How to deal with a compliance check from HMRC.

Personal tax compliance checks can sound intimidating. However, with the right preparation and understanding, they don’t have to be. In this spotlight, we aim to walk you through what to expect during a tax compliance check, how to stay organised and ways to handle the process smoothly.

By offering clear, straightforward advice, we hope to give you confidence in facing any compliance check that may come your way.

What is a personal tax compliance check?

A personal tax compliance check is essentially an enquiry from HMRC into your tax return. It could be triggered by anything from simple errors to unusual activity, but it doesn’t necessarily mean you’ve done something wrong. HMRC conducts these checks to ensure that the information on your tax return is accurate and in line with UK tax laws.

Most checks are random or part of routine checks, and in many cases, they may only involve minor clarifications. It’s worth noting that HMRC’s advanced data analysis systems now flag potential issues with increasing precision.

According to HMRC’s data, around £33bn was lost in the 2021/22 tax year due to errors and failure to take reasonable care, making these checks a priority for the government.

Why might you be selected?

HMRC might select your tax return for review for a few common reasons. These could include:

• inconsistent information or discrepancies between your tax return and the data HMRC holds
• missing information or failing to declare income from various sources
• a significant change in income from one year to the next
• regularly filing late returns
• higher-risk occupations or industries (like cash-based businesses)
• random selection as part of HMRC’s routine investigations.

Understanding why you may be selected can help you respond more effectively to HMRC’s queries. Rest assured that, in most cases, checks are resolved quickly and without penalties, provided there is no evidence of intentional wrongdoing.

How HMRC selects returns for review

HMRC uses advanced technology and human insight to decide which tax returns to review. The Connect system, introduced in 2010, plays a significant role in this process. This system collects and analyses data from a variety of sources, including banks, employers, government departments and even social media. It then compares this data to the information provided in tax returns to identify discrepancies. In recent years, HMRC has emphasised using technology to ensure accurate tax returns, reducing the need for manual investigations.

While the majority of compliance checks are automated and randomly selected, certain behaviours can increase your chances of being flagged. If you’re self-employed, earn income from multiple sources or work in industries that deal heavily in cash, such as hospitality or construction, your returns may be subject to closer scrutiny. Furthermore, high-value transactions or significant changes in financial circumstances may trigger an investigation. HMRC is focused on ensuring that everyone pays their fair share, but the vast majority of checks are resolved without issue when the correct information is provided.

What happens during a compliance check?

Once selected, HMRC will contact you by letter to inform you that they are conducting a compliance check. This letter will outline the areas of your tax return they wish to review and may request supporting documents such as bank statements, invoices or receipts.

It’s essential to respond to this letter promptly. If you’re unsure about any part of the request or the information you’re being asked to provide, seek professional advice as soon as possible.

HMRC typically gives you 30 days to respond, but you can request an extension if necessary.

Depending on the outcome, the check could take a few different paths.

• No further action: If everything is in order, HMRC may close the enquiry without changing your tax return.
• Minor adjustments: If HMRC finds minor errors, they may adjust your tax return accordingly. You may need to pay any additional tax due or be refunded if you’ve overpaid.
• Further investigation: If HMRC finds more significant issues, they could extend the check, and you might face penalties or interest on unpaid tax. In rare cases, HMRC may conduct a full audit.

How to prepare for a compliance check

Preparation is key to handling a tax compliance check with minimal stress. Here are some steps to ensure you’re ready.

1. Keep thorough records

The best way to protect yourself during a compliance check is to keep accurate and thorough records of your income, expenses and deductions. HMRC requires you to keep records for at least five years after the submission deadline of the tax year they relate to. This includes:

• bank statements
• payslips
• invoices
• receipts
• investment records
• pension contributions.

Good record-keeping can help you quickly provide the evidence HMRC may request and resolve any discrepancies that might arise during the check.

2. Review your tax return carefully

Before submitting your tax return, double-check that all the information is correct and complete. Look for common errors like mistyped figures, missed deductions or failing to declare all sources of income. If you use accounting software, ensure it is up-to-date and all data is accurately entered.

3. Seek professional advice

If you’re not confident in managing your tax affairs, consider working with a tax adviser or accountant. They can help you prepare your return, spot any potential issues, and ensure that everything complies with HMRC regulations. According to recent statistics, around 65% of UK taxpayers use professional assistance to file their taxes, which can significantly reduce the risk of errors.

4. Respond promptly and clearly

When HMRC contacts you regarding a compliance check, respond to their letter quickly. Provide the requested information and documents in a clear and organised manner, and make sure that everything is legible and easy to understand. If you need extra time to gather the necessary records, let HMRC know as soon as possible, and they may grant you an extension.

Potential outcomes and penalties

Most compliance checks end with minimal disruption. However, if HMRC identifies errors or omissions, they may ask you to make additional payments or amend your return. In more serious cases, you could face penalties or interest on unpaid tax.

HMRC calculates penalties based on the nature of the error.

• Careless mistakes: If you’ve made a genuine mistake without trying to underpay your tax, penalties could range from 0% to 30% of the additional tax due.
• Deliberate underpayment: If HMRC finds evidence that you’ve deliberately understated your income or exaggerated your expenses, penalties could range from 20% to 70% of the additional tax due.
• Deliberate underpayment with concealment: In cases where taxpayers have attempted to hide their errors, penalties can rise to between 30% and 100%.

In rare cases, deliberate fraud or evasion could result in prosecution, but for most individuals, the key to avoiding penalties is cooperation and transparency during the compliance check.

If you realise you have made an error, HMRC is more likely to reduce a penalty or apply a lower percentage if the error is proactively disclosed rather than waiting for them to identify it. Providing HMRC with timely access to the necessary information in a straightforward manner can also help mitigate the penalty.

How to dispute an outcome

If you disagree with the outcome of a compliance check, you have options. HMRC allows you to request a review of their decision, which involves a different officer assessing your case.

You’ll need to submit this request within 30 days of receiving HMRC’s findings. Providing additional evidence or documentation supporting your position is essential during the review, especially if something was missed or misunderstood in the initial check. Disputes are often resolved at this stage, with HMRC amending their findings or providing clearer reasoning.

Should the review not resolve the issue to your satisfaction, the next step is to appeal to the tax tribunal. This independent body will examine the facts of the case and make an impartial decision. Most cases do not reach this stage, but knowing that a clear process is in place to protect your rights as a taxpayer is reassuring. Throughout this process, professional advice and support can make all the difference, ensuring your case is presented effectively and you understand each step of the process.

How a professional can help

Ultimately, a personal tax compliance check is part of HMRC’s efforts to ensure fairness in the tax system. Most individuals can resolve these checks with minimal fuss by keeping good records, submitting accurate returns and responding promptly.

We’re here to support you if you’re unsure about any part of the process or if HMRC has contacted you and you need help navigating your compliance check. Our team of experienced accountants has helped numerous clients through similar situations, and we’re ready to assist with advice, document preparation and professional representation.

While compliance checks may seem daunting, they are manageable with the right preparation and expert guidance. Please don’t hesitate to get in touch with us if you require assistance.

Updated fuel rates impact UK company-car drivers. These rates, which apply to petrol, diesel, LPG, and electric vehicles, are used to reimburse employees for business travel or repay the cost of fuel used for private travel.

HMRC has introduced new advisory fuel rates, effective 1 September 2024, impacting company-car drivers across the UK.

Notably, the rates for petrol engines have been reduced. For engines up to 1,400cc, the rate is now 13p per mile, down from the previous rate of 14p. Engines between 1,401cc and 2,000cc see a rate of 15p per mile, while those over 2,000cc are now at 24p per mile. Diesel engines have also seen reductions, with the rates set at 12p for engines up to 1,600cc, 14p for those between 1,601cc and 2,000cc, and 18p for engines over 2,000cc.

The rates for liquefied petroleum gas (LPG) vehicles remain unchanged, with up to 1,400cc engines at 11p, those between 1,401cc and 2,000cc at 13p, and engines over 2,000cc at 21p per mile.

Electric vehicle owners also face a rate reduction, with the advisory rate now set at 7p per mile. Depending on their primary fuel source, hybrid vehicles continue to be treated as petrol or diesel.

These changes come as the British Vehicle Rental and Leasing Association advises its members and customers to seek the best energy tariffs for home charging to optimise costs. The adjustments to the advisory fuel rates reflect ongoing shifts in fuel and energy costs, as well as vehicle efficiency improvements.

Businesses and employees alike should review these new rates to ensure they are accurately reimbursed for their travel expenses under the new HMRC guidelines.

Talk to us about your finances.

Demand rises, but supply keeps growth in check. Buyer demand has surged by 20% compared to the previous year, with new sales agreements rising by nearly 25%.

The average cost of a UK home reached £266,400 in July, reflecting a 1.4% rise over the first seven months of 2024. This equates to an increase of £3,600 since January.

In contrast, 2023 saw a minimal 0.1% rise in the same period. Property website Zoopla projects house prices to be 2.5% higher by the end of 2024.

This growth follows the Bank of England’s recent interest rate cut from 5.25% to 5% in early August—the first reduction since March 2020. However, Zoopla reported that this rate cut has not had a material impact on buyer demand.

Higher interest rates had dampened consumer sentiment earlier, contributing to a drop in buyer demand during summer 2023 as mortgage costs spiked.

Currently, the supply of homes for sale is at a seven-year high, offering buyers more options and helping to keep house price inflation in check for the rest of 2024 and into 2025. Zoopla cautioned that the record levels of supply mean sellers must be mindful of their pricing strategies.

Research found that homes requiring a price reduction take more than twice as long to sell as those without cuts. One in five sellers lowered their asking price by 5% or more in August. Meanwhile, London’s property market saw a slight 0.2% increase, with the average home price remaining significantly higher than the UK average at £536,300.

Talk to us about your property.

Investors brace for capital gains tax increase. This “frenzy” of activity comes as concerns mount that the Labour administration will increase taxes to address a £22 billion shortfall in public finances.

Wealth managers and tax experts say fears of a capital gains tax hike in the upcoming October Budget have triggered a surge in asset sales among business owners, property investors, and shareholders.

In August, Prime Minister Keir Starmer indicated that Labour will likely raise taxes, a move designed to plug the budget deficit. This potential increase in capital gains tax has alarmed asset owners, especially since Labour ruled out raising national insurance, income tax, or VAT in the run-up to July’s general election.

Capital gains on assets such as businesses, second homes, and shares are taxed at rates ranging from 10 to 28%, significantly lower than income tax rates between 20 and 45%.

Advisers report that clients are selling assets to external buyers and exploring alternative strategies, such as selling into family trusts or gifting assets to younger generations.

Those concerned about potential changes to the inheritance tax system, including the possibility of a cap or the elimination of certain tax reliefs, are also considering these measures. This pre-emptive activity highlights the growing uncertainty among UK investors as the October Budget approaches.

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The Chartered Institute of Taxation (CIOT) has emphasised the importance of accurate and up-to-date tax reporting for all crypto-asset owners.

Crypto investors in the UK are urged to review their tax obligations as HMRC begins issuing “nudge letters” to those it suspects may have underpaid tax on their crypto gains.

Gary Ashford, chair of CIOT’s Crypto Assets Working Group, highlighted that many investors might not realise that profits from crypto assets are subject to income tax or capital gains tax (CGT), similar to other assets. He advised that even those who do not receive a letter should review their crypto activity and ensure they meet their tax obligations.

Ashford also pointed out tax liabilities could arise even if investments appear unprofitable. Actions such as selling, lending, “staking” crypto assets, or transferring them between portfolios can trigger a taxable event. He warned that these disposals are taxable within the relevant tax year, regardless of whether the overall portfolio shows a loss after the year ends.

Furthermore, from April 2024, the CGT reporting threshold for those outside self assessment has been reduced to £3,000, down from £6,000 and significantly lower than the £12,300 limit before April 2023. As a result, more individuals may find themselves subject to CGT reporting and payments without realising it. Those with taxable gains exceeding this threshold, including from crypto assets, must report them to HMRC and pay any tax due or face potential interest and penalties.

Although HMRC has introduced measures to assist taxpayers, such as a dedicated section for reporting crypto disposals in the 2024/25 tax returns and a disclosure service for previous years’ disposals, the CIOT is calling for further efforts to raise awareness of these obligations.

Talk to us about your tax obligations.

How your structure affects tax and liability.

Choosing the appropriate structure for your business is one of the first and most important decisions you will make. It affects everything from your tax obligations to the level of personal liability you will face, and even how you can raise funds. If you are thinking of starting a business, or restructuring an existing business, it is worth taking a closer look at the options available to ensure you make the best choice for your business.

Key considerations when choosing your structure

When choosing the right structure for your business, there are several key factors to consider.

1. Tax implications: Different structures come with different tax obligations. Sole traders and partnerships are taxed on their income, while limited companies pay corporation tax and may benefit from lower personal tax rates on dividends.
2. Personal liability: One of the main advantages of a limited company or limited liability partnership (LLP) is the protection of personal assets. If personal financial exposure is a concern, these structures may be more appropriate.
3. Compliance and administration: Limited companies and LLPs require more administrative work, including filing annual accounts and tax returns, which in turn results in additional costs. Sole traders and partnerships, on the other hand, have fewer regulatory requirements.
4. Investment and growth: Some structures make it easier to raise capital or attract investors. For example, limited companies can issue shares, whereas sole traders and partnerships may struggle to attract outside investment.
5. Tax flexibility: One advantage of a limited company is the ability to retain profits within the business without needing to withdraw them as dividends. This can allow you to defer tax liabilities, whereas sole traders and partners are taxed on the entirety of their profits in the year they are earned. This flexibility can be useful for managing cashflow and planning for future growth.
6. Perception and credibility: Operating as a limited company can enhance your business’s credibility. Many clients and potential partners view a limited company as more official and established compared to a sole trader, which can help build trust and attract larger contracts or partnerships.
7. Long-term goals: Consider the future direction of your business. While starting as a sole trader or partnership may be simpler, switching to a limited company down the line could bring added tax benefits and protections.

Understanding your options

There are several business structures available in the UK, each with its own set of advantages and drawbacks. These include sole traders, partnerships, limited liability partnerships (LLPs) limited companies, and community-interest companies (CICs). The choice you make should be based on your business’s size, industry, long-term goals and the personal preferences of those involved. Let’s examine each structure more closely.

Sole trader

The simplest and most common business structure in the UK is the sole trader. As a sole trader, you are the sole owner and responsible for all aspects of the business, including its debts and liabilities. While this offers great flexibility, it also means that your personal assets are at risk if the business faces financial difficulties.

From a tax perspective, as a sole trader, you will pay income tax on your business profits through the self-assessment system. National Insurance contributions (NICs) are also applicable, though for the 2024/25 tax year, Class 2 NICs have been scrapped and are now only payable on a voluntary basis. You will still pay Class 4 NICs on profits between £12,570 and £50,270 at 6%, with a 2% rate on profits above £50,270.

Many individuals choose this route because it is easy to set up and manage. However, as the business grows, it may be worth considering whether a more structured approach, such as forming a limited company, could offer better tax efficiencies and protection.

Partnership

A partnership is similar to being a sole trader but involves two or more people sharing responsibility for the business. Each partner shares the profits, as well as the risks, liabilities and losses. Like sole traders, partners are personally liable for any debts the business cannot cover.

From a tax perspective, partnerships also fall under the self-assessment system, with each partner paying income tax and NICs on their share of the profits. For the 2024/25 tax year, the same NIC thresholds and rates apply as for sole traders. There are likely to be slightly more administrative burdens when compared to acting as a sole trader as you’ll want to draft a partnership agreement, as well as have partnership accounts prepared each year.

One of the main advantages of a partnership is the pooling of resources and expertise. However, the lack of personal liability protection can make it a risky option for those involved, especially in sectors with higher levels of financial exposure.

Limited liability partnership (LLP)

For those who want the benefits of a partnership but with added protection, a limited liability partnership (LLP) may be a better fit. In an LLP, each partner’s liability is limited to the amount they have invested in the business. This can be particularly useful for professional services businesses, such as law firms and accountancy practices.

LLPs are taxed similarly to partnerships, with each partner paying income tax and NICs through self assessment on their share of the profits. However, as LLPs are legally separate entities, the business itself must comply with certain administrative requirements, such as filing annual accounts and a confirmation statement with Companies House.

An LLP provides a flexible structure with the added benefit of limiting personal financial exposure, but the increased administrative burden may not be suitable for every business.

Limited company

A limited company is a separate legal entity from its owners (shareholders) and directors. This means that, unlike sole traders and partners, the personal assets of the shareholders and directors are protected if the company faces financial difficulties. However, the increased protection comes with greater responsibility in terms of compliance and administration.

Limited companies in the UK pay corporation tax on their profits. For the 2024/25 tax year, the main rate of corporation tax is 25% for companies with profits over £250,000. Companies with profits between £50,000 and £250,000 will pay a tapered rate between 19% and 25%, while those with profits under £50,000 will continue to pay 19%.

Shareholders may also be liable to pay tax on dividends. The dividend allowance for the 2024/25 tax year is £500, with dividends above this threshold taxed at rates of 8.75%, 33.75% and 39.35% depending on your income tax band.

For many businesses, the tax efficiencies offered by a limited company structure outweigh the increased administrative responsibilities. However, it’s important to understand the implications for cashflow and the additional legal requirements that come with running a company.

Community-interest company (CIC)

A community-interest company (CIC) is a type of limited company designed specifically for social enterprises. CICs must work for the benefit of the community and are subject to additional regulations that ensure their profits are used to achieve their social objectives.

CICs can either be limited by shares or by guarantee, and they must submit an annual community interest report to demonstrate how they are benefiting the community. While CICs do not receive any special tax treatment, they may be eligible for certain grants or other forms of funding that are not available to other types of businesses.

For those looking to balance running a business with making a positive impact, a CIC may be the most suitable option. However, the additional regulatory requirements should be carefully considered before proceeding.

Legal and regulatory requirements

When choosing a business structure, it’s important to understand the legal and regulatory obligations associated with each option. These requirements vary depending on the structure you select and may involve everything from initial registration to ongoing compliance.

Sole traders are the simplest structure in terms of legal obligations. If you operate as a sole trader, you must register with HMRC for self assessment and ensure you submit your tax return each year. There’s no requirement to file annual accounts or register with Companies House. However, sole traders are still required to keep accurate records of their income and expenses.

Partnerships share similar obligations to sole traders but with the added responsibility of registering the partnership with HMRC. Each partner is responsible for paying tax on their share of the profits, and accurate records must be kept for both individual partners and the partnership as a whole.

For limited liability partnerships (LLPs), the regulatory requirements increase. In addition to each partner submitting their own self assessment tax return, the LLP itself must file a partnership tax return (SA800) with HMRC, detailing the business’s income and how it is divided among the partners. LLPs must also register with Companies House, submit annual accounts, and file a confirmation statement each year.

Limited companies face the most stringent legal requirements. They must register with Companies House, appoint directors, file annual accounts and submit a confirmation statement. Additionally, limited companies must register for corporation tax with HMRC and file a corporation tax return each year. Directors have a legal responsibility to act in the best interests of the company and comply with company law, including maintaining accurate statutory records and minutes of key decisions.

Failing to meet these legal and regulatory requirements can result in penalties, fines and even the risk of being struck off the Companies House register. Therefore, it’s essential to stay on top of your obligations, regardless of the structure you choose.

Come to us for further advice

The decision about which business structure to choose is not one to take lightly. Each structure comes with its own set of benefits and responsibilities, and the right choice for you will depend on your specific circumstances, goals and plans for the future.

We are here to help you make the best decision for your business. Whether you’re just starting out or considering restructuring an existing business, we can offer tailored advice based on your needs.

Contact us today to discuss how we can support your business in making the right choice for the future.

Strategic planning of gifts to minimise tax liabilities.

Tax-efficient gift-giving is an essential aspect of estate planning that can significantly reduce your inheritance tax (IHT) liabilities while benefiting your loved ones. By carefully planning and utilising the available allowances and exemptions, you can ensure that more of your wealth passes on to your family and less is lost to taxes. At our practice, we believe that understanding the rules around gift-giving is key to making informed decisions. In this guide, we’ll walk you through the essentials of tax-efficient gift-giving for the 2024/25 tax year.

Understanding the basics of tax-efficient gift-giving

When we talk about tax-efficient gift-giving, we refer to the strategic planning of gifts to minimise tax liabilities, particularly IHT. For tax purposes, a gift is any transfer of money or assets to another person without receiving anything of equal value in return. This could include cash, property, shares or other valuable assets.

The current UK tax rules provide several ways to give gifts without incurring immediate tax liabilities. However, these gifts’ timing, structure and documentation are vital to ensuring they remain tax-efficient. As of the 2024/25 tax year, IHT is charged at 40% on estates above the nil-rate band, which remains at £325,000 (there is also a ‘residence nil rate band’ of £175,000 per person, subject to certain restrictions). Properly planned gifts can reduce the taxable value of your estate, potentially saving your beneficiaries a significant amount in IHT.

Annual gift allowances

One of the simplest and most effective ways to give tax-efficient gifts is by utilising the annual gift allowance. For the 2024/25 tax year, you can give away up to £3,000 each year without it being added to the value of your estate for IHT purposes. This is known as the annual exemption.

If you didn’t use your £3,000 allowance in the previous tax year, you can carry it forward, allowing you to give away up to £6,000 tax-free in the current year. However, this carry-forward can only be used for one year, so planning your gifts is important.

The annual exemption can be used to make gifts to any number of individuals, but it’s worth noting that this is the total amount you can give away tax-free each year, not the amount per recipient. For example, you could give £1,000 to three people or the entire £3,000 to one person.

Exempted gifts

In addition to the annual gift allowance, certain gifts are completely exempt from IHT. These exemptions provide further opportunities for tax-efficient gift-giving.

Small gifts exemption

You can give away up to £250 to any number of individuals each tax year, provided that the recipient doesn’t also receive part of your £3,000 annual exemption. The small gifts exemption is particularly useful for making regular small gifts to friends and family without affecting your estate’s IHT position.

Gifts to spouses or civil partners

Gifts between spouses or civil partners are completely exempt from IHT, as long as both individuals are UK-domiciled. This means you can transfer any amount of money or assets to your spouse or civil partner without it being subject to IHT. This exemption is one of the most effective ways to manage the tax impact of your estate.

Gifts to charities and other exempt organisations

Gifts to registered charities, political parties and certain national institutions are also exempt from IHT. If you’re charitably inclined, this exemption allows you to support your favourite causes while reducing the taxable value of your estate. Additionally, leaving 10% or more of your estate to charity can reduce the IHT rate on the remainder of your estate from 40% to 36%.

Potentially exempt transfers (PETs)

A potentially exempt transfer (PET) is a gift that becomes exempt from IHT if you live for seven years after making the gift. PETs are a powerful tool for reducing the taxable value of your estate, but they require careful planning and documentation.

When you make a PET, the value of the gift is immediately removed from your estate for IHT purposes. However, if you pass away within seven years of making the gift, it may still be subject to IHT. The rate of tax applied to a PET that becomes chargeable within seven years is reduced on a sliding scale, known as taper relief. For example, if you survive three to seven years after making the gift, the IHT rate progressively reduces from 40% to 8%.

This sliding scale makes it beneficial to make large gifts as early as possible. Even if you’re unsure about living for the full seven years, the potential reduction in IHT liability can still make PETs a valuable part of your estate planning strategy.

Regular gifts from surplus income

One often overlooked exemption is the ability to make regular gifts from your surplus income. These gifts are exempt from IHT as long as they’re made from your income (not capital), are regular and don’t affect your standard of living.

To qualify, you must demonstrate that the gifts are part of a regular pattern and that you have sufficient income to cover your living expenses after making the gifts. Common examples include regular payments to children or grandchildren, contributions to someone’s living costs or paying for life insurance premiums.

Keeping detailed records is essential to proving that these gifts qualify for the exemption. You should document the source of the income, the amounts gifted and evidence that your standard of living hasn’t been affected. If done correctly, this exemption allows you to reduce the value of your estate over time without triggering an IHT liability.

Gifts for weddings and civil partnerships

Weddings and civil partnerships provide another opportunity for tax-efficient gift-giving. You can give tax-free gifts to someone getting married or entering a civil partnership, with the amount varying depending on your relationship with the couple.

• parents can give up to £5,000
• grandparents can give up to £2,500
• anyone else can give up to £1,000.

These gifts must be given on or shortly before the wedding or civil partnership ceremony to qualify for the exemption. They are a straightforward way to provide financial support to a loved one on their special day while also reducing the value of your estate for IHT purposes.

The importance of record-keeping

Accurate record-keeping is a critical component of tax-efficient gift-giving. Without proper documentation, you may find it difficult to prove to HMRC that your gifts qualify for the various exemptions and allowances.

For each gift you give, you should keep detailed records that include:

• the date of the gift
• the recipient’s details
• the value of the gift
• the type of gift (for example, cash, property)
• any relevant exemptions or allowances applied.

For regular gifts from surplus income, you should also maintain records of your income and living expenses and how you calculated that the gifts didn’t affect your standard of living. This documentation will be invaluable if HMRC questions your estate after your death, ensuring that your gifts are correctly accounted for and exempted from IHT.

Gifting property and other high-value assets

Gifting property, shares or other high-value assets can have significant tax implications, particularly with respect to capital gains tax (CGT). When you gift an asset that has increased in value since you acquired it, you may be liable for CGT on the gain.

However, there are strategies to minimise CGT liabilities when making such gifts. For example, you could transfer assets that have not appreciated significantly or utilise the CGT annual exemption, which allows you to make gains of up to £3,000 (for the 2024/25 tax year) without incurring CGT.

Gift Hold-Over Relief, on the other hand, essentially allows the individual to gift an asset and not have to pay any capital gains on the gift (with the recipient instead paying it when they sell the asset). The gift has to be business assets (which can include shares, but they must be unlisted).

To further minimise CGT, if an individual has exhausted their annual exemption, they could transfer the asset to their spouse, who can then gift it, utilising their own exemption. Similarly, for the £3,000 annual gift exemption and wedding gift exemptions, if more needs to be given, assets can be transferred to a spouse, who can then re-gift to the intended recipient, effectively doubling the exemptions by using both spouses’ allowances.

If you’re considering gifting high-value assets, it’s advisable to seek professional advice to explore the most tax-efficient way to do so. We can help you navigate the rules and ensure that your gift achieves the desired tax benefits.

The role of trusts in tax-efficient gifting

Trusts can be valuable in tax-efficient gift-giving, particularly for managing large gifts or protecting family wealth across generations. By placing assets into a trust, you can reduce the value of your estate for IHT purposes while retaining some control over how the assets are used.

There are different types of trusts, each with its own tax implications.

• Discretionary trusts: These allow trustees to decide how to distribute the trust’s income and capital among the beneficiaries. These can be useful for providing for future generations while maintaining flexibility.

• Bare trusts: In a bare trust, the beneficiaries have an absolute right to the trust’s assets. The assets are held in the trustee’s name, but the beneficiaries have the right to the income and capital.

Trusts can be complex, and setting one up requires careful consideration of your goals and the tax implications. It is essential to work with an adviser who can guide you through the process and ensure that the trust is structured to achieve your objectives.

Seeking professional advice

While the principles of tax-efficient gift-giving are straightforward, the rules can be complex and mistakes can be costly. Professional advice is invaluable when planning significant gifts or complex arrangements, such as trusts or gifting high-value assets.

Our firm specialises in helping clients navigate the rules around gift-giving and estate planning. We can work with you to develop a personalised strategy that maximises the tax benefits of your gifts while ensuring that your wealth is preserved for your loved ones.

In summary

Tax-efficient gift-giving is essential to estate planning, allowing you to pass on your wealth while minimising tax liabilities. By understanding the available allowances and exemptions, keeping accurate records and seeking professional advice when needed, you can ensure that your gifts are both generous and tax-efficient.

Whether you’re looking to make small gifts to family members, transfer high-value assets or set up a trust, we’re here to help. Contact us today to discuss your estate planning needs and learn how we can help you and future generations.

Unlock the benefits of R&D tax credits for your business.

Research and development (R&D) tax credits are a crucial incentive designed to encourage businesses to innovate and invest in new technologies, processes and products. Yet, despite their significance, many businesses either aren’t aware of their potential benefits or aren’t fully utilising them.

We explore what R&D tax credits are, who can claim them, and how businesses can maximise their potential.

What are R&D tax credits?

R&D tax credits are government incentives designed to encourage businesses to spend more on R&D activities. The purpose is simple: by reducing a company’s tax bill or providing a cash lump sum, these credits make it easier for businesses to reinvest in innovation. They’re available to a wide range of companies, from large corporations to small and medium-sized enterprises (SMEs), regardless of their industry.

Who can claim R&D tax credits?

One of the most common misconceptions about R&D tax credits is that they are only for companies involved in scientific research or high-tech industries. This isn’t the case. Any company undertaking a project seeking to advance science or technology can potentially claim R&D tax credits. This includes activities such as developing new products, processes or services and significantly improving existing ones.

Eligible projects

To qualify for R&D tax credits, a project must meet certain criteria set out by HMRC. It should:

• aim to create an advance in science or technology
• attempt to overcome scientific or technological uncertainties
• not be readily available or easily deducible by a competent professional in the field.

Importantly, these projects don’t need to succeed to qualify. Even if the project fails or the company doesn’t fully achieve its objectives, the R&D expenditure could still be eligible for tax relief.

How R&D tax credits work

The process for claiming R&D tax credits can seem complex, but it essentially revolves around calculating the company’s eligible R&D expenditure and applying the relevant tax relief. The calculation differs slightly depending on whether the company is an SME or a large business.

R&D tax credits for SMEs

For SMEs, R&D tax credits are particularly generous. To qualify as an SME, a company must have fewer than 500 employees and either an annual turnover under €100m or a balance sheet total under €86m.

R&D expenditure credit for large companies

Large companies that don’t qualify as SMEs can claim R&D tax relief through the R&D expenditure credit (RDEC) scheme. The RDEC offers a credit of 20% of qualifying R&D expenditure, which is taxable, resulting in a net benefit of 15%. While this rate is lower than the SME scheme, it still represents a significant incentive for larger companies to invest in R&D.

This scheme can also be used for SME’s whose expenditure doesn’t qualify for the SME scheme (e.g. the expenditure was covered by grant funding or was “customer-led”).

Notable changes to the rules

The UK Government has announced it will be merging the SME and RDEC R&D tax relief schemes into a single, streamlined scheme from April 2024 (although elements of the SME scheme still remain for R&D-intensive companies in the form of the enhanced scheme).

This new approach will follow the RDEC model but retain some SME benefits. While the consolidation aims to simplify the process, it may result in reduced relief for certain SMEs, especially those that don’t qualify for the enhanced R&D intensive scheme. The merger also introduces changes such as subcontracting rules and relief caps, making the claims process more complex and reinforcing the importance of seeking specialist advice. The HMRC website is regularly updated with relevant information.

Common misconceptions about R&D tax credits

Despite the availability of R&D tax credits, many businesses miss out on claiming them due to common misconceptions.

Misconception 1: R&D tax credits are only for large, high-tech companies

As mentioned earlier, this is not true. Companies of all sizes and across various sectors can claim R&D tax credits. Whether a business is involved in manufacturing, construction, agriculture or even creative industries, there’s a good chance that R&D tax credits are relevant.

Misconception 2: The application process is too complex

While the process of claiming R&D tax credits involves detailed documentation and a clear understanding of what qualifies as R&D, it’s not as daunting as it seems. Many companies choose to work with specialist advisers who can guide them through the process, ensuring that all eligible activities are identified and accurately claimed.

Misconception 3: We didn’t achieve our project goals, so we can’t claim

One of the biggest benefits of the R&D tax credit scheme is that it rewards innovation, even when projects don’t go as planned. If your company attempted to resolve a technological or scientific uncertainty, it could still qualify for relief, regardless of the outcome.

How to maximise your R&D tax credit claim

Given the significant financial benefits, businesses should approach the R&D tax credit claim process with a well-planned strategy.  Here are some tips to ensure you’re getting the most out of your claim.

1. Keep detailed records

Accurate and comprehensive records are crucial for a successful R&D tax credit claim. This includes documenting project objectives, methodologies, time spent by staff and all related costs. The more detailed your records, the easier it will be to substantiate your claim and maximise the benefit.

2. Identify all qualifying activities

It’s easy to overlook certain activities that qualify as R&D. Beyond obvious R&D work, consider whether your company has been involved in process improvements, software development or even trials and testing that attempted to solve scientific or technological challenges. An experienced R&D tax adviser can help identify these activities.

3. Understand the scope of eligible costs

R&D tax credits cover a wide range of costs, not just direct R&D expenses. Qualifying costs can include:

• staff salaries, wages and other associated costs like employer NICs and pension contributions
• costs of materials and consumables used in R&D
• utilities like power and water which are used in R&D processes
• software costs directly related to R&D activities
• payments to subcontractors and external agencies, provided they relate to R&D (Note: For the accounting period starting 1 April 2024, the subcontractor needs to be based in the UK).

By thoroughly understanding the scope of eligible costs, you can ensure that your claim is as comprehensive as possible.

4. Work in ‘projects’

It is helpful to think of your R&D activities as distinct projects, each representing its own area of innovation. HMRC typically prefers claims to be split into projects, so keeping detailed records for each project throughout the year will help ensure a well-organised and comprehensive claim.

5. Review past claims

R&D tax credits can be claimed for previous years, typically up to two years from the end of the accounting period in which the R&D expenditure occurred. If your company has overlooked R&D tax credits in the past, it might be worth reviewing previous periods to see if there’s potential for a claim.

6. Work with a specialist adviser

While handling R&D tax credit claims internally is possible, working with a specialist adviser can significantly increase the likelihood of a successful and maximised claim. Advisers have the expertise to identify all qualifying activities and costs, and they can help navigate the intricacies of HMRC’s requirements.

Significant changes have recently been made and continue to be made to the schemes, making claims even more complex, further justifying the need for an adviser. Furthermore, historically, HMRC enquired for further detail on 1% of claims, but to reduce fraudulent claimants abusing the scheme, now look into 20% of claims.

The impact of R&D tax credits on business innovation

R&D tax credits are more than just a tax relief; they’re a catalyst for innovation. For many companies, the financial relief these credits provide makes the difference between pursuing and shelving a new idea due to cost concerns.

According to HMRC’s statistics, for the tax year 2021 to 2022, over 90,315 companies claimed R&D tax credits, amounting to £7.6bn in tax relief. This represents a significant investment in the future of UK businesses, helping to drive forward new technologies, products and services.

Encouraging growth and competitiveness

By lowering the financial barriers to innovation, R&D tax credits help businesses of all sizes remain competitive. They enable companies to take risks on new projects, invest in research and develop cutting-edge solutions that might otherwise be unaffordable. This, in turn, strengthens the UK economy by fostering a culture of continuous improvement and technological advancement.

Supporting SMEs and large businesses alike

While large companies often have the resources to dedicate entire teams to R&D, SMEs may find allocating funds to innovative projects more challenging. R&D tax credits level the playing field by making it more feasible for smaller companies to invest in research and development. As a result, SMEs can compete on a global scale, bringing new products and services to market and driving economic growth.

Don’t miss out on R&D tax credits

R&D tax credits are an invaluable resource for UK businesses, providing financial support that can be reinvested into further innovation. Whether your company is a small startup or a large enterprise, engaging in activities that advance science or technology could make you eligible for significant tax relief.

To ensure you’re making the most of this opportunity, keep detailed records of your R&D activities, identify all eligible costs and consider seeking advice from a specialist. With the right approach, R&D tax credits can provide the boost your business needs to stay ahead in a competitive market.

Get in touch with us today to learn more about how we can help your business innovate and grow.

0.25% reduction for late and repayment interests. The Bank of England (BoE) cut the base rate to 5.0% on 1 August, the first reduction in over four years.

HMRC will lower late payment and repayment interest rates for the first time in a year. This change has prompted HMRC to adjust its rates, which are tied to the base rate. The changes will take effect on 20 August.

From 20 August, the late payment interest rate will decrease to 7.5% from 7.75%, where it has remained for the past 12 months. The repayment interest rate will drop to 4.0% from 4.25%.

Late payment interest is set at the base rate plus 2.5%, while repayment interest is set at the base rate minus 1%, with a lower limit of 0.5%.

Additionally, on 12 August, the corporation tax self-assessment interest rate for underpaid quarterly instalments will decrease to 6.0% from 6.25%.

As a result, HMRC will continue to pay lower interest on overpayments, with the rate decreasing to 4.75% from 5.0%. Similarly, the interest on overpaid quarterly instalments and early payments of corporation tax not due by instalments will also drop to 4.75% from 5.0%.

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Enforcement will focus on 11 specific regions: Belfast, Birmingham, Bradford, Cardiff, Cornwall, Cumbria, East Anglia, Glasgow, Liverpool, the North East, and Watford.

HMRC is cracking down on small and medium-sized businesses (SMEs) in 11 UK regions for potential non-compliance with the National Minimum Wage (NMW). Companies found guilty of underpaying will have to reimburse workers for NMW arrears, and face increased National Insurance Contributions (NICs).

Businesses that refuse HMRC’s initial offer of a health check meeting risk financial penalties of up to 200% and public naming and shaming.

Many SMEs might unintentionally breach regulations due to the complexity of NMW rules and common misunderstandings about calculating NMW beyond just an hourly rate.

HMRC has allocated over £27m to address NMW non-compliance, focusing on regional enforcement. Areas were chosen based on data indicating a higher number of workers potentially earning below the required NMW and intelligence from worker complaints.

Over 50% of SMEs in the targeted regions could be affected, facing significant administrative burdens, even if they are compliant. Many businesses have already received letters from HMRC as part of a three-stage process.

Targeted businesses will first receive a nudge letter listing common areas of NMW non-compliance. The next step is a letter offering a free HMRC health check. Ignoring this offer will result in HMRC opening a formal enquiry.

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