HMRC notices

The tax gap for the 2020-21 tax year has been published and remains at 5.1%. This is the second lowest recorded percentage and remains unchanged from the previous 2019-20 tax year.

The tax gap is basically the difference between the amount of tax that should have been paid to HMRC and the amount of tax collected by the Exchequer. The gap includes tax that has been avoided in the UK’s black economy, by criminal activities, through tax avoidance and evasion. However, it also includes simple errors made by taxpayers in calculating the tax they owe as well as outstanding tax due from businesses that have become insolvent. 

In monetary terms, the tax gap is equivalent to lost tax of £32 billion. This is £2 billion less than the tax gap in 2019-20. This is due to the fact that total amount of tax due fell from £672 billion in 2019-20 to £635 billion in 2020-21 because of the economic impact of COVID-19.

The key findings from HMRC’s Measuring the Tax Gap publication include:

• The UK tax gap in 2020-21 is estimated to be 5.1% of total theoretical tax liabilities (£32 billion), which means HMRC protected 94.9% of all tax due.
• The tax gap reduced from 7.5% in the tax year 2005-6 to 5.1% in 2020-21. 
• The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICs and CGT) is 3.5% in 2020-21 at £12.7 billion – this is the biggest share of the total tax gap when viewed by type of tax (39.5%).
• The tax gap for VAT is 7% in 2020-21 and is the second biggest share of the total tax gap at £9 billion (28.0%).
• The tax gap for Corporation Tax reduced from 11.5% in 2005-6 to 9.2% in 2020-21 reaching a low of 6.5% in 2011 to 2012 and remaining stable since 2014-15.

HMRC’s press release on the tax gap states that ‘the reduction is a result of the government’s action to help taxpayers get their tax right first time, whilst bearing down on the small minority who are deliberately non-compliant’. The tax gap was estimated to be as high as 7.5% in 2005-6.

HMRC last published guidance on the standard for agents in January 2018 (updating the first set of standards published in February 2016). The standard applies to all tax agents who transact with HMRC and to any professional who advises or acts on behalf of others in relation to their tax affairs. HMRC’s guidance sets out what agents can expect from HMRC and vice versa. 

What to expect from HMRC

If a taxpayer wants an agent to deal with HMRC on their behalf, HMRC will deal with that agent courteously and professionally. HMRC want to provide agents with a service that is fair, accurate and based on mutual trust and respect. HMRC also want to make it as easy as possible for agents to get things right.

What HMRC expects from an agent

HMRC expects all agents who want to interact with HMRC to meet the HMRC standard which requires all tax agents to maintain high standards that promote tax compliance.

This includes that the agents demonstrate:

• Integrity,
• Professional competence and due care,
• Professional behaviour,
• They meet specific standards when advising on tax planning.

The largest accountancy and tax professional bodies share a standard known as ‘Professional Conduct in Relation to Taxation’ (PCRT). Where agents meet the PCRT standard, HMRC does not envisage that their standards will place further onerous requirements on agents.

Intrastat declarations were historically used to collect information on the movement of goods from the UK to other EU countries and vice versa. Any business that exceeded the exemption threshold for either arrivals or dispatches of goods were obliged to submit monthly returns. 

This changed following Brexit and there were further changes from 1 January 2022. Since 1 January 2022, Intrastat declarations only apply for movements of goods between Northern Ireland and the EU.

There is no requirement to submit a declaration for goods you move from Great Britain (England, Scotland and Wales) to the EU. Intrastat no longer covers these movements of goods.

The exemption threshold for arrivals in 2022 is £500,000 and the exemption threshold for dispatches is £250,000. Intrastat filings must be made electronically. The deadline for submission is the 21st day of each month following the end of the period to which the declarations relate e.g., the return for the month ending 31 January 2022 is due by 21 February 2022. 

The furnished holiday let (FHL) rules allow holiday lettings of properties that meet certain conditions to be treated as a trade for tax purposes. 

In order to qualify as a furnished holiday letting, the following criteria need to be met:

• The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
• The property must be located in the UK, or in a country within the EEA.
• The property must be furnished. This means that there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

In addition, the property must pass the following three occupancy conditions.

1. Pattern of occupation condition. The property must not be used for more than 155 days for longer term occupation (i.e., a continuous period of more than 31 days).
2. The availability condition. The property must be available for commercial letting at commercial rates for at least 210 days per year.
3. The letting condition. The property must be let for at least 105 days per year and homeowners should be able to demonstrate the income from these lettings. 

Where there are a number of furnished holiday lettings properties in a business, it is possible to average the days of lettings for the purposes of qualifying for the 105 days threshold. This is called an averaging election.

There is also a special period of grace election which allows homeowners to treat a year as a qualifying year for the purposes of the furnished holiday let rules where they genuinely intended to meet the occupancy threshold but were unable to do so subject to a number of qualifying conditions.

The maximum amount that can be invested in an ISA in the current (2022-23) tax year is £20,000.

ISA’s are a valuable and flexible relief and should be considered as an option for most investors.

An ISA is a tax-exempt savings account available to UK residents. Whilst the amount invested in an ISA does not benefit from tax relief the income and gains are free from most taxes including Income Tax and Capital Gains Tax. Eligible holdings include cash ISAs, stocks and shares ISAs and innovative finance (including peer-to-peer loans) ISAs.

There is no minimum period for which an ISA must be held, and you can make withdrawals at any time without the loss of tax relief. The £20,000 limit can be used in one account or split across diverse types of ISA’s.

It is also possible for qualifying taxpayers to invest up to £4,000 of the £20,000 ISA limit in a Lifetime ISA. The Lifetime ISA is available to those aged between 18 and 40 to save for a new home or for their retirement. Under the scheme, the government provides a 25% bonus on yearly savings of up to £4,000 and once you start saving before you are 40, you can continue using the scheme until you turn 50. If you are approaching the age limit cut-off it is well worth opening a Lifetime ISA before you turn 40 as you can continue saving until the day before you are 50. The money invested in a Lifetime ISA can be used for other purposes but will be subject to a 25% withdrawal charge.

There are also Junior ISAs available for under 18’s which were introduced to encourage children to save money. The returns from Junior ISAs are also tax-free and are usually locked until the child reaches 18. The annual subscription limit for Junior ISAs is currently £9,000.

HMRC publishes a list of income streams that are excluded from a UK property business. The list includes fishing concerns, hotels and guest houses, tied premises, caravan sites, lodgers and tenants in your own home, extra services to tenants and letting surplus trade accommodation. In most cases the income from these activities will be taxed as income of a trade and not as property income.

In addition, there are certain receipts that can arise out of the use of land, and which are specifically excluded by statute from a rental business. These include yearly interest, income from the occupation of woodlands managed on a commercial basis, income from mines and quarries and income from farming and market gardening.

There is also a £1,000 property income allowance that applies to income from property (including foreign property). If a taxpayer’s annual gross property income is £1,000 or less the amount is exempt from tax and does not need to be reported on their tax return.

An overdrawn director's loan account is created when a director (or other close family member) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the director’s loan account (DLA). 

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 as interest must be charged and be reported on the directors’ personal Self-Assessment tax return. 

There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company. If this happens, the company must deduct Class 1 National Insurance through the company’s payroll. The director will be required to pay Income Tax on the loan through their Self-Assessment tax return.

HMRC has used new powers introduced in the Finance Act 2022 to name tax avoidance schemes and their promoters for the first time. Under this legislation HMRC can name avoidance scheme promoters, publish details of the way they promote tax avoidance schemes and name the schemes they promote.

This allows HMRC to warn users and potential users of these schemes at the earliest possible stage of the risks and to help those already involved to leave these avoidance arrangements.

The two named schemes are:

• Absolute Outsourcing, of Foerster Chambers, Todd Street, Bury, Greater Manchester
• Equity Participation Scheme (EPS), promoted by Purple Pay Limited (PPL), of Gracechurch Street, London.

Both schemes involve individuals agreeing an employment contract and working as a contractor. The schemes pay contractors the National Minimum Wage with the remainder of their wage paid through a loan to try to avoid National Insurance and Income Tax.

HMRC will also regularly update the list by publishing the details of other tax avoidance schemes and their promoters. It is important to note that there are other schemes and the fact that a scheme is not included in HMRC’s list does not mean that the scheme works or is in any way approved by HMRC.

A partnership is a relatively simple way for two or more legal persons to set up and run a business together with a view to profit. Partnerships can take many forms. Legal persons other than individuals can also be partners in a partnership.

There are two main types of partnership, a conventional one with two or more partners in the business. There is also a limited liability partnership or LLP, this more complex structure provides partners with the protection of limited liability, just as with a company.

HMRC’s manual is clear that a partnership may exist without a written agreement, on the basis that a later written agreement gives formal expression to an oral agreement already existing. The date of the formation of the partnership remains the date on which the terms of the oral agreement are implemented.

However, when a written agreement creates a partnership where none exists, it is effective from the date of execution and implementation of the written agreement. It has no retrospective effect.

HMRC’s own internal advice when determining if a partnership exists states that… it is important that you establish all of the facts to determine the true relationship between the parties. This will include finding out what the intentions of the parties were. No single factor is likely to be conclusive on its own. You will need to form an overall view, based on all the facts and evidence.

A wasting asset is an asset which has a predictable life of 50 years or less. HMRC’s guidance is clear that when you dispose of an asset, you are required to estimate its predictable life based on the nature of the asset and your intended use of the asset when you originally acquired it.

Certain chattels are always treated as wasting assets, for example, plant or machinery. Such items will always be wasting assets. This rule applies no matter what the actual life of the item of plant or machinery proves to be.

The residual or scrap value of a wasting asset is the amount it will be worth at the end of its predictable life. Again, this has to be estimated by reference to the position as it was when the asset was acquired by the person making the disposal.

The owner of a wasting asset may incur additional expenditure which enhances the value of the asset. This will not affect the predictable life of the asset but may alter its scrap or residual value.