It’s a World Cup: think Penalties!

One such area that no incoming Chancellor will rush to undo concerns various Penalties that HMRC have available against taxpayers who don’t quite follow the rules [as it were..]. A new, streamlined penalty regime came into effect from 1st April 2010; it didn’t really make headlines then, and although many individuals and businesses might think the changes were unnecessary or just another sign of the power of Government versus the individual taxpayer, they are unlikely to be suddenly cancelled by the new government.

Inaccuracy penalty

From 1 April 2009 there was a penalty for inaccurate tax documents and returns. This penalty is being extended to almost all taxes for return periods starting on or after 1 April 2009, for documents that are due to be filed on or after 1st April 2010. Apart from the ‘big ones’ [e.g. PAYE/VAT/Corporation Tax – for which these penalties already applied last year] the new rules cover virtually every other tax you can think of, such as Excise Duty, Tobacco Products Duty, etc.

Under the new system HMRC “will not penalise you if you take reasonable care to get your tax right”. Taking ‘reasonable care’ includes:

· keeping accurate records to make sure your tax returns are correct
· checking what the correct position is when you don’t understand something
· telling HM Revenue & Customs (HMRC) promptly about any error you discover in a tax return or document after you’ve sent it.

This clearly puts the onus onto every business operator to maintain an accurate accounting system, and to be open and honest when providing their accountant or tax advisor with information that will be used for preparing returns to HMRC.

Failure to notify penalty

From 1 April 2010 HMRC can apply a penalty if people don’t tell them about a tax obligation at the correct time. Again the penalties relate to almost every tax that you can think of, as well as quite a few that you’ve probably never heard of.

The failure to notify penalty will most commonly apply where you don’t tell them at the right time that:

· you are liable to tax because your new business has made a profit
· your business’s turnover has reached the VAT registration threshold
· you sell an asset and make a capital gain on which tax should be paid
· you start a type of business that is required to register with HMRC – for example for Excise
· your circumstances change in another way that affects your tax position [which is a classic ‘catch-all’ provision if ever we’ve seen one].

VAT and Excise wrongdoing penalties

From 1 April 2010 HMRC will apply wrongdoing penalties where a person:

· issues an invoice that includes VAT which they are not entitled to charge
· handles goods on which Excise Duty has not been paid or deferred
· uses a product in a way that means more Excise Duty should have been paid
· supplies a product at a lower rate of Excise Duty knowing that it will be used in a way that means a higher rate of Excise Duty should be paid
-the latter clause should be noted in particular by those fuel retailers selling products such as “Agricultural Diesel”! This penalty applies to anyone registered for VAT or Excise, anyone who should be registered to pay VAT or Excise duties and to other members of the general public.

Name & Shame

If those are the ‘penalties’ – what are the actual sanctions? What will HMRC do to you if you get caught? Simple: first the actual amount of tax that’s been underdecalared, plus an additional amount calculated as a percentage of that tax; exactly how hard they hit you comes down to how much you cooperate with them – and that includes just how good [or otherwise] your basic accounting records are. That’s been HMRC practice for a long time, what’s new is the ‘name & shame’ part: from April of this year if a taxpayer is found to have evaded over £25,000 in tax, HMRC can publish the names, business details and amount involved on their website, together with a press release to the media. Apart from any personal embarrasment, that’s not something that will do you a lot of favours if you’re trying to raise funds or get anyone interested in investing in your business in future.

Given that there’s going to be another Budget in the next few weeks, it’d take a brave or foolish soul to try and predict what will be in it; as we go to press there are persistent rumours of another hike in VAT rates, and possibly an extension to the scope of VAT to include things like newspapers and maybe even more categories of groceries. As a retailer, one can only hope that if any of these changes are being considered, they’ll be kept relatively simple and that we are all given sufficient notice [say six months..] to implement them smoothly, unlike the ‘overnight’ VAT changes back in December 2008.

VAT and Income Tax rates unchanged.

It was never very likely that the Chancellor would have stood up and announced any increases in ‘universal’ taxes at this time, and there were no surprises that both VAT and Income Tax rates have been left alone. This of course means that the 50p rate of tax announced last year comes into effect from April 2010, for taxable earnings of £150,000 and over. Other than this ‘additional rate’ all personal tax rates, bands and allowances remain unchanged for 2010/11; for those fortunate individuals who still look forward to pay rises, the absence of any ‘index-link’ between RPI and tax bands/allowances does mean that they’ll effectively be losing a little more of any increased pay than they might realise from the bland headline ‘tax rate unchanged’!

But VAT Registration thresholds amended.

The taxable turnover threshold, which determines whether a person must be registered for VAT, will increase from £68,000 to £70,000, from 1 April 2010. The taxable turnover threshold which determines whether a person may apply for deregistration will be increased from £66,000 to £68,000.

National Insurance Rates unchanged.

No changes announced to any NIC rates for 2010/11 – all classes [employed, self-employed, employer’s and employee’s] remain as for 2009/10.

Corporation Tax Rates unchanged, but capital allowances are:

While the main rates of Corporation tax remain unchanged, there was a slight change to capital allowances. The Annual Investment Allowance (AIA) allows businesses, regardless of size, to reduce their taxable profits by the full amount of their annual capital expenditure on most plant and machinery (apart from cars), up to a maximum amount of £50,000 each year. The maximum amount of the AIA will increase to £100,000 from 1 April 2010 (for corporation tax) or 6 April 2010 (for income tax). Capital expenditure above this threshold will continue to be eligible for standard capital allowances against taxable profits. However, the “Temporary first year allowance” rate of 40% that was available in 2009/10 is removed for 2010/11.

Fuel duty – and politicians don’t think they’re ‘out of touch’!

Last year’s Budget announced that the main rate of fuel duty would increase by 1pence per litre in ‘real terms’ on 1 April 2010. In reality that would have been 2.76 pence per litre increase. In the 2010 Budget it was announced that this increase would be implemented in three stages: 1 penny per litre on 1 April 2010, 1 penny per litre on 1 October 2010, and 0.76 pence per litre on 1 January 2011. With the inevitable ‘add on’ from the oil majors, we’re expecting pump prices to be back to the disastrous levels of over £1.25/litre by the end of this year; it probably doesn’t even register with ministers chauffeured around in state limousines just how much that affects the public in general – or the impact on the forecourt trade in particular.

Drink anyone?

Maybe not, but an awful lot of forecourt shops now rely on the off-licence trade to make a contribution to keeping the site profitable. However no Chancellor would pass on an opportunity to raise duty on booze [social and medical reasons, you understand..] and this time it is Cider that takes the biggest hit. Duty rates for all still ciders, and sparkling cider exceeding 1.2 per cent alcohol by volume (abv) but not exceeding 5.5 per cent abv, were increased by 10 per cent above inflation. Duty rates for all other alcoholic drinks will increase by 2 per cent above inflation – every year until 2013.

How about a smoke then:

No, he couldn’t resist those either. The rates of Tobacco Products Duty (that is the duty on cigarettes, cigars, hand rolling tobacco, other smoking tobacco and chewing tobacco) were increased by 1% in ‘real terms’ [or around 9p a packet in really- ‘real terms’] with effect from 6pm on Budget day. The intention is to raise tobacco duty by 2% per year ‘in real terms’ every year until 2014.

Some relief – Business Rates:

Updated property values for business rates take effect from 1 April 2010 the ‘multiplier’ for 2010-11 is being reduced to compensate, so that total revenue from business rates remains the same in real terms. The 2010 Budget announced a temporary increase in the level of small business rate relief for one year, from 1 October 2010 –

Need help with paying the government?

The Business Payment Support Service (BPSS) – giving people streamlined access to request Time to Pay their tax – introduced at the 2008 Pre-Budget Report to support viable businesses experiencing temporary financial difficulty, is to continue. The service is available for all HMRC taxes, including VAT, Corporation Tax, Income Tax and NICs and PAYE. HMRC will require businesses seeking Time To Pay (TTP) arrangements for arrears of £1million or more, to provide an Independent Business Review (IBR) in support of their request. There will be no change for all other businesses. HMRC will continue through The Business Payment Support Service (BPSS) to provide help and support on the same principles as before. And those same principles will continue to apply to businesses with large debts.

Relief if you’re selling the business.

Entrepreneurs’ Relief was originally introduced on 6 April 2008. It allowed individuals in business [sole traders or partnerships] to claim relief on the first £1 million of gains made on the disposal of any of the following:

• all or part of a business
• the assets of a business after it has ceased
• shares in a company

Entrepreneurs’ Relief reduces the amount of gains liable to Capital Gains Tax by four-ninths o Entrepreneurs’ Relief reduces the amount of gains liable to Capital Gains Tax by four-ninths on all qualifying gains up to £1 million. You can make claims on more than one occasion as long as the total of all your claims doesn’t exceed £1 million of qualifying gains.

If you’ve really had enough, the good news is that from April 2010 the limit for relief has doubled to £2 million.

The law in this case is the “Immigration, Asylum and Nationality Act 2006” which came into effect on 28th February 2008. It basically sets out who is entitled to work in the UK, what checks an employer is required to undertake before employing any worker, and the penalties for failing to perform such checks. At this point it’s important to remember that the law imposes civil penalties simply for failure to carry out the required checks [or failure to provide evidence that those checks were in fact performed], but that even more severe criminal sanctions apply where employers are guilty of knowingly employing workers who don’t have the right to work here. As with all things ‘legal’ we can only try here to alert you to the existence of the problem, point out some particular danger areas, and recommend that if you have any doubt as to your particular circumstances you should seek expert advice.

 Avoiding Racial Discrimination claims.

If the penalties for failing to establish an employee’s status seem severe, remember that if you’re found guilty of racially discriminatory employment practices you could face unlimited fines. The simple rule therefore is to apply the same employment status checks for ALL employees regardless of their race, claimed origin or appearance.

 What you need to check.

The 2006 Act features two lists of documents that employers should check; in some cases a single document is sufficient, in others a combination of documents from both lists is required:

“List A” documents [which include things like a full UK /EU /Swiss passport, an official Home Office/UK Border Agency residence permit, etc.,] that basically show a person’s statutory right to live and work in the UK without time limit.

“List B” documents that show permission to work but with time [and other] restrictions – such as a Home Office Work Permit.

When the applicant brings their documents to you:

Satisfy yourself that the document(s) are valid and genuine, and have not been tampered with.
Check that any photographs and birth dates on the documents match the applicant’s appearance.
Check information in the job application against the documents to ensure the details match up.
Check that the document(s) allow the worker to do the work on offer.

 How do you know the documents are genuine?

An employer isn’t expected to be an expert on counterfeit paperwork; other than where documents look obviously tampered-with [“Tippex” is always a bit of a give-away..] or seem to conflict with each other, you’re not expected to recognise more sophisticated forgeries. However if something simply doesn’t feel ‘right’ or just seems to conflict with everything the employee’s telling you during their interview, and you’re not sure whether or not a document is valid, call the Home Office UK Border Agency Sponsorship and Employers’ Helpline on Tel 0300 123 4699.

 The Proof – keeping a record of what you’ve checked.

This is where the Attorney General apparently forgot the law [and it cost her a £5,000 civil fine]; you must keep a record of the documents your employee provided to support their entitlement to employment. You should photocopy and/or scan all of the documents, and any scanned files should be stored on a permanent medium such as a non-rewritable CD ROM.

As far as passports are concerned, the information that needs to be copied includes:

The front cover.
The date of expiry.
Any photographs and signature
All of the pages giving your potential employee’s personal details including nationality. Pages containing a UK government stamp, or endorsement allowing your employee to do the work you are offering.
Other documents should be copied in their entirety.

You’ll need to keep all of these copies for at least two years after the worker leaves your employment; Having a record of every copied document will help you establish a “Statutory excuse” if the UK Border Agency detects anyone working illegally for you. If you lose any records, the UK Border Agency might look at your normal recruitment procedures when considering if you have established a statutory excuse, e.g. if you have a consistent practice of copying documents for each worker.

 Don’t forget the need to re-check at regular intervals.

Remember that if you’ve taken on an employee under the “List B” criteria, it means that the employee only has a right to work here for a limited time. In this case you have to re-check all of their documentation at least once every 12 months, keeping a note of the dates of each check. Failure to perform and record these re-checks renders you liable as if you’d never done any in the first place.

 If the employee won’t provide the required documents for re-checks.

Stop!
Seek legal advice.

While there appears to be no explicit requirement for the employer to actually report the employee to the UK Border Agency in such cases, some reading of the Home Office guidelines to employers could be interpreted as implying the expectation of such action. This is a very grey area where the advice of an employment solicitor should be sought urgently.

 The penalties for not complying.

You can receive a civil penalty of up to £10,000 per illegal migrant worker if you do not establish a ‘statutory excuse’- in other words, if you fail to undertake the required checks or keep a record of those checks. However, if you know that you are employing a person who is not permitted to work, you will not be entitled to that ‘statutory excuse’ and additionally, you could be prosecuted for the criminal offence of knowingly employing an illegal migrant worker. If you are convicted under this offence, you could face an unlimited fine and/or a prison sentence of up to two years.

Hence according to Revenue& Customs the restoration of the 17.5% rate will take place from midnight on 31st December as originally announced. For those businesses which are actively trading at that time [particularly clubs, pubs and hotels – but not forgetting quite a few petrol retailers as well -] HMRC have recognised that it will be impractical to re-set their VAT rates while trading, or to have to stop trading at midnight. As a result, there will be special dispensation in place that allows such businesses to continue trading at the present rate until the end of that ‘trading day’ – 6.00 am on 1st January.

There are conditions attached: It is restricted to those businesses open at midnight on 31 December 2009 that account for VAT at the point of sale such as businesses on a retail scheme – pubs, shops, restaurants etc.

It will not apply to:

• mail order or on-line retailers;
• businesses that account for VAT on the basis of VAT invoices issued; or
• pre-payments for supplies of goods or services to be provided after 6am on 1 January 2010.

So, if your premises are open on New Year’s eve and trading past midnight, you will need to run a day/month-end no later than 6.00 am on the 1st and reset your VAT rates from that point onwards.

Price marking of shop items following VAT change

Although you’ll have to make sure that your Point of Sale and Accounting System are adjutsed back to the 17.5% rate at the due time, you will have a little more leeway as far as price-marking of shelf items is concerned. The basic law is that all traders are required to display clearly their prices inclusive of the correct rate of VAT. However, for a period up to 14 days, they are permitted under the Price Marking Order 2004 (SI 2004/102) to let consumers know, by way of a general notice, that an adjustment in price, to take account of the VAT change, will be made at the till. Just make sure that your ‘general notice’ is quite prominent and easily seen by all customers – perhaps right over each Point of Sale.

PAYE returns on-line in 2010

While we pointed out some time ago that paperless VAT returns were coming into effect from April 2010, it’s also worth reminding everyone that virtually all employers will be required to file their Employer Annual Return (P35 and P14s) online from the 2009-10 tax year onwards. The 2009-10 Return is due by 19 May 2010. This is not a problem for those employers already using an established payroll bureau, since most of those have been submitting electronic returns for several years – but anyone still doing their own payroll calculations and submitting information on paper should start planning for the changes now.

Remember your limits..

No, we’re not talking about alcohol, exactly [although that does come to mind as another reminder for this time of year..] but about cash and stock levels on-site. Because of the usual staffing ‘issues’ around this time, as well as the simple need for even the most dedicated retailer to take some time away from their business over the holiday period, there’s often a tendency for basic housekeeping to be allowed to drift a little. Perhaps a temptation to leave cash on site in rather larger amounts than usual [after all, the banks seem largely closed for a week as well] or to entrust someone else to do the banking for you just once during the holidays? Even if you remain careful about the cash side, how about leaving extra stocks of tobacco and/or alcohol out of the secure store room so that the staff don’t sell-out while you are away? But before you do, just have a look at your insurance policy: usually there’ll be specific limits on the value of cash and particular stock items [like cigarettes, for example] that are covered in the event of theft or other loss. Some retailers may already have allowed these values to slip a little over the years, but in any case there are usually rather more ‘valuables’ on site at this time of year. Don’t get caught out: either ask your insurers beforehand to raise the limits to more realistic levels [and of course expect an additional premium charge] or make your arrangements so that you don’t end up with large amounts uncovered.

Now that sounds like a good rule for everyone over the festive period. Here’s wishing you a peaceful and prosperous 2010 from all at EKW Group!