Settlement Opportunity

[jbryce]

http://www.financeandtaxtribunals.go...02/TC04027.pdf

It's worth reading this short (7 pages) case.

Essentially the taxpayer relied upon an accountant who was subsequently found to be very naughty indeed. The accountant was routinely adjusting his clients' income between self employment and companies and over claiming expenses. HMRC raided his premises and he was subsequently barred from being an agent.

HMRC wrote to all clients telling them what happened and inviting them to revisit their tax returns with a view to settling. The taxpayer in the case did not indicate she wanted to settle but subsequently made various adjustments to her return although she was very clear that much of the detail and analysis was beyond her capability of understanding.

The tax and interest was subsequently agreed and paid.

HMRC then wanted penalties for her being careless. She objected on the grounds that she was unaware of the illegal practices of the accountant and that a penalty on her was unfair.

Appeal rejected.

The FTT thought that she should have taken more care to understand her position and in particular ignoring the offer to settle was a key element.

Some parallels with various contractor schemes but more instructive about how HMRC are seeing this sort of situation as a revenue raising activity.

...so, basically, HMRC are being horrid, but if you ignore the Settlement opportunity they will just get plain nasty

[Rob79]

...so, basically, HMRC are being horrid, but if you ignore the Settlement opportunity they will just get plain nasty

One swallow does not make a summer but chasing this unfortunately lady who was clearly out of her depth and looking at penalties of around £1,600 or so does rather indicate a very hard line.

[TheDandy]

One swallow does not make a summer but chasing this unfortunately lady who was clearly out of her depth and looking at penalties of around £1,600 or so does rather indicate a very hard line.

It certainly represents a very easy target. People need to tread very carefully if they are thinking of making a settlement without taking professional advice - IMHO at least. Are you sure your settlement will actually be the last of it.....?

[Safe]

.....Oh lord. Has anyone asked HMRC this? I'm still waiting for them to get back to me - although they said I could calculate the amount owed as the total amounts gross of tax.
So if I received X in loans I would be paying tax on X.

Given that we are being dragged over the coals, grossing the amounts up would just be 'grossly' unfair.

Disagree with both of you. If they treat 63K as a net income for 2006-2007 tax year then the total gross income will be circa 98k with tax only 31k. If you add couple of years interest and IHT on this then it will be well above 36K which lower than 28.5k from HMRC. I think we need to wait and see the breakdown calcs and how they calculated. Even with the figure i have given here I have calculated the 63K as total income (including salary part) so in reality the tax well over 31K as you are exceeding 100K and losing half of your tax allowance for every £2 over 100K.

[Rob79]

It certainly represents a very easy target. People need to tread very carefully if they are thinking of making a settlement without taking professional advice - IMHO at least. Are you sure your settlement will actually be the last of it.....?

A contract settlement does not in theory allow HMRC to reopen that year.

I've not seen HMRC renege on such a settlement except where a subsequent fraud investigation covered the period.

I would agree that professional help is a must (but then I am a professional so I would say that wouldn't I?)

[Rob79]

Disagree with both of you. If they treat 63K as a net income for 2006-2007 tax year then the total gross income will be circa 98k with tax only 31k. If you add couple of years interest and IHT on this then it will be well above 36K which lower than 28.5k from HMRC. I think we need to wait and see the breakdown calcs and how they calculated. Even with the figure i have given here I have calculated the 63K as total income (including salary part) so in reality the tax well over 31K as you are exceeding 100K and losing half of your tax allowance for every £2 over 100K.

It'll be interesting to see the calculation.

Administratively an assessment for income tax and an assessment for IHT are different beasts. In this case the figures are not assessments but even so it would be surprising if an HMRC person on the phone could not at least distinguish between the two taxes.

[LadyPenelope]

I do think that if it were gross it would be more than the 29.5k.

I also doubt there will be penalties since they state in their letter that if you settle you avoid penalties, and they have stated this in writing so would be unlikely to refute as much in a tribunal. Unless they have somehow weasel-worded it which is not beyond realms of possibility. I'm at work so can't check the exact wording of the letter, but I will later. Maybe the additional £4.5k is penalties, I just don't know yet.

As an aside, I also think that the girl claiming her gym membership and understating her income by £30k was taking the p1ss, so I can understand the penalties here. I think the principle here is that ignorance of the law constitutes no excuse.

But yeah, we need to see the computations and also see what happens next. Unless we have another example of settlement calcs, which I haven't seen as yet.

[Rob79]

I do think that if it were gross it would be more than the 29.5k.

I also doubt there will be penalties since they state in their letter that if you settle you avoid penalties, and they have stated this in writing so would be unlikely to refute as much in a tribunal. Unless they have somehow weasel-worded it which is not beyond realms of possibility. I'm at work so can't check the exact wording of the letter, but I will later. Maybe the additional £4.5k is penalties, I just don't know yet.

As an aside, I also think that the girl claiming her gym membership and understating her income by £30k was taking the p1ss, so I can understand the penalties here. I think the principle here is that ignorance of the law constitutes no excuse.

But yeah, we need to see the computations and also see what happens next. Unless we have another example of settlement calcs, which I haven't seen as yet.

I agree that a penalty is unlikely and would be very unusual.

Seeing the calculation is key here.

With regard to the case, I think the lady in question was told that the £30k that did not form part of her self employment income had instead gone to her company as income. As far as she was concerned she/her company had declared the income and the games played by the accountant teeming and lading personal/corporate accounts were beyond here comprehension and she was just not aware that such action was illegal until the Revenue told her.

Contrast this with various cases on "discovery" where a decision from an officer employed by HMRC can be overturned and a "discovery" made if that officer is subsequently thought to be below the standard required.

What's sauce for the goose is evidently not sauce for the gander.

[creativity]

Guys I don't necessarily see why anyone should seek professional help as the process to calculate the tax is quite simple (to me as a contractor?):

I have gone through all my online bank statements and tabulated salary and loans for all years affected. Added both summed salary and loan payments together to obtain my total 'income' for that year. Then I used the tax rates for that year and calculated how much tax I need to pay for each rate (inc my personal allowance). Then I simply negated the tax I did pay. Voila, the total left is the value HMRC are after. Goes without saying P60's are very very handy for this. Luckily I had all of mine. I cant see HMRC arguing with this especially as they have my P60's - Im just awaiting to see how much interest they add. Im not looking to 'settle' as there are no advantages but at least when this APN arrives it will have the right numbers.

Also, in order to pay this forthcoming APN, HMRC have forced me to act shrewdly with my future tax position. Which means I am planning to MVL my existing LTD company and work abroad for at least 12 months (you can also take a full time job or a long break) - this will enable me to extract the profits from my LTD company at ET rate (10%), enough to pay my APN bill and retain some cash for myself. The reason I am going to work abroad is so that I can retain a good contractor rate and pay the countries tax (in my instance the Netherlands) using a standard Umbrella company run by the agent.
After a year or so I could decide to return at which point I could start another LTD company.

So in the end my tax position would be offset by liquidating my LTD company and taking advantage of the discounted CG tax (ET). More hassle for me, but only a little.

HMRC don't like you closing/opening LTD companies in succession but liquidating one for good reasons (working abroad, full time job etc) is OK as long as you have no intentions of starting another shortly after just to obtain a tax advantage. Of course I have no intention of that...

[DonkeyRhubarb]

Not sure I agree or maybe I don’t understand. Using HMRC’s tool http://www.hmrc.gov.uk/campaigns/19years-calc.pdf, enter an example: Select year 06/07 and enter £10,000 as income due. It gives you a total of £14,573 and it breaks it down with 3 interest charges:

1. £2,380.15 in interest for the balancing payment of £10.000.
2. £1190.10 in interest on the first PoA of £5,000
3. £1,003.62 in interest on second PoA of £5,000

This gives a total interest charge of £4,573.

The first amount (£2,380.15) would be the correct amount of accrued interest for £10,000 from 06 to present day. So how can being charged interest on the two missed PoA payments not be seen as paying interest twice on the same amount?

Can't follow that calculator but your conclusion is wrong.

I've seen HMRC written calcs for interest and it's only charged once.