It’s no secret that HMRC are constantly cracking down on tax loopholes, schemes and non-compliant practices. Some of the top areas where we currently understand HMRC is focusing its attention for recouping unpaid taxes are outlined below:
HMRC are getting tougher on what records need to be kept when claiming mileage from the company. Details of the date, mileage, start and end location and the reason for the journey should be logged for each business trip undertaken, rather than estimating once a year when the accounts are prepared. If investigated, HMRC are likely to check calendars to the dates detailed on the mileage log to ensure they match up.
Reimbursement of Private Expenses
For a company to reimburse an employee for costs they incurred privately and be able to claim this as a tax-deductible expense, the expense has to be wholly, exclusively and necessarily incurred in the performance of their duties. The inclusion of the word “necessarily” means that the individual had to incur that expense in order to do their job.
Overdrawn Directors’ Loan Accounts
Any capital introduced into a company by the director, to settle the overdrawn account, is increasingly being investigated by HMRC to verify the source of the funds and where the capital originated.
Where the loan account is overdrawn and interest is declared, HMRC want to see the actual payment of this interest into the company’s bank account, rather than it being a simple “book entry”.
HMRC are looking for dividends to be physically paid out of the bank, as separate, discrete amounts, and reflected as dividends when maintaining the company’s accounting records during the year, rather than just being lumped in with general drawings, which are adjusted during the year-end accounts preparation.
Where dividends are declared but physical payments are not made, i.e. clearing an overdrawn loan account, dividend vouchers should be created to support the declaration of the dividend at the specific date.
Employment Status and IR35
When investigating employment status, more importance is being placed on the ‘direction, control and supervision’ of the individual by the end client, than there has been in the past. Although control is being highlighted, the reason for this scrutiny is posibly linked to the recently implemented ‘Onshore Employment Intermediaries’ legislation and for IR35 puropses, it is still only one of the three core tests. The ability to use a substitute is still important in assessing IR35 and it is essential that both the contract and working practices are reviewed and corroborate each other.
HMRC are also looking into redundancy payments to ensure that the £30,000 tax-free exemption is being applied correctly. Certain conditions must be met for the exemption to apply.