Professional Tax Consultancy

HMRC Toolkits – Friend or Foe?

Mid-February saw the announcement by HMRC of the publication of a further 3 toolkits for use when completing Returns. As HMRC explain, these are primarily designed for agents’ use, but could be used by anyone completing a self-assessment Return.

This brings to 15 the number of such toolkits now available. HMRC are obviously keen to improve compliance at the point where computations and Returns are prepared – shortly after the announcement referred to above, they also published a series of ‘tools’ to help improve record keeping – so it is an opportune time for consider how useful these might be. Practitioners completing Tax Returns may have already used one or more of the toolkits during Return completion for the 2009-10 reporting season.

Formally announced in May 2010 after a pilot exercise involving agents, the original toolkits were developed with the consultation of various accountancy and tax representative bodies. HMRC state that use of the toolkits is voluntary and it is also stated that not using the toolkits will not mean that a taxpayer will not have taken reasonable care, when penalties are under consideration. We are of course in a relatively new penalty regime, following Finance Act 2007 and in spite of what HMRC say, initiatives such as the toolkits are clearly intended to be a part of the new compliance regime as a whole. That is not to say of course that they will not be useful to taxpayers and their agents alike.

Coverage

Toolkits are now available for the following aspects of Tax Return preparation

• Capital Allowances for Plant and Machinery
• Capital Gains Tax for Land and Buildings
• Capital v Revenue Expenditure
• Directors' Loan Accounts
• Expenses and Benefits from Employment
• Marginal Small Companies' Relief
• National Insurance Contributions and Statutory Payments
• Private and Personal Expenditure
• Property Rental
• VAT Input Tax
• VAT Output Tax
• VAT Partial Exemption
• Trusts and Estates
• Capital Gains Tax for Trusts and Estates
• Inheritance Tax

The toolkits are in PDF format, so can be easily downloaded and saved by the Return preparer – one danger of doing so is that with subsequent legislation changes, they may become out of date on specific areas, so it is recommended that users ensure the most up to date version is being used.

Contents

Content-wise, the toolkits are fairly standard, consisting of:

• A general introduction;
• A checklist;
• Explanatory notes to the questions in the checklist, highlighting risk areas and summarising suggested risk mitigation;
• Links to more detailed HMRC guidance – normally the relevant HMRC manual

The approach taken is interesting, as historically, HMRC have not openly stated where they consider the risk areas to be in tax compliance, although most practitioners will be aware of the issues in, say, the distinction between capital and revenue expenditure. Indeed, more established practices carrying out tax compliance may have been using checklists as part of a technical overview, for some considerable time. So how useful are the checklists likely to be to practitioners, and are there any dangers?

Advice to practitioners

Firstly, there is no reason why practitioners should familiarise themselves with the toolkits – a brief review suggests they cover most if not all of the ‘hotspots’ involved in that particular area of tax compliance.

There are also other aspects to consider – qualified practitioners will be working to professional standards when completing Tax Returns and additionally, fee protection coverage will generally demand that ‘reasonable care’ is taken when making a Return.

Perhaps the biggest danger when using the toolkits is to get drawn into a world of technical support for Return preparation that consists entirely of HMRC resources. There is no reference to case law, an invaluable source of assistance to practitioners and tax advisers alike, limited reference to legislation – reading tax legislation is not for everyone of course, but with the tax law rewrite recently completed, it should not be regarded as ‘out of bounds’ -and potentially they are of limited scope in a particular technical area.

For instance, take one particular issue that is the subject of regular dispute and debate – the often complex distinction between property dealing that amounts to a trading activity (which is subject to Income or Corporation Tax) and those property transactions subject to Capital Gains Tax. This has regularly been the subject of case law and without criticising HMRCs comments in the Capital Gains for Land and Buildings toolkit, it is inevitable that it will be limited in its use – this is one of a number of toolkit subjects where practitioners would be best obtaining a more independent view.

Finally, despite HMRC assurances, the suspicion will remain that HMRC may one day involve toolkits in their assessment of whether reasonable care has been taken – our advice here would be to resist any suggestion that lack of use of them is careless, but at the same time, do not rely on use of them solely to protect one from any suggestion of carelessness, as far as tax penalties are concerned.