The Fizz! Blog

Taxman to knock on landlords' doors, maybe

I started a post about this story in the Telegraph:

Up to one million landlords could get a knock on the door from the taxman as part of a Government drive to track down those who do not pay enough tax. The move, being introduced by HM Revenue & Customs, aims to identify those landlords who could be liable to pay extra tax on their buy-to-let rental income.

And so on.  But then I got a feeling of deja vu - I was pretty sure I'd commented on exactly the same story before.  Sure enough, I did, in February, when the story was in the Guardian.  I still believe a crackdown would be very fair and long overdue - but I'll believe it when I see it.

www.fizzhq.com

Dragonfly - a storm in a teacup?

There's been a lot of fuss in the last couple of weeks about a court decision that could adversely affect many contractors working via limited companies.

The company concerned is called Dragonfly Consulting Limited, and it has lost a long running battle with the Revenue.  The company has been found to fall foul of IR35.  IR35 is a rule that says that if an individual is working for another entity doing what is, to all intents and purposes, a job, then, even if the individual forms a limited company which sits between him and that other entity, then tax and National Insurance must be paid as if the individual were are an employee of the entity.  In other words, the individual loses the tax benefits of having their own limited company, and suffers the higher tax burden of an employee.

The central point in the Dragonfly was a "substitution clause" in a contract - a commonly used device that states that the individual can send someone else to do the work if they want.  This is a good pointer that the relationship is not a job - if you're an employee, you can't just send someone else in to work to do your job for you, generally.  However, in the case of Dragonfly, the end customer essentially told the court "Well, yes, the contract says that, but in reality he has to come in and do the work himself, and he knows that".  So the clause was set aside as it didn't actually reflect the real relationship.

There's more detailed discussion of the case at AccountingWeb (free registration required), where it's argued that the case has strengthened the taxman's hand.  In particular it is suggested that contractors and advisers now need to take much more care to ensure that substitution clauses are realistic and workable.

However, I don't really agree with that part of their analysis. It's always been the case that, under IR35, you can only rely upon a contract if it accurately reflects the real relationship between you and your client.  If the contract is a sham, or there are parts in it that are for show, with both parties knowing that they don't reflect the real terms of engagement, then the contract (or that part of it that is unrealistic) can be set aside.  Since IR35 came in, competent tax advisers have been telling their clients that a substitution clause is great, but that if the customer wouldn't accept a substitute in real life then it's not worth the paper it's written on.  So, in my view, nothing has really changed.

If you're worried by the implications of Dragonfly, do give us a call.

www.fizzhq.com

Another good tax case

There has been a rich seam of interesting or amusing tax cases over the last few months, oxymoronic as that may sound.

The company at the centre of one such case was (still is, in fact) a payroll provider - it processed payrolls for its clients, working out the tax and National Insurance deductions to be made by them and getting cheques from them to settle the tax and NI.

However, it's fair to say that it wasn't a very good payroll provider.  In time, it found that submitting its clients' cheques in respect of all those different payroll schemes, all under different tax reference numbers, was just taking too long.  So it came up with an imaginative solution - it pretended that all the employees of its clients were its own employees!  That way, they could just send all the cheques in together with one reference.  Needless to say, you're not allowed to do that.  If tax and NI are payable in respect of a particular employer's staff, then they need to paid under that employer's payroll scheme, not some other company's scheme.

Furthermore, the provider also screwed up somewhere along the line, and found that insufficient deductions had been paid over.  Some of their clients had underpaid tax - it must have been a nightmare unravelling the records of the spurious, monster payroll scheme that had been created in order to work out exactly which ones had underpaid.

Its clients, understandably - legally, if not morally - tried to argue that the payroll provider should meet the shortfall.  After all, it had been telling the Revenue that the cheques were in respect of its own employees.  That being the case, surely the payroll provider should stump up the missing cash?

Well, no.  The High Court decided that, regardless of what the payroll provider had been telling the taxman, the tax and NI remained the responsibility of the actual employers.  The payroll provider could breathe a sigh of relief.  Presumably it has now stopped cutting corners!

www.fizzhq.com

Your liability isn't always limited

Traditionally, the main benefit of trading via a limited company has been limited liability - if the company goes pop and is unable to pay its debts, then the shareholders have no obligation to settle those liabilities on the company's behalf.  However, that doesn't mean that the directors (who, in 90% of cases, are the same as the shareholders) can behave in a cavalier manner.  If they do, then they may commit a civil offence known as Wrongful Trading, and be found personally liable for company debts.

One company director found this out over the summer, at enormous cost.  Basically, the events in the case of Paycheck Services 3 Limited were as follows:

• Although the companies he controlled were closely related, the director of them believed, from his understanding of the legislation, that they were not associated for tax purposes.  If they had been associated then their tax liabilities would have been significantly higher.

• On his assumption, the director paid out dividends from the companies that only left enough in the bank to pay the smaller amount of tax he believed to be due.

• The taxman told the director that he was incorrect, and that the companies *were* associated and their tax bills should be higher.

• The director continued as before, paying out big dividends leaving only enough in the kitty to pay the lower tax bills he considered appropriate.

• The taxman once again suggested that to the director that he was wrong, and so the director sought the view of a barrister specialising in tax law.  The barrister told the director that the taxman was right.

• Once again, the director continued as before, now considering both the taxman and the barrister to be mistaken.

• The director eventually accepted that he was wrong and the taxman right.  However, because of the chunky dividends that had been paid out, the companies could not pay the higher tax bill and they were put into liquidation.

You will be unsurprised to learn that the director's conduct in paying out dividends that left the companies unable to pay their tax liabilities was found by a court to be reckless.  Amusingly, they decided that he wasn't reckless during the period that only the taxman disagreed with him - the judges considered that the taxman is wrong so often that disagreeing with them was not reckless, it was reasonable!  However, from the instant that the barrister gave him the written opinion that he was in the wrong, he very clearly was being reckless.  On profits made from that point onwards, he was liable to pay the extra tax due.

The moral of the story - just because you trade through a company, you cannot do exactly as you wish and then walk away from the consequences.

www.fizzhq.com

Not a brilliant advert for estate agents

Usually, no stamp duty is payable on houses bought for less than £125,000.  This morning, the Chancellor announced a temporary stamp duty "holiday" on properties costing up to £175,000. Just after the announcement, Radio Five spoke to an estate agent to get his view on the news.

The estate agent said that, while any help offered to homebuyers is welcome, the most that this change will save anyone is £500, which is just a drop in the ocean.

But his £500 figure was nonsense.  The usual stamp duty on a house costing £175,000 is 1% of the total price - so, £1,750.  Now it's nil.  So the most that can be saved is £1,750, not £500.  Still arguably a drop in the ocean, but a much bigger drop.

The industry "expert" was evidently under the impression that the first £125,000 of any property purchase is taxed at 0%, with only the excess liable to stamp duty.  Which is quite wrong.  Once the price is over £125,000, the whole lot gets taxed.

Of course, the stamp duty holiday isn't going to make any difference, for several reasons, but, honestly - isn't it possible for the BBC to track down an estate agent who has the slightest idea about the basics of his industry?

www.fizzhq.com

Always get it in writing

Something every tax practitioner soon learns is that, if you're asking HM Revenue & Customs a question of any importance, you always try and get an answer in writing.  If they later change their mind, they may well still try to disown their answer by claiming that not all the facts were disclosed to them, but it's still a good starting point.  If you just get an answer from them on the phone, you've no chance if they have a change of heart down the line.

Sadly, nobody said this to a taxpayer who took a complaint all the way to the High Court over the summer.  The taxpayer, a Mr Refson, had been told by a Revenue employee over the phone that certain travel expenses that he had incurred could be deducted from his income and, as a result, reduce his tax bill.  The advice was erroneous and his tax bill turned out to be higher than he had hoped.

At this point almost any adviser would have recommended that he pay the extra tax and move on.  However, he decided to pursue the point, eventually ending up appealing in the High Court.  To no-one's surprise, he lost.  The court told him that a taxpayer could only expect to rely on such an opinion if full disclosure of all the circumstances were made to the Revenue, it was made clear to them that a ruling was being sought from them, and a clear ruling was received in writing.  An informal, undocumented phone call was not enough.

www.fizzhq.com