported sales:

  • The different penalties that can be charged are explained. These can be reduced if full disclosure is made.
  • The letter also explains what further action HMRC might take if a business avoids paying any tax it owes.

HMRC’s campaign is expected to run for at least a year. Even if your sales have been correctly reported, you still need to confirm this within 30 days of receiving a one-to-many letter.

Penalties

A new penalty has been introduced, along with the usual penalties for inaccuracies, for being in possession of an ESS tool:

This is defined as software or hardware which allows a business to hide or reduce the value of individual transactions on its electronic sales records. It includes using a till – or modifying a till – to suppress sales.

The initial penalty for possession of an ESS tool can be up to £1,000. A daily penalty of up to £75 a day is then charged if possession or access to the ESS tool continues.

A penalty can be charged for simply being in possession of an ESS tool, regardless of whether the tool is actually used to suppress sales. Possession also includes access to, or even trying to access, an ESS tool.

HMRC’s guidance on ESS can be found here.

Photo by Rodion Kutsaiev on Unsplash

Small businesses top tax gap defaulters

Written by admin on . Posted in HMRC Investigations, Income Tax, Insolvency, PAYE. No Comments on Small businesses top tax gap defaulters

The tax gap increased in 2022/2023, to a record £39.8 billion, with small businesses being blamed for around 60% of uncollected taxes.

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC and, , what is actually paid. Despite the record high receipts in monetary terms, the overall tax gap has fallen in percentage terms. It is now estimated that 4.8% of taxes are unpaid compared with 7.4% back in 2005/06.

Small companies

The worst offenders are small limited companies, with the amount of unpaid corporation tax now standing at £10.9 billion, nearly triple the £3.7 billion of five years ago. This means:

  • In percentage terms, the tax gap for small companies is a somewhat alarming 32.2%.
  • Some 45% of small businesses have submitted an incorrect corporation tax return containing an under-declared tax liability.

By comparison, the tax gap for mid-sized companies is 6.7%, and for large companies is 2.9%.

High tax take

Recently released figures also give a stark illustration of how much the tax take has increased:

  • The theoretical amount of tax liabilities has been growing at around 15% a year, increasing from £640.1 billion for 2020/21 to £823.8 billion in 2022/23.
  • The theoretical amount has nearly doubled since 2005/06.

Tax receipts as a proportion of GDP over the past 20 years have previously been steady at around 28% but now stand at just over 30%.

Behaviour

The two types of behaviour contributing most to the tax gap are:

  • failure to take reasonable care; and
  • criminal actions.

Failure to take reasonable care means not spending the time and effort to make sure reported figures are correct. Directors of limited companies are generally expected to exercise a higher level of reasonable care compared to small sole traders.

If you need help with your tax liabilities, please get in touch.

HMRC’s summary of the latest tax gap figures can be found here.

Photo by Antoine Da cunha on Unsplash

HMRC and Provisional Liquidations via S.234 Insolvency Act 1986

Written by admin on . Posted in HMRC Investigations, Insolvency, PAYE. No Comments on HMRC and Provisional Liquidations via S.234 Insolvency Act 1986

We are seeing a marked increase in HMRC’s use of provisional liquidations particularly where umbrella companies are concerned. Some readers may have an opinion on umbrella companies and may argue that HMRC are on the right track, personally, and in the immortal words of the fictional Francis Urquart: “You might very well think that. I couldn’t possibly comment“. That said, anyone who has been directly involved in working these cases will know how draconian the granting of a provisional liquidation order can be on the directors and by extension, their families.

Such orders include the appointment of a liquidator who quite naturally is charged with preserving the assets of the company, investigating the conduct of the directors and retrieving company assets where there have been dispositions contrary to both company and insolvency law. Clients have had their offices and homes searched; business accounts frozen and limitations imposed on their ability to draw funds from these and in some instances, their personal bank accounts.

There are reasons why the insolvency act provides for a provisional liquidation and no doubt HMRC have genuine reasons for seeking the court’s consent to the grant of such an order. Trust me when I say that judges in these (ex-parte) cases are no walk overs and put up quite strenuous counter arguments to submissions made by HMRC and their counsel but there is no denying that there is usually a public interest argument for the consideration of the taking of the decision to intervene in the company in this manner.

If you’ve read this far then you won’t be surprised to learn that there is a reason for today’s blog on this subject. We have received yet another request from a client in dire need for assistance with their case and as I thrive off unusual and/or complicated cases, I’m more than likely going to say yes to taking their instructions. The thing is; despite the onboarding of colleagues to my team, I am nearing capacity, and besides this, I really could do with the input of a tax lawyer/investigator/specialist with experience in this area and thought I’d reach out to my LinkedIn contacts to see who might be interested in working with me on one of these cases – needless to say this would be on a consultancy basis.

So, sticking with my tv/film references, as Gabrielle Union once said, if you got it: “Bring It” (please!?!). Might be best to call, DM or email me for an initial chat.

Photo by Francesco Ungaro on Unsplash

HMRC ramps up its checks and investigations

Written by admin on . Posted in Company Director, HMRC Investigations, Inheritance Tax. No Comments on HMRC ramps up its checks and investigations

There’s no respite for HMRC with inheritance tax (IHT) accounts, undeclared dividend income and gains from share disposals to scrutinise.

HMRC is currently busy with several ongoing checks. They are looking at IHT accounts, targeting undeclared dividend income, and making sure any gains from share disposals have been correctly declared.

Inheritance tax accounts

The complexities of IHT can catch out even seasoned observers and there are many pitfalls, including:

  • Business property: 100% relief from IHT may be available, so it is important to make sure claims are correct. It is worth noting that relief may not be available if a business has a large amount of cash or assets held as investments.
  • Valuations: HMRC might contest valuations submitted in respect of unquoted shares, property or jointly owned assets. To avoid problems, obtain formal IHT valuations from experts.
  • Payment deadline: IHT on an estate must be paid within six months after the end of the month in which death occurred; this is a much tighter deadline than for most other major taxes.

Dividend income

HMRC is writing to company owners who may have undeclared dividend income. Its approach is to compare a company’s reported profits with the movement in reserves. Where a difference is identified, this could be an indication of dividends being paid to shareholders.

Anyone receiving a letter should contact HMRC within 30 days of its receipt, even if there is no dividend income to declare, or risk facing a compliance check.

Share disposals

Letters are also being sent to taxpayers who have disposed of shares but are suspected of omitting the details from their tax returns.

HMRC has looked for discrepancies by checking the information it has on share disposals against details declared on self-assessment tax returns. Anyone receiving a letter will have 60 days to amend their return.

If no capital gains tax is due on the disposal identified by HMRC, the taxpayer needs to explain why in writing.

HMRC’s guide to valuing an estate for IHT purposes can be found here.

Photo by Sander Sammy on Unsplash

HMRC, eBay and second-hand news

Written by admin on . Posted in HMRC Investigations, Income Tax, self-assessment. No Comments on HMRC, eBay and second-hand news

The media storm surrounding HMRC taxing eBay and other online sellers from the start of 2024 was, in fact, itself counterfeit goods.

A crop of stories across social and traditional media swirled across the start of the new year about HMRC cracking down on ‘side hustle’ tax from 1 January, leaving sellers using sites like eBay and Vinted feeling uncertain. Coming after an early December announcement that HMRC had effectively closed its main self-assessment helpline until 1 February 2024, the story only fuelled the outrage directed at the Revenue.

Except that it was not fresh news or, even, news at all. There was no new ‘side hustle’ tax. HMRC was starting the first year in which digital platforms, such as eBay, would be required to automatically report details of sellers who in a calendar year:

  • Had sales of at least €2,000 (about £1,725 at current exchange rates); or
  • Made at least 30 sales.

Further, this was not a UK-led law as revealed by the denominating currency. The initiative started with a set of model rules published in July 2020 by the Organisation for Economic Co-operation and Development (OECD), of which the UK is a member, aimed at reducing tax avoidance via digital platforms. The first reports from platforms will not be sent to HMRC until January 2025 and will cover only the current year.

Contrary to fears raised online earlier this year, neither HMRC nor the OECD have any interest in the sale of personal items no longer required, whether clothing or mobile phones. The new reporting requirements are for people who are trading ie buying and selling goods with the aim of making a profit, something that has always been taxable.

It is worth bearing in mind that there is also a little-known trading allowance, which exempts from tax £1,000 of trading income (before expenses) in a tax year. A similar £1,000 allowance applies to property income (also before expenses), which matters here because Airbnb falls within the scope of the reporting regime.

There are a couple of lessons to learn from this saga of the ‘side hustle’ tax. The first is that tax is rarely simple and media information – especially social media – can be misinformation. The second is that HMRC’s ability to gain insight into your sources of income is ever-expanding.

You have been warned…………..

The government has published information on who may be affected by the advent of reporting rules for digital platforms,

Photo by charlesdeluvio on Unsplash

New PAYE process for High Income Child Benefit Charge

Written by admin on . Posted in High Income Child Benefit Charge, HMRC Investigations, Income Tax, PAYE. No Comments on New PAYE process for High Income Child Benefit Charge

One of the many criticisms aimed at the High Income Child Benefit Charge (HICBC) is that anyone caught by the charge needs to submit a self-assessment tax return even if all of their tax is collected under PAYE. However, this is set to change.

The government has announced that employed individuals will, in future, be able to pay the HICBC through their PAYE tax code without the need to register for self-assessment. The statement in July on draft Finance Bill legislation from Victoria Atkins, the Financial Secretary to the Treasury, didn’t give a date for the change, but said details would be released “in due course”.

The change will be particularly welcome for those earning just over £50,000 who have to go through the self-assessment process just to report and repay a small amount of child benefit.

Child benefit

For 2023/24, child benefit of £24.00 a week is paid for a first child, with £15.90 a week paid for each subsequent child. Child benefit is paid regardless of income, so the HICBC is the government’s way of reducing the amount paid to higher earners.

The charge

The HICBC can come into play when an individual – or their partner – receives child benefit and their annual income exceeds £50,000.

  • The charge removes 1% of child benefit for every £100 of income over £50,000.
  • Once income reaches £60,000, the charge is 100% so the amount of child benefit is essentially reduced to nil.
  • For those with several children, the HICBC can result in a high effective marginal tax rate.

For 2020/21, some 355,000 individuals were hit by the charge, with a high proportion having been subject to compliance checks by HMRC for failing to register for self-assessment. Despite the HICBC being in place since 2013 – and with HMRC running various publicity campaigns – there is still a general lack of awareness.

Although HMRC has adopted a more lenient attitude towards HICBC penalties in recent years, the maximum penalty can potentially be equivalent to the amount of HICBC owed.

Detailed government guidance on the HICBC can be found here.

Photo by Markus Spiske on Unsplash

Businesses failing to pay minimum wage

Written by admin on . Posted in HMRC Investigations, National Living Wage, National Minimum Wage. No Comments on Businesses failing to pay minimum wage

Just over 200 businesses – including some of the country’s best-known retailers ­– have failed to pay the minimum wage and will have to repay workers and face penalties of up to £7 million.

The minimum wage rules can be complex, and the fact that some major retailers have been caught out shows just how difficult compliance can be.

Uniforms

One particular area where businesses were not compliant was in regard to uniforms. The rules differ depending on whether uniforms are required as a condition or employment or if they are optional.

  • If employees are required to wear specific uniforms, any deduction by the employer to cover the cost reduces pay for minimum wage purposes. Similarly, if an employee has to reimburse their employer or has to purchase the uniform themself.
  • If uniforms are optional, pay is only reduced where the employer makes a deduction from the employee’s pay.


Working time

The other major problem area was paying correctly for time worked. This is not anywhere as simple as might first appear as illustrated by these examples:

  • Being on standby near the workplace counts as working time, but not if the worker is on standby at home nearby.
  • Travelling between assignments counts, but from home to the first assignment, and then from the last assignment back home does not – unless the first and last trips are by train and the employee is working on their laptop.


Penalties

A penalty of up to 200% of the unpaid wages can be charged, subject to a maximum penalty of £20,000 for each employee. However, the penalty will be cut in half if the unpaid wages and penalty are paid within 14 days.

Non-compliant employers will also be named and shamed, even where minimum wage underpayment is not intentional.

It is worth taking advice if an employer has any uncertainty over their wage position. A business can check if it is paying the correct amounts of National Living Wage and National Minimum Wage using HMRC’s calculator here.

Photo by Emily Morter on Unsplash