UK Company Tax Planning

UK Corporation Tax Planning & Compliance Made Simple

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UK Corporation Tax Administration

Tax matters include:
1. the corporation tax self-assessment system
2. the role of the Senior Accounting Officer
3. the processes for resolving disputes together with time limits generally.
4. the DOTAS rules and/or anti-avoidance legislation and their application to a scenario.

There is an ongoing strong theme of alignment of UK tax administration across different taxes eg penalty charges etc.

Corporation Tax
You must pay Corporation Tax on profits from doing business as:
– a limited company
– any foreign company with a UK branch or office
– a club, co-operative or other unincorporated association, eg a community group or sports club

You don’t get a bill for Corporation Tax. There are specific things you must do to work out, pay and report your tax.

1 Notification of chargeability:
A company falling within the scope of corporation tax for the first time must notify HMRC within 3 months of start of the accounting period. Failure to notify chargeability to tax within 12 months of the end of the accounting period will lead to a standard penalty based on a percentage of the tax unpaid 12 months after end of the accounting period.

2 Corporation tax return:
The return is due for filling on/or before the later of: 
-12 months after the end of the period to which return relates
-3 months after the date on which the notice to file the return is received (if later)

Company’s tax return is filed electronically and must include accounts.

Failure to submit the return on time will result in penalty as follows:
– one month – £100
– 3 months – Another £100
– 6 months – HM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of – 10% the unpaid tax
– 12 months – Another 10% of any unpaid tax

3 UK Corporation Tax Payment:

  • Key issues: normal comapny, Large companies, payment dates, instalment amounts, penalties
  • Regardless whether a return has been filed, corporation tax is payable 9 months and one day after the end of each accounting period.
  • For large companies, quarterly instalments are required starting on the 14th day of the 7th month, and the next 3 quarters on the 14th day of the month.
  • Large company is one paying corporation tax at main rate – augmented profits >£1.5m., reduced proportionally for periods <12m; or if a company has 51% group companies at end of previous accounting period (£1.5 divided by the number of entities).
  • However a company is not large if total tax liability is <£10,000, reduced proportionally by months in the accounting period [NOT by the 51% group companies]
  • Newly large companies (not large in previous 12 m) & augumented profits ≤ £10 million (divided by no of >51% group companies), quarterly payments are not required.
  • Instalments are based on the estimated current year’s liability. Interest is automatically charged on tax paid late, refunded to overpaid tax or tax paid early; penalties depend on reasons for failure to pay – deliberate, reckless, fraudulent etc – in extreme cases penalty is X2 of interest due (though cases are rare).
  • Ss 189 and 190 TCGA 1992 gives HMRC the right to collect unpaid cgt from 3rd parties (i) to the extent that they received the gains distribution (ii) cgt is unpaid after 6 months
  • 4 Group Corporation Tax Payment:
    >51% group can elect Group payment system, where a nominated member makes pays by installmen on behalf of the whole group.
    Once all group members have filed their returns, payments are allocated to each entity, any shortfall needs to be paid. HMRC allocates the shortfall between members in a way that maximises the tax geared penalties payable.
    Members in the loss relief group can allocate payments between themselves. This is different from the Group payment arrangement.
     
    5 Time limits for correcting and enquiring into corporate tax returns?

    Time limits for correcting corporate tax returns
    HMRC have 9 months after a return is filed (or an amendment filed) to correct obvious errors such as arithmetic mistakes. The company can amend the return within 12 months of the filing date. However, you can claim a refund up to 4 years after the end of the tax year it relates to (overpayment relief).

    Enquiries
    1st step HMRC takes to check tax return -open an enquiry; enquiry has fixed time limits.
    HRMC does not have to give reason for opening an enquiry
    An enquiry finishes when HMRC issues a closure notice which should state either (i) no amendment of the return (closure notice) or (ii) make the necessary amendment (contract settlement).
    An amendment can be appealed within 30 days of notification, and must be first made to HRMC and can progress to First-tier Tribunal.
    If HMRC are taking long to close the enquiry, a taxpayer can appear to First-tier Tribunal to direct HRMC to issue a closure notice. The First-tier Tribunal will issue the instructions unless HRMC has reasonable grounds NOT to issue one.
    Once a closure notice is issued, a taxpayer doesn’t have the right to appeal, though he can file a further taxpayer amendment or claim for relief within the usual time limits.

    Discovery
    If the enquiry window has passed, or if an enquiry was made but was then closed, HMRC have the power to re-open a past year of assessment and raise a discovery assessment.
    A discovery assessment can only be made if:
    (i) the potential loss of tax was due to CARELESS or DELIBERATE behaviour
    (ii)incomplete disclosure leading to a loss of tax of some kind.
    The normal time limit for discovery assessments is 4 years after the end of the accounting period (due to incomplete disclosure) but is increased to 6 years in case of CARELESS conduct or 20 years in cases of DELIBERATE conduct.

    Determinations
    If a return is not delivered by the filing date, HMRC may issue an estimated tax demand, a ‘determination’, then you have 3 years from filing date, or 12 months from the issue of the determination, if this is later, in which to file a return and replace the estimate. After this, the only option is Special Relief – only applies in very exceptional circumstances.

    6 Keeping Records:
    Companies must keep records until the latest of:
     
    Six years from the end of accounting period
    – Date any enquiries are completed
    – Date after which enquiries may not be commenced
    Failure to keep records can lead to a penalty or up to £3,000 for each accounting period.

    7 HMRC Information Powers
    HMRC have due processes with regards to what information they are allowed to ask for and why they ask for it.
    Usually the process starts when HMRC sending a request for the information informally.
    IF taxpayer does not provide information, a formal notice will be issued with a reasonable time limit. Taxpayer has the right to appeal against a formal notice unless notice made with the approval of the First-tier Tribunal; Appeal to be made in writing (with grounds for appeal) within 30 days from notice date. However taxpayer cannot use the appeal to challenge HRMC’s right to enquire.
    Appeals can be dealt with through an internal review & tax tribunal
    Penalty for failure to provide information
    If taxpayer fails to provide information, a basic penalty of £300 is charged. If failure continues, daily penalty of £60 per day which can increase of £1000.
    If taxpayer provides false information, a penalty of £3,000 per inaccuracy is charged.
    A taxpayer can appeal the penalty to First-tier Tribunal within 30 days of penalty notice. Taxpayer can not appeal against tax-based penalty for failure to comply or obstruction.
     

    8 Penalties for incorrect returns
    Penalties apply for failure to notity, late filing, late payment and inaccuracy in return.

    No penalty where a taxpayer simply makes a mistake
    30% unpaid tax where a tax payer fails to take reasonable care.
    70% unpaid tax if error is deliberate.
    100% unpaid tax if deliberate failure with concealment.

    Note:
    Penalty will be reduced where a taxpayer make a disclosure, especially when this is unprompted by HMRC.

    If you have a reasonable excuse, you can appeal against a penalty by writing to your company’s Corporation Tax office.

    9 Appeals and Disputes
    The company can appeal against amendments to the corporation tax return. The appeal must be normally be made within 30 days of the amendment and must state the grounds for appeal. The appeals procedure is as per VAT.
    Disputes between taxpayers and HMRC can be dealt with by an HMRC internal review or by a Tribunal hearing- see below.

    10 Internal reviews
    Disputes between taxpayers and HMRC can be dealt with by an HMRC internal review or by a Tribunal hearing. For direct taxes, appeals must first be made to HMRC, which will assign a ‘caseworker’.
    For indirect taxes, appeals must be sent directly to the Tax Tribunal, although the taxpayer can continue to correspond with his caseworker where, for example, there is new information.
    After caseworke is assigned, the taxpayer may be offered, or may ask for, an ‘internal review’ , which will be made by an objective HMRC review officer not previously connected with the case. This is a less costly & effective way to resolve disputes
    informally, without need for Tribunal hearing. An appeal to Tax Tribunal cannot be made until any review has ended.
    The taxpayer must either accept the review offer, or notify an appeal to the Tax Tribunal within 30 days of being offered the review; otherwise the appeal will be treated as settled.
    HMRC must usually carry out the review within 45 days , or any longer time as agreed with the taxpayer.
    The review officer may decide to uphold, vary or withdraw decisions.
    After the review conclusion is notified, the taxpayer has 30 days to appeal to the Tax Tribunal.
     
    11 Tribunal hearings:
    If there is no internal review, or the taxpayer is unhappy with the result of an internal review, the case may be heard by the Tax Tribunal.
    The person wishing to make an appeal (the appellant) must send a notice of appeal to the Tax Tribunal. The Tax Tribunal must then give notice of the appeal to the respondent (normally HMRC).
    The Tax Tribunal is made up of two ‘tiers’:

    a) A First Tier Tribunal
    b) An Upper Tribunal

    The case will be allocated to one of four case ‘tracks’:
     
    (a) Complex cases, which the Tribunal considers will require lengthy or complex evidence or a lengthy hearing, or involve a complex or important principle or issue, or involves a large amount of money.
    Such cases will usually be heard by the Upper Tribunal
    (b) Standard cases, heard by the First Tier Tribunal, which have detailed case management and are subject to a more formal procedure than basic cases
    (c) Basic cases, also heard by the First Tier Tribunal, which will usually be disposed of after a hearing, with minimal exchange of documents before the hearing
    (d) Paper cases, dealt with by the First Tier Tribunal, which applies to straightforward matters such as fixed filing penalties and will usually be dealt with in writing, without a hearing

    A decision of the First Tier Tribunal may be appealed to the Upper Tribunal. Decisions of the Upper Tribunal are binding on the Tribunals and any affected public authorities.
    A decision of the Upper Tribunal may be appealed to the Court of Appeal.

    12 Senior Accounting Officer (SAO) regime for Large Companies Only – Finance Act 2009

    Assessment within SAO regime
    – A Large Company is a company or group of companies if, in the preceding year, the turnover of all qualifying companies within the group is in excess of £200m and/or balance sheet total is greater than £2bn when aggregated. The group’s status needs to be assessed each year.
    – a company which is not a UK incorporated company, is not within the SAO regime even if it files UK tax returns
    – It is not relevant that a company is dormant and no longer trades; if it meets the above, it should fall under SAO regime
    – If a company was not within the SAO regime before it was acquired by the group, it will not subject to the SAO requirements until the year following its acquisition.

    Who can be an SAO
    SAO is the director who has overall responsibility company’s financial accounting & tax.
    SAO main duties
    The SAO’s duties include reviewing the accounting processes in place, evidencing that these are being monitored, preparing supporting documentation and ensuring that staff involved in the accounting processes have adequate training. Certify that the accounting systems in operation are adequate for the purposes of accurate tax reporting. Any inadequacies identified need to be rectified; and reported.
    Taxes covered
    Include Corporation Tax, VAT, Customs and Excise Duties, Insurance Premium Tax, PAYE, Stamp Duty Land Tax and Stamp Duty Reserve Tax.
    SAO notification, deadline & penalty
    •Company to notify HMRC annually as to the identity of the SAO for all relevant companies for the relevant financial year within 6 months after end of period of account. If not, a penalty of £5k for a company.
    •SAO to issue an annual unqualified or qualified certificate specifying the nature of the inadequacy if the error is material. Note that materiality is not defined – hence any error could be reported. Penalty of £5k for failure to provide annual certificate or for providing inaccurate certification due to careless or deliberate inaccuracy
    •Only one penalty can be charged in relation to any particular financial year though.
    •A penalty will not be charged where there is a reasonable excuse for failing to comply. A reasonable excuse is normally an unexpected or unusual event that is either unforeseen or beyond a person’s control which prevents the SAO from fulfilling his/her duty.

    13 DOTAS: Disclosure of tax avoidance schemes

    AIM of DOTAS
    The DOTAS regime was originally designed to enable HMRC to keep up to date tax avoidance schemes are in circulation and then HMRC monitors the scheme’s use and if necessary legislate to terminate it.
    Changes to regulations, from February 2016, have significantly broadened the DOTAS rules, which could conceivably capture more standard tax planning strategies.
    The regime covers the main taxes – income tax, corporation tax, or capital gains tax, NI,IHT, VAT and SDLT.

    What arrangements should be disclosed?
    A tax arrangement must be disclosed to HMRC when:
    (i)Enables a person to obtain a tax advantage, and
    (ii)the main benefit or one of the main benefits of the arrangement is the tax advantage, and
    (iii)falls within any of the hallmarks
    Disclosure is generally required to be made by the scheme ‘promoter’.

    The hallmarks (SI 2006/1543)
    The hallmarks include for direct tax and NICs schemes (the rules are different for SDLT and VAT) include:
    (i) Confidentiality: from a competitor and HMRC
    (ii) A premium fee
    (iii) Standardised (“shrink wrapped”) tax products
    (iv) Loss schemes
    (v) Leasing schemes
    (vi) Pension benefit schemes
    (vii) Employment income provided through third parties
    (viii) Financial products

    Disclosure:
    •If an obligation to disclose exists, notification must be made within 5 days of the arrangements first being made available.
    •scheme promoter is required to disclose the main elements of the scheme to HMRC.
    •Who is a promoter ?– someone who makes the scheme available for implementation.
    •Special rules apply where disclosure is not made by a promoter, in those cases a scheme user must make disclosure.
    •HMRC will then issue the scheme with a Scheme reference number (SRN) which must be passed to the scheme user
    •A scheme user will have to notify HMRC that it is using the scheme by inserting the number in its tax return.
    •Promoter must provide HMRC with periodic list of clients they have issued SRNs.
    •HMRC have the right to publish information about the scheme promoters.
    •Financial penalties are levied on those who fail to comply with the regime.

    Problems with DOTAS – confusing to the end-user – some take scheme numbers to be approval from HMRC which is not true; mass marketed scheme may carry no number.