The allocation of costs between repairs and improvements always involves an element of judgment, but if HMRC disagree with the taxpayer's decision additional tax and penalties can be due, as we explain below. We also have a warning about pension annual allowances and the declaration required on the taxpayer's SA tax return. Finally we celebrate an outbreak of common sense at HMRC concerning Business Record Checks.
This is an
extract from our topical tax tips newsletter dated 22 October 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
Repairs or improvement
If a client spends a substantial sum on repairing or altering their let property you will probably learn about the project after the event, when you complete the tax return. What you do next could have a huge bearing on the level of any penalty payable should HMRC question the apportionment between repairs and capital.
Only the landlord can know whether the work undertaken has installed a fixture, fitting, or part of the structure which did not previously exist, or has improved such an item so its nature has been transformed. Any of those outcomes means the cost should be classified as an improvement (capital expenditure); everything else is a repair. A diligent taxpayer will record all the expenditure when the work is done and categorise the costs at that time.
However, without back-up to support the landlord's records, his analysis is worthless. If HMRC open an enquiry the tax inspector will ask for sight of various documents to support the cost apportionment. Those will include: architects drawings, builders' estimates, receipts and building inspector's report. Ideally the documents should tell a clear story to link the before and after state of the property. In reality this is unlikely to be the case, but HMRC will demand evidence of why and how each section of work was done.
When the tax inspector's view of the repair/capital cost split differs from the landlord's, HMRC may seek to impose a penalty for a careless inaccuracy - up to 30% of the underpaid tax. You can counter this with the argument that the taxpayer took reasonable care establish the correct deduction claimed on the tax return.
The HMRC compliance manual (para CH81130) says if an inaccuracy in a document exists despite the person having taken reasonable care, no penalty will be due. The HMRC manual goes on to say the standard of care is: “that of a prudent and reasonable taxpayer in the position of the taxpayer in question.”
The alternative approach is to encourage clients to keep adequate back-up to support all repair/ capital apportionments, and advise them not to claim costs as repairs which could be shown to be improvements.
The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We've been
publishing this newsletter weekly since 2007; it's clearly written
and focused on precisely what accountants in general practice need to
know about each week.
Tuesday 27 October 2015
Thursday 15 October 2015
Errors in loss calculations, Nudge letters, Non-resident or Non-domicile
How confident are you that your tax return software calculates the tax due correctly? In last week's newsletter we explained why you may need to be sceptical. We also highlighted some underhand letters HMRC are sending to taxpayers. Finally there was a revised HMRC guidance note and a consultation document which you should read if you have any non-domiciled or non-resident clients.
This is an extract from our topical tax tips newsletter from last week, dated - 8 October 2015. You can obtain future issues as they are published by registering here>>>
Nudge letters
HMRC has a “nudge” unit. Its policy is to persuade taxpayer to pay the right amount of tax. It does this through carefully worded letters containing psychology techniques to subconsciously nudge the recipients to declare previously undeclared profits. We have reported earlier missives from the HMRC nudge unit in our newsletters on 17 April 2014 and 3 July 2014.
The latest targets of the nudge unit are taxpayers who are in dispute with HMRC. Some of those taxpayers have been receiving letters that encourage them to settle the dispute with HMRC. The letters play on the natural desire of taxpayers to avoid confrontation, particularly when up against a powerful opponent such as HMRC.
If your client has received such a letter, but you may not be aware of it as HMRC are not sending copies of the letters to the registered tax agent. This is a serious issue, as those nudge letters could be construed as an attempt to apply improper pressure to settle the tax dispute - coming from the party that has the greater power.
If you feel a line has been crossed by the nudge letter your client has received in connection to their tax dispute, a reasonable course of action would be to complain to HMRC. Out tax investigation experts can provide impartial advice on the issues underlying the tax dispute and the likelihood of winning the argument.
As always, the full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week.
This is an extract from our topical tax tips newsletter from last week, dated - 8 October 2015. You can obtain future issues as they are published by registering here>>>
Nudge letters
HMRC has a “nudge” unit. Its policy is to persuade taxpayer to pay the right amount of tax. It does this through carefully worded letters containing psychology techniques to subconsciously nudge the recipients to declare previously undeclared profits. We have reported earlier missives from the HMRC nudge unit in our newsletters on 17 April 2014 and 3 July 2014.
The latest targets of the nudge unit are taxpayers who are in dispute with HMRC. Some of those taxpayers have been receiving letters that encourage them to settle the dispute with HMRC. The letters play on the natural desire of taxpayers to avoid confrontation, particularly when up against a powerful opponent such as HMRC.
If your client has received such a letter, but you may not be aware of it as HMRC are not sending copies of the letters to the registered tax agent. This is a serious issue, as those nudge letters could be construed as an attempt to apply improper pressure to settle the tax dispute - coming from the party that has the greater power.
If you feel a line has been crossed by the nudge letter your client has received in connection to their tax dispute, a reasonable course of action would be to complain to HMRC. Out tax investigation experts can provide impartial advice on the issues underlying the tax dispute and the likelihood of winning the argument.
As always, the full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week.
Tuesday 6 October 2015
VAT and DIY, Employee share schemes, US tax returns
Last week we contemplated the hazards of completing tax forms incorrectly or late. We had a cautionary tale of mistakes when submitting a VAT claims under the DIY builder scheme, and a report of faults in HMRC's processing of 2014/15 share scheme returns. We also had a final warning of the deadline for submitting USAtax returns - this applies to more people than you may realise.
US tax returns
The USA has a citizen based taxation system, rather than a residence based system, which most other countries in the world operate. This means that all citizens of USA must complete a USA tax return every year, even if they have never lived in the USA.
This obligation to file a USA tax return extends to non-USA citizens who are in possession of a valid “green card” which allows a person to work in the USA. The deadline for filing the 2014 tax returns for US-related individuals who live outside the US was 15 June 2015, although a four month extension could be requested on IRS form 4868.
That extension is due to run out on 15 October 2015, which is also the last day on which an electronically filed personal tax return will be accepted by the IRS. Taxreturns submitted later must be filed on paper. Even if there is no tax liability in the US, a late filing penalty of up to $10,000 can apply.
The USA tax return needs to report the individual's worldwide income, not just income that arises within the USA. This requirement gives rise to a potential double tax charges on non-USA income and gains. However, due to the operation of double taxation agreements with USA, there may not be any further tax to pay for a UK resident, as tax rates in the UK are generally higher than in the USA.
Having said that anyone completing a USA tax return must consider categories of income and gains which are tax free in the UK, but which are wholly or partially taxable under US law, such as:
This is an extract from our topical tax tips newsletter dated 1 October 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week.
US tax returns
The USA has a citizen based taxation system, rather than a residence based system, which most other countries in the world operate. This means that all citizens of USA must complete a USA tax return every year, even if they have never lived in the USA.
This obligation to file a USA tax return extends to non-USA citizens who are in possession of a valid “green card” which allows a person to work in the USA. The deadline for filing the 2014 tax returns for US-related individuals who live outside the US was 15 June 2015, although a four month extension could be requested on IRS form 4868.
That extension is due to run out on 15 October 2015, which is also the last day on which an electronically filed personal tax return will be accepted by the IRS. Taxreturns submitted later must be filed on paper. Even if there is no tax liability in the US, a late filing penalty of up to $10,000 can apply.
The USA tax return needs to report the individual's worldwide income, not just income that arises within the USA. This requirement gives rise to a potential double tax charges on non-USA income and gains. However, due to the operation of double taxation agreements with USA, there may not be any further tax to pay for a UK resident, as tax rates in the UK are generally higher than in the USA.
Having said that anyone completing a USA tax return must consider categories of income and gains which are tax free in the UK, but which are wholly or partially taxable under US law, such as:
- sale of the taxpayer's own home;
- premium bond or lottery prizes; and
- interest & gains generated within an ISA or pension fund.
This is an extract from our topical tax tips newsletter dated 1 October 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week.
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