Dear Sir or Madame
As part of a special scheme run by the HMRC we have been obligated to implement a number of procedures and regulations. They provide stricter criteria for the filing of self-assessment tax returns, especially for subcontractors under CIS. The scheme is meant to increase the accuracy of tax returns and to prevent instances of unjustified tax refunds. HMRC initiated the scheme in 2012, including a growing number of accountancy firms across the UK. As of 10 September this year, the scheme also applies to our company and its Clients.
1. Regulations and procedures to improve the accuracy of tax calculations
As part of the new scheme, Taxpol and its Clients have been obligated to implement a series of new rules and procedures. These are the most important ones:
Taxpol, as an HMRC agent, is required to raise the awareness of all its Clients with regard to their duty to maintain and keep all relevant business records that provide a basis for filling in their tax returns.
Business records to be kept by the Client should include the following information:
a) name of the customer and work address
b) dates of commencement and completion of work at any location
c) income from work completed within a given period
d) expenses related to the particular work.
It is Taxpol’s duty to verify expenses declared by our Clients in their accounts. Taxpol should check whether the declared expenses were actually made and whether they were made solely in relation to business operations.
Taxpol has to obtain from its Clients a guarantee concerning the keeping of records and their availability to support any figures used in completing a tax return. Taxpol should also check the reliability of these warranties by means of selective verification.
Before the return is submitted to HMRC, its final version should be reviewed by the Client who needs to sign a statement, in which they agree for the return to be submitted and accept all of the declared amounts.
Taxpol should not submit tax returns on behalf of Clients who are unable to provide evidence for their expenses if these expenses exceed 10% of their turnover.
Tax returns filed on behalf of Clients, where the ratio of expenses to turnover falls in the range of 11-20%, may be filed only based on business records kept by the Client (see section 2), which would support the data quoted in the tax return. It is Taxpol’s duty to check, whether such records do exist.
Taxpol has a duty to file any tax returns with expenses exceeding 20% of turnover only after reviewing all of the records and only when such records are available for the verification of the numeric data included in the tax return.
II. New rules for interpreting expenses
Taxpol and its Clients are under obligation to apply new rules when it comes to the interpretation of expenses related to business operations:
Costs of tickets and fuel as costs of commuting between home and work are not going to be accepted by HMRS unless the Client works at various locations and does not operate within a specified area, or performs a particular job outside their usual area of operations. Such costs can be included in a tax return, providing that the Client can support it, e.g. by keeping relevant records. Other transportation costs pertaining to business operations, such as travelling to a tool store, shall still be accepted, provided the Client can demonstrate that the expense was for business purposes only and is able to provide details as to the purpose of any such expense and as to the particular order it was related to;
Telephone costs can be accepted as business expenses if the Client can support them with a telephone record, marking individual business-related calls;
Internet costs will be accepted if they were solely for business purposes and the Client is able to support such instances with relevant documents;
Tools and material storage in the household is not a basis to classify one’s home as business premises. Such costs can be accepted if the Client uses a room within the house for business purposes only, e.g. to keep business records, work on growing his business, or provide actual servicess. In such instances the Client can apply a set monthly rate only in months in which such expense took place.
III. Date for the new rules to come into force
Taxpol and its Clients are required to apply all the new rules as of 10 September 2014.
IV. Amendment Programme 2012/13 and 2013/14 for CIS Clients
All Clients registered under CIS (subcontractors) who in their tax returns for years 2012/13 and 2013/14 defined expenses in a way different to the above interpretation should amend their tax returns in line with the above rules. Taxpol, following a review of its own records, is required to identify such Clients and notify them of any amendments that may be necessary. The deadline for submitting voluntary amendments under this programme is 31 December 2014.
V. HMRC guarantee
HMRC guarantees that those Clients who accept and apply the rules under the new programme (including the CIS Clients required to amend their returns) will not be required to alter their tax returns for any years prior to 2012/13 in relation to the above provisions. It means that HMRC will not ask these Clients to amend their tax returns made before 6 April 2013, unless any such return is selected for enquiry due to matters unconnected with this programme. HMRC guarantees that the CIS Clients who voluntarily submit corrected returns for years 2012/13 and 2013/14 will not be subject to any penalties, and no interest will be charged with regard to repayment of any tax that could have been unlawfully returned.
HMRC gives the above guarantees only to those Clients who continue to engage with their Agents, in this case – the accounting firm Taxpol.
VI. Consequences and penalties
Clients who do not follow the rules imposed by the new programme, including CIS Clients who do not file voluntary amendments for years 2012/13 and 2013/14, risk that HMRC will review their returns and seek to recover any amounts of tax due, including penalties and interest:
a) for up to 4 latest years – when mistakes are found to be made in spite of taking reasonable care,
b) for up to 20 latest years – when mistakes found in a tax return result from negligence or deliberate behaviour.
HMRC undertakes to review all Clients who decide to discontinue engagement with their current Agent (in this case, the accounting firm Taxpol) and move to a different accountants or decide to file their tax returns personally. HMRC is able to find and identify all such Clients.
This letter has been written based purely on information provided by the HMRC. Please, do not ignore it. Should you need a more detailed explanation, please do not hesitate to contact any of our offices.
We advise all CIS Clients to submit their corrected tax returns voluntarily. Consequences of not taking action can be costly. On our part, we can assure that we will assist you in filing the corrected returns.
Should the expenses presented in your return exceed 20% of your turnover, but you claim they are accurate and were actually incurred only for business purposes, we will help you to provide (retrieve) relevant business records, in line with the HMRC rules. In such cases, amendments may not be necessary. If no such records can be provided, we will agree with you a line of defence in case of enquiry.
If the expenses shown in your return exceed 20% of your turnover and you know for a fact that some of them are inaccurate or were not entirely incurred in connection with your business activities, the voluntary correction is absolutely necessary.
In such a case, please contact us immediately. Voluntarily corrected returns, filed using us as an agent, can be filed no later than 11 December. After this date you will have another 2 weeks (until 31 December) to file a corrected return personally without our assist.
We hope that you accept the new HMRC rules and that, with joint effort, they will cause you as little concern as possible.
We are looking forward to hearing from you.