Taxing times

Tax facts

New VAT flat rate scheme guidance
New guidance has been issued by HM Revenue & Customs (HMRC) on the VAT flat rate scheme and, in particular, changes have been introduced concerning businesses wishing to deregister. Businesses should consider whether or not they may be better-off by operating within the Scheme.

The main aim of the Flat Rate Scheme is to reduce the cost of complying with VAT obligations by simplifying the VAT calculation for small businesses; instead of paying HMRC the total VAT charged on invoices minus any input VAT that may be reclaimed, businesses are charged a fixed percentage of their gross turnover and pay that amount to HMRC each year.

New HMRC enforcement powers
HMRC “believe that it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar, to take care to check the correct tax treatment, or seek suitable advice. We expect people to take their tax seriously.”

As an incentive to ensuring that a taxpayer takes tax seriously, HMRC now have the following powers:

Three new powers to gather information
Written notice may be given to a person requiring them to provide information or produce documentation reasonably required for the purpose of checking their tax position. Information includes explanations, schedules or documents which may be more than six years old, and/or which do not already exist.

A third party notice may be given to a person requiring them to provide information or produce documents reasonably required for the purpose of checking another person’s tax position.

An “Identity Unknown Notice” may be given to a person requiring them to provide information or produce documentation reasonably required for the purposes of checking the UK tax position of an unknown individual or a class of persons whose identities are unknown.

Compliance check powers
Powers to enter business premises and inspect the premises (but not by forced entry), business assets and statutory records. Where an information notice has been issued, these documents may be required for inspection at the same time. An inspection will only take place if “reasonably required to establish the tax position” of the taxpayer.

Usually inspections will be by mutually agreed appointment, but HMRC do have powers to make unannounced visits where they establish that there may be a strong risk that business assets or documents may be removed or destroyed.

The new rules also apply to inspection of a residential property which is partly used for business purposes. HMRC’s powers do not extend to the inspection of premises used solely as a dwelling.

Penalties for inaccuracies
Taxpayers, who file incorrect tax returns (on or after 1st April 2009 for periods starting on or after 1st April 2008), or need to pay more tax or repay a refund as a result of an enquiry, may be charged a penalty.

Penalties will apply unless the taxpayer takes “reasonable care.” This will include keeping accurate records, understanding the position and informing HMRC about any error.

The new regime is intended to discourage concealment of inaccuracies. Mitigation of penalties is based on the quality of the disclosure, which includes giving information and helping HMRC regarding the inaccuracy. Reduced penalties will apply if an unprompted disclosure is made.

Internal review process
A new review process operated internally in respect of most HMRC decisions. The taxpayer or his agent may request a review of the decision, and that review will be undertaken by a specially trained member of HMRC staff, who is independent of the individual working on the case.

The intention is to provide a fresh pair of eyes, a more cost effective means of resolving disputes and an additional safeguard. If agreement is still not achieved as a result of the review, the option of progressing matters to a Tribunal is available.

The Tax Tribunal Process
The General and Special Commissioners are replaced by a new Tribunal service operated by the Ministry of Justice. The new service replaces the separate system for direct taxes and VAT. There is the First Tier Tribunal and the Upper Tier Tribunal. The new appeal hearings will fall into four categories: Complex, Standard, Basic and Paper.