Month: February 2024

HMRC uses some clever tactics to keep an eye on UK taxpayers and their activities, by making the most of the data available.

Here we look at some of the ways HMRC gathers information – and why it’s so important to make sure you keep your tax affairs in order.  

General information powers

HMRC can legally request any information ‘reasonably required to check a taxpayer’s tax position’. It’s mainly used in an enquiry, but it is not limited to those – it can be applied to potential tax fraud situations too. 

HMRC can also ask third parties for information about taxpayers, such as banks or letting agents. Since 2021, HMRC can approach financial institutions without having first to seek your consent. 

Looking for unregistered businesses

HMRC actively searches for non-registered businesses and income that hasn’t been declared. It uses online search tools, reports from members of the public and information from other government departments to watch for potential tax evasion.

It also has Connect, a sophisticated software application which explores large volumes of information to detect patterns and inconsistencies. It’s thought to look at information including bank interest, credit card data and information from the Land Registry.

Other key sources of information include:

• customer lists from websites selling luxury items or services
• policyholder lists from insurance companies
• letting agents’ books
• mortgage providers
• property websites
• socia media

HMRC is said to use social media sites to identify people who appear to be living beyond their means – taking lots of luxury holidays and buying high end cars, or offering properties to let on a short or long term basis.

Targeting landlords and certain professions

HMRC has targeted commonly ‘non-compliant’ pockets of the economy for years, including tradespeople and – interestingly – solicitors and doctors. In more recent times, it has focused on Buy to Let income and money earned from second jobs.

Local authorities that require landlord licences have become a big asset to HMRC in identifying people who often own a portfolio of properties in a single town or city.

Small businesses are also under the microscope – especially where cash-in-hand could be involved. Around half the UK ‘tax gap’ originates from small and medium sized businesses.

Offering rewards

HMRC has a public hotline where people can report tax fraud of all kinds, which receives more than 100,000 tip-offs per year.  The informants are encouraged by the offer of financial rewards for a successful conviction.

Publicised wins

An example of HMRC’s successful detective work is the discovery of an escort agency operating from a multi-million pound property in London, after credit transactions were linked to the property. The owner admitted making more than £100,000 per year, tax free, for more than five years.

What to do if you’re worried

You will generally benefit from disclosing any wrongdoing to HMRC as soon as possible, rather than waiting for them to come to you. That way, you’re less likely to be prosecuted. Cooperating fully could also reduce any penalties you might face.

If you have received a letter saying that HMRC suspects you have been involved in tax fraud, there is some guidance here: https://www.gov.uk/guidance/admitting-tax-fraud-the-contractual-disclosure-facility-cdf. It’s a good idea to seek professional advice in this situation.

Get tax advice and support

The safest way to make sure you’re not scrutinised by HMRC is to check that you are paying the correct tax. By working with a reputable accountant you can make sure that all your records are correct and you’re paying the right amount of tax when it’s due.

As Lune Valley tax specialists and accountants, we’re here to help you manage your tax, whether you’re a landlord, a small business owner or you have more than one source of income. For more information, contact us today.

Many of our SME clients want to take some or all of the profits from their business and use them personally. There are ways to reduce the amount of tax you pay on those profits, so that your business is operating as efficiently as possible.

Here are five options to consider in how to take the profit from your company.

1: Taking a small salary

Paying a small salary can be tax-efficient if the recipient is not using their personal allowance elsewhere. Paying a salary at least equal to the Lower Earnings Limit for National Insurance purposes (£533 per month for 2023/24) will make sure the year counts towards state pension qualification.

The ideal salary will depend on whether your company is eligible for the National Insurance Employment Allowance, which shelters you from National Insurance costs on salary.

In a case where the personal allowance is available in full, and Employment Allowance is not available – which is common where a sole employee is also the director – it makes sense to pay a salary equal to the Primary Threshold.  In 2023/24 this is £11,908.

If the Employment Allowance is available, an optimal salary equals the personal allowance, set at £12,570 for 2023/24.

2: Using dividends

Dividends are paid out of post-tax profits, which have already been subject to corporation tax.

All taxpayers benefit from a dividend allowance, set at £1,000 for 2023/24, so paying a dividend up to this amount is free from further tax.

Once you’ve taken an optimal salary and used your dividend allowance, if you want to take further profits it’s usually best to take dividends rather than additional salary. Dividend tax rates are lower and there is no National Insurance to pay on these.

Remember, dividends must be paid in proportion to shareholdings, and they can only be paid if you have sufficient profit to pay them. If you take dividends over the level of your profit, the difference is seen as a Directors Loan.

3: Making pension contributions

Your company can also make pension contributions on behalf of the director. The pension contributions can usually be deducted in full from pre-tax profits. As long as the contributions are within the available annual allowance and below the level of the lifetime allowance, there will be no tax charges on the recipient.

4. Paying rent

Many small businesses are based at home, and your company can pay rent for a room from the director. This is tax efficient, as the company benefits from deducting the rent from profits for corporation tax purposes.

Although the rental income to the director is taxable, they may be able to benefit from the property income allowance to receive £1,000 of rent tax-free. Another advantage of paying rent is that there is no National Insurance to pay.

5: Applying benefits-in-kind

Giving directors and family employees benefits-in-kind can be very tax efficient. A mobile phone, workplace parking or health insurance are tax-free to the employee and the company can deduct the cost from its taxable profit. Most benefits in kind are free of National Insurance.

Some benefits-in-kind can still be tax efficient even if a tax charge applies. It may be beneficial for the employee to have an electric company car, for example, rather than be given more salary to pay for the car.

The most beneficial approach in reducing your tax will depend on your specific circumstances. It’s a good idea to talk to an accountant for advice on how to manage your company’s finances in the most efficient way.

As Lune Valley accountants we help limited companies and sole traders with tax advice, company accounting and payroll services. Get in touch