The Moaning Accountant

It was announced in the Budget that as from April 2013, unincorporated businesses with annual receipts banked of under £77,000 will be allowed to calculate profits on a cash basis. It will not be necessary to draw up a balance sheet, although if asked, traders must be able to show exactly what sums were received, presumably by production of their invoicing and bank statements. There are also a couple restrictions on the expenses that will be allowed under the scheme, and accounting year ends in the scheme must be as at 5^th April.

HMRC expects that most of the three million or more traders that presently meet the criteria will opt to use the scheme. I cant believe they will, as in addition to the expense restrictions, there will be more work involved in the change from one basis to another , and hence higher accountants fees, and there will also be larger tax bills for those with year ends that are not 5^th April at present. This situation would repeat if and when the business passed the £77,000 threshold and went back to accruals basis. It may suit a new business, although a new business may still pay more tax than it would otherwise have done,due to the expense restrictions, which surely it could ill afford to do.

Eligibility is restricted to individuals or simple partnerships carrying on a trade or profession. Companies and Limited Liability Partnerships will not be eligible, nor is any business dealing in property or farmers (unless they do not use averaging claims or herd basis).The receipts based test is for income tax only, so it will be possible to qualify for the scheme and still be liable to register for VAT, as that threshold is based on turnover of the same £77,000 figure at present, in which case the trader must apply the for flat rate scheme for VAT as well.

The restrictions on expenses are in relation to business use of a car, and business use of home.

The car expenses( this does not apply to a van or to a single cab pick-up truck with no back seat) will be restricted to 45p a mile for the first 10,000 miles in a year and 25p a mile thereafter. Only one car ( or one van or one pick-up truck) will be eligible and no Capital Allowances claims will be available. ( But see more on Capital Allowances below).

The Business Use of Home expenses will be restricted to £8 a month if you work at home for at least 25 hours a month, £16 if you work at home at least 51 hours and £24 if you work at least 101 hours a month at home. (These figures will also apply to Business Use of Home claims in an accruals based set of accounts, unless one room is specifically set aside as an office.)

There will be compulsory adjustments for private use where a trader lives on premises liable to business rates, such as a pub or a guest house, at a rate of £350 a month for one person, £500 for two people and £650 a month for more than two people.

There will be no need to claim Capital Allowances- all machinery and equipment will be deductible in the Profit & Loss account with the exception of cars , as above ( and also motorbikes). This seems to me particularly ill thought out, since the expense of a van or truck could easily push the accounts into loss, with no means to relieve it except against future profits. HMRC seem to think that everyone would benefit from an immediate deduction, whereas Capital Allowances allows the spreading of expenditure between tax years which can be much more tax efficient than a loss claim, particularly if the trader has no other source of income in the tax year.

The transition to cash accounting will be a nightmare for any trader not already using 5^th April as the year end. If, for instance, your current year end is 31 December and you adopt the cash basis from 6th April 2013, the basis period for 2012/13 will run from 1st January 2012 to 5^th April 2013, producing much more profit than usual. Up until now, HMRC have insisted on no period of account being longer than 18 months, but year ends at 30^th April or 31^st May could challenge that.

Also, the perceived benefit of cash accounting- i.e., that you wont pay tax on monies that you have not received will always be balanced by the disadvantage of a higher tax charge when the business grows beyond the £77,000 threshold and accruals basis becomes mandatory and hence turnover and profits have to include unpaid invoices. Its simply putting off the evil day. Subcontractors in particular will not want the bother of having to analyse their bankings when they have hitherto simply totalled up their SC60's.

It is a scheme of very limited utility.

It was bit frenetic this year. On Monday it became apparent that , due to strikes taking place in the call centres, HMRC would extend the deadline to Midnight on 2nd February. However, all I needed to do was to get some people ( you know who you are) to sign and approve returns that were already complete, and I just ploughed on regardless. Then it became apparent that the Revenue web portal, while stamping received returns correctly. had nevertheless decided to skip a day and was insisting that it was February 1st already and so too late to reduce Payments On Account. Much time was spent on the phone to strike hit call centres as a result- but actually that turned out okay, which is just as well, because I was fairly grumpy about it. But I was done about half past eight, so that was not too bad really.

And so the merry go round starts again on 6th April. In the meantime those two or three of you ( you too know who you are) who have not got your stuff to me, or who have accounts part done and awaiting provision of further info, need to get your act together to avoid being stuck with penalties beyond the £100 that will be imposed on the novel date of 3rd February!

Though its a bit late, I would like to wish everyone a Happy New Year. Maybe it wont be so bad. There's no harm in being optimistic.

This did not make the papers, since after all, it was just another tax case- or was it?

A Mr Steel was appealing against his conviction under the Proceeds Of Crime Act wherein he was liable to forfeit assets of £707,000- and all because he had omitted to disclose income on his tax return. Mr Steel describes himself as "a grafter" and admitted that he had "moonlighted" to supplement his regular earnings. Said " moonlighting" included building work and kerbside motor repairs and as a result of not disclosing these relatively small earnings in his 2002/03 Tax Return he had rendered himself liable to pay £3,558 plus interest and penalties. The penalties, could have been as much as a further £3,558, but something "oooh" occurred and instead of that the Revenue charged Mr  Steel with cheating the public revenue- a criminal offence. The case reports do not give any information as to why this happened, but in my opinion he must really have upset someone- possibly by being uncooperative in the investigation, or maybe because this was not the first time this had happened.

At his trial, the judge's summing up referred to the suspicion that Mr Steel had also been engaged in benefit fraud and dealing in counterfeit goods. This is an unusual thing for a judge to say, since it refers to matters unproven and with which the defendant had not been charged.The judge therefore made a confiscation order of Mr Steel's assets, and since it would be impossible to say what proportion of his assets had been acquired lawful means and what by unlawful, all his assets, some £707,000 were therefore forfeit.

The Proceeds of Crime Act says that where the proceeds of a crime can be shown to exceed  £5,000, a court can consider a confiscation order, and that where the criminal activity concerned continues for more than six months, a finding can be made that the defendant was " leading a criminal lifestyle". The Appeal against the original findings of the lower court disputed that either condition had been met. In the first place the tax involved was less than £5,000 and in the second place a tax liability arises at a given "due date" ( most often 31 January in a given year) and therefore criminal activity could not be shown to be continuing for six months or more. The Appeal also disputed that a charge of cheating the public revenue was applicable to a tax case that arises from the provisions the Taxes Management Act 1970 ( the TMA) to do with non-disclosure. 

However, the Court of Appeal held that  simply failing to give notice of liability to income tax as required by the TMA is sufficient grounds for a charge of cheating the public revenue. That is a major change to tax law, as far as most practitioners in the field are concerned. Hitherto, we had always considered the TMA to set the framework for the basis of settlement of cases under the civil law, not as providing the basis for criminal charges, which usually arise under common law, as in theft, false accounting and so on. The Court of Appeal also held that the £5,000 threshold had been met because the liability for the 2002/03 tax year also formed the basis for the Payments on Account due for 2003/04, so the tax at stake was £3,558 X 2. That too is a major change, since Payments on Account, we had thought, were exactly that- they do not constitute a liability in themselves. If the tax due for 2003/04 was less than £3,250, Mr Steel would get all or part of his money back.

Finally, and to my mind most exceptionally, the Court of Appeal held that because the formal indictment referred to Mr Steel's failure  between 1 April 2003 and 31 December 2004 to notify his liability to tax, the judge had been correct in finding that the defendant was guilty of leading a criminal lifestyle,and subject to a confiscation order. So, from tax due of £3,558 we have moved to £707,000 a penalty of over 9000% of the tax due. This reminds me of sentencing Bernie Madoff to 150 years- it is not so much justice, as vengeance.

The Proceeds of Crime act was, when it was passing through parliament, referred to as a measure needed to counter organised crime and terrorism. This, however is whats it is being used for in practice. Mr Steel may well be a very bad person for all I know, but I can't help feeling that if he was engaged in benefit fraud or counterfeiting, then he should have been charged with that, and if there was insuffiicent evidence for that, then so be it. To convict him of a criminal offence in relation to a matter that most people would only suffer interest and up to a 100% penalty for seems to me entirely unjust. Or are we to take it that in future more people will be charged with a criminal offence in relation to non- disclosure of small scale earnings?