Horwath Clark Whitehill - Corporate Taxes Update - October 2008

Apr 8, 2009 | Publisher: CroweClarkWhitehill | Category: Business & Jobs |  

A summary of the latest UK tax news www.horwathcw.com Corporate Taxes Update October 2008 In this issue: • Corporation tax comes under scrutiny • VAT repayment opportunity • Filing dates: operational guidance for medium & large groups • Salary sacrifice: HMRC issues amended guidance • HMRC guidance on the practical effect of the Demibourne case Corporation tax comes under scrutiny The corporation tax liabilities of large businesses have been under scrutiny recently as the Public Accounts Committee has published findings of its review of corporation tax returns in the 12 months to February 2008. According to the report the corporate ‘tax gap’ - which is identified as being the difference between the tax paid and the theoretical liability - may be as much as £8.5bn. However it is acknowledged that HM Revenue & Customs (HMRC) does not have a robust measure for calculating this gap. The report also mentions that in 2005/06, 50 of the top 700 businesses paid 67% of the corporation tax from large businesses while 181 paid none. It is also stated that HMRC should publish a report analysing which companies did not pay any corporation tax. Although the intention may be to ensure that companies pay the right amount of corporation tax, this sweeping approach could potentially victimise companies that have genuine business reasons for not having a corporation tax liability. One commentator has mentioned that the majority of the 181 companies identified were loss-making or did not have a significant presence in the UK. In addition industry trends should be considered before publicly ‘naming and shaming’. The report notes that HMRC’s resources may not be targeted effectively as 60% of HMRC’s enquiries produced less than 1% of the additional corporation tax raised. HMRC has said that it will focus its resources on higher risk companies - this needs to be more evident and the benefit of being a low risk company should be more widely publicised. Companies should therefore be aware of the areas of risk in their businesses and take steps to ensure that they are able to manage this risk and reduce the probability of an enquiry from HMRC. VAT repayment opportunity Following the Abbey National case in August 2001, HMRC’s treatment of costs incurred by partially-exempt businesses in relation to the sale of parts of the business as a transfer of going concern was found to be incorrect. Prior to 1 August 2001 HMRC said that such costs should be treated as overheads and therefore the VAT recovered was subject to a restriction based on the taxpayer’s method of partial-exemption. However the Abbey case stated that this policy was flawed and that those costs should be attributed to the VAT liability relating to that part of the business being sold i.e. if that part of the business is fully taxable, VAT can be recovered in full. Following the case of Condé Nast, businesses have until 31 March 2009 to make claims to recover input VAT not claimed on costs incurred before 1 May 1997 and possibly back to 1973. From 1 April 2009 businesses will only be able to go back three years. Taxpayers that are most affected are likely to be commercial buy-to-let companies which own taxable and exempt properties. A summary of the latest UK tax news www.horwathcw.com Corporate Taxes Update October 2008 Filing dates: operational guidance for medium & large groups In the Finance Act 2007 the rules on tax return filing dates and the period within which HMRC could open a tax enquiry were changed. This change followed a review into HMRC’s online services by Lord Carter and seeks to provide an incentive for taxpayers to file their tax returns early. For tax returns relating to accounting periods ending after 31 March 2008 HMRC has 12 months from the date of delivery of the tax return to open an enquiry; previously it had 12 months from the statutory filing date (the statutory filing date being 12 months after the end of an accounting period). This does not affect companies that are members of medium or large groups (as per the Companies Act 2006); although it has been observed that many medium or large groups are so complex that they may find it difficult to file their returns before the statutory date. Following consultation with representative bodies HMRC has announced that it is keen to encourage members of medium and large groups to file their returns early and it has issued a notice outlining HMRC operational practice. HMRC has stated that it takes a risk-based approach to reviewing tax returns and that in a number of cases the returns are quite complex and require them to consider the group position as a whole. HMRC is therefore being non-committal about enquiry windows but has said that “…where it is practical to do so, our aim is to open all enquiries into a group’s returns within 12 months of the delivery of the last individual company tax return from any member of that group.” HMRC states that for companies looked after by the Large Business Service and the Large and Complex Customer Group, HMRC customer relationship managers will seek to agree timetables for delivery of returns and opening of formal enquiries. Where it is practical to do so these managers will seek to make certain that this timetable ensures that any enquiries are opened within 12 months of the delivery of the last tax return as outlined above. These HMRC teams look after the largest companies and therefore for other companies which are members of medium and large groups but are simply looked after by the local HMRC office the statutory filing deadline will remain unchanged. Such complexity is bound to create uncertainty and so in these circumstances the best advice is to liaise with HMRC at an early juncture to ascertain the appropriate timetable for filing company tax returns. Salary sacrifice: HMRC issues amended guidance HMRC has issued amended guidance on salary sacrifice arrangements and in particular clarification of the relevance of ‘significant life events’. A salary sacrifice arrangement is established between the employer and the employee and enables the employee to sacrifice a portion of his/her salary in return for the payment of a benefit. A summary of the latest UK tax news www.horwathcw.com Corporate Taxes Update October 2008 Typically an individual will sacrifice part of their gross salary and opt for a contribution from the employer into a pension fund or medical cover. Such arrangements will usually be efficient in terms of income tax or national insurance contributions or both. In such circumstances the employee is treated as receiving a lower gross salary plus a benefit (i.e. the pension contribution or the medical cover). Care should be taken to ensure that the revised gross salary is not below the National Minimum Wage. These arrangements typically last for a specific period (say one year). Employers must ensure that the arrangements are properly implemented and that the employee does not have the option to convert the salary sacrificed into a cash payment during that period. HMRC does accept that where an employee has a lifestyle change the salary sacrifice agreement can be reviewed at that time where it falls during the period. A lifestyle change is not specifically defined by HMRC but generally refers to an unforeseen life event such as the redundancy of a partner, the pregnancy of an employee or partner and the marriage or divorce of the employee. Designed in conjunction with a flexible benefits package a salary sacrifice arrangement can be an effective tool to motivate employees, as they gain the ability to choose their own remuneration and rewards package and choose cash and benefits that suit their personal circumstances. HMRC guidance on the practical effect of the Demibourne case The Special Commissioners decision in the case of Demibourne Ltd v HMRC highlighted a number of tax issues that can arise as a consequence of an employer not operating PAYE properly and income tax then being paid by the wrong person. Typically this occurs where a worker is treated as self-employed but subsequently it is concluded that they are an employee. In these circumstances the employer will not have operated PAYE but the worker should have paid income tax under self-assessment. The pragmatic solution is that the income tax already paid by the individual under self assessment is offset against the PAYE liability of the employer. However prior to the amendment of the PAYE Regulations HMRC could not take such action. So although they had made gross payments to the worker the employer was pursued for PAYE. Following the issue of recent amendment regulations, the powers of HMRC have now been extended. HMRC can now direct that an outstanding PAYE liability be transferred from an employer to an employee to be offset against the tax that the employee self- assesses, pays on account or is deducted under the Construction Industry Scheme. HMRC does have a degree of discretion whether to make a direction. Typically this is likely to occur if there is strong evidence that the employer has deliberately failed to operate PAYE, without collusion from the employee, in the expectation that the employer would benefit from the new legislation if discovered. Employers should be aware of these regulations to ensure that HMRC make a direction to pass the liability to the employee and ensure that the employer is not left with an unexpected tax bill. Corporate Taxes Update A summary of the latest UK tax news www.horwathcw.com October 2008 For more information please contact: Angela Lazda Tax Partner angela.lazda@horwath.co.uk Stuart Weekes Senior Tax Manager stuart.weekes@horwath.co.uk Horwath Clark Whitehill LLP Aquis House 49-51 Blagrave Street Reading, RG1 1PL Telephone: 0118 959 7222 Fax: 0118 958 4640 www.horwathcw.com This information is published without responsibility on our part for loss occasioned to any person acting or refraining from acting as a result of any information published herein. © Horwath Clark Whitehill LLP October 2008 Other matters • HMRC has issued factsheets ES/FS1 for the worker and ES/FS2 for employers and contractors to help decide whether a worker is an employee or self-employed. • HMRC has announced that it has updated its FAQ page for employers. • National Minimum Wage (NMW) rates increased from 1 October 2008; for workers aged 22 or more the NMW is now £5.73 per hour.

Horwath Clarke Whitehill - Corporate Taxes Update - October 2008.pdf

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