Working Together Issue 6

Contents

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Feedback

Our last edition led to our biggest ever postbag; many thanks to everyone who wrote in. Apologies if you haven't yet received a reply; we will answer all of you as soon as we can.

We received a lot of useful feedback on the articles on Tax Return filing and SA Statements of Account and agents. An article on your views about statements for agents appears in this issue. We have fed back your comments and suggestions about Tax Return filing to the group in the Revenue who are looking at this and we will give you an update in our next edition.

We received a number of responses to the article entitled "Sheer Hogwash", most of you were positive and supportive of Working Together (WT). But we did receive some criticisms, most of which were constructive but some made for uncomfortable reading. No one involved in WT, either within the Revenue or within the Representative Bodies, expected to change things overnight. Lessons are being learned. One of which is that, despite the personal support of senior managers within the Revenue, we still need to do more to raise the profile of WT, not only locally but also amongst Head Office specialists. But our overall aim is to help practitioners and the Revenue together, to improve the day to day operation of the tax system. We can only achieve this by working together.

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SA Cases - Estimated Underpayments from April 2002

The Revenue have been aware for some time of the difficulty experienced by agents and taxpayers alike in completing Question 18 of the SA Tax Return when there are both actual and estimated underpayments involved (boxes 18.1 and 18.2). You have told us also that the coding out of estimated underpayments in SA cases is inappropriate since the actual underpayment will be established when the Return is filed. It can then be coded out or paid as appropriate.

From April 2002, estimated underpayments will no longer be coded out automatically in SA cases. It will still be possible to have underpayments coded out if the completed Tax Return is received by 30 September and the tax owed is less than £2000.

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Class 2 NIC Lower Earnings Limit - Correction

In the article on Class 2 NIC - Late notification penalty, in our last edition, the Class 2 NIC Lower Earnings Limit was shown incorrectly. It should have read £3955 and not £3995. Our apologies.

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Self Assessment Return - Directors with no Employment Income

Employment pages do not need to be completed where no payments (including deemed Schedule E payments), lump sums, benefits or income of any kind were received from the directorship. The "Yes" box at Question 1 on page 2 of the Return should be ticked. Please say why the Employment page(s) have not been completed in the "Additional Information" box, 23.6 on page 8 of the Return. There is no need to tick the Employment box in Question 24 (Question 23 up to 1999/2000), the Declaration.

This note will be mirrored under "If you were a director", on page EN2 of the Notes on Employment for the year to 5 April 2002.

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Filing by Internet - the ITSA Internet Service for Agents

From November, agents will be able to send individual SA100 Tax Returns and supplementary pages over the Internet on their client's behalf provided only that the Revenue holds a form 64-8 for that client. An upgrade to the Revenue's main SA computer system will make this possible. In order to do this the agent will have to register for the service.

Prior to November, from late August, agents will be able to use the service but only if each client provides an Internet authorisation (see below) for the agent to file on his or her behalf over the Internet.

How do agents register for this service?

Full guidance is available on this web site on how to register as an agent to use the new service. You will need to register separately for this service even if you are already registered for the Internet Service for PAYE. Prior to registering you will need to know your Agent Code. The easiest place to find this is on the cover sheet for the Self Assessment Clients' Account Information sheets (SA327). But if you have any difficulty you should either ask your local Tax Office or you can telephone the Online Services Helpdesk.

What do clients need to do?

What action needs to be taken by your clients will depend on when you as an agent want to use the service.
  • From November all agents who have registered to use the Internet service for Self Assessment will be automatically authorised to send an individual client's return over the Internet provided the Revenue holds a form 64-8 for that client. This includes all forms 64-8 which are currently held as well as those completed in the future.
  • From late August until then, each client will need to provide an Internet authorisation for the agent to file on his or her behalf over the Internet. If your client has previously registered to use the Internet service for Self Assessment they will just need to visit the Government Gateway and provide the authorisation. Otherwise they will first have to register at the Government Gateway before providing the authorisation. In either case you will need to tell the client your agent Gateway Agent ID.
  • After November, where for any reason the Revenue does not hold a form 64-8, your client will still be able to register at the Government Gateway and then provide an Internet authorisation.
If you haven't sent the Inland Revenue completed forms 64-8 for all your clients you may wish to do so now, so that after November you can use the Internet service to send in your clients' Tax Returns, without needing them to authorise this on the Government Gateway. Existing stocks of form 64-8 can continue to be used as the Revenue has decided that the form does not need to be redesigned.

Agents will need to ensure that the client has signed a hard copy (or electronically signed an electronic copy) of the Return to be submitted by the agent over the Internet and are advised to keep appropriate records to confirm that in the event of any query.

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Internet Service for PAYE - Employers

Since April this year it has been possible for employers, payroll bureaux and agents to send End of Year Return forms P35, P38A and P14 over the Internet. The latest figures show that just under 2,700 PAYE Returns for 2000/2001 were filed over the Internet. And since the forms P11D, P11D(b) and P46 were added to the service in June, hundreds of those forms have also been received.

We have received feedback from some agents saying that they have had to "fudge" the registration on behalf of some of their employer clients who had neither the time, inclination, nor sometimes the Internet access to fulfil their part of the registration process.

We strongly discourage employers from disclosing their password and user ID, even to their agent. We recognised that some employers might not have access to the Internet, and so ever since the Internet service for PAYE first became available, we offered employers an alternative way to authorise their agent to use the Internet service on their behalf.

This alternative requires the employer to complete and return a paper form FBI 2 by post instead of authorising their agent online. The FBI 2 authorises the agent to use the Internet service for PAYE to accept information from, and send information to, the Inland Revenue on the employer's behalf in the same way as the online authorisation does.

If you have an employer client who would like to use the alternative authorisation process, you can download Forms FBI 2.

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Class 1A NICs - Late Return Penalties for 2000/2001

The statutory deadline was 6 July 2001, for employers to send their 2000/2001 forms P11D(b) to the Revenue. This is the form showing the Class 1A National Insurance Contributions due on taxable benefits. Late Returns may be subject to penalties of £100 per month (or part month) for every 50 (or part of 50) directors and certain employees who get benefits.

For this year only, as this is a new procedure, the Revenue will not charge the penalty until 19 September 2001. Forms returned after that date will have the penalty backdated to the July deadline. But interest remains payable on any Class 1A National Insurance Contributions paid late after 19 July 2001.

After this first year, penalties may apply from 6 July if the P11D(b) is received after 19 July, when payment will be due.

It was originally the Revenue's intention not to give any advance publicity to this extension for the first year. It was believed that publicity might create an incentive for late returns. But as people enquiring were being given different messages, this low-key approach created confusion, for which we apologise.

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Directions that ITSA Payments on Account do not Apply

The Revenue issues directions that Payments on Account do not apply:

  1. 1. where the taxpayer has ceased to be within Self Assessment
  2. 2. for tax equalised foreign national employees whose employers have entered into an agreement with the Inspector to use the 'Modified PAYE Scheme'.

SAT2, "Self Assessment; the legal framework" issued in 1995, suggests misleadingly that directions will be issued in much wider circumstances than these.

A customer can always make a claim to reduce the Payments on Account (giving the reasons and at his or her own risk of an interest charge) on any payments that turn out to have been due. Both directions by an Officer and claims by the customer must be made before 31 January following the year of assessment.

A longer version of this article appears in Tax Bulletin 54.

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CTSA Late-Filing Penalties and Long Periods of Account

Corporation Tax is chargeable by reference to accounting periods (APs), which cannot in law be longer than 12 months. If a company makes up its accounts for a period longer than 12 months (a long period of account), the results are apportioned and form the basis of two APs for CT purposes.

Example:

An 18 month period of account for a company with a continuing trade, results in an initial 12 month AP followed by a 6 month AP.

In such cases, the initial AP benefits from a statutory filing date of 12 months after the end (but not more than 30 months after the start) of the period of account, rather than the usual and earlier 12 months after the end of the AP. If the company makes up separate accounts for 12 and 6 months, the normal filing date rules apply. Whatever the case, a company Tax Return is required for each AP.

Tax Offices need to know when Returns relate to an apportioned period of account, rather than separate accounts, so they can amend the filing date for the initial AP on the Revenue's CT computer system (COTAX). If the position is not clear, or the filing date is not amended, the computer may wrongly issue late-filing penalty notices for the initial AP.

We are currently reviewing our guidance to see if our returns handling processes can be improved. But companies and their tax agents can help too by telling the Revenue

  • about any returns that relate to a long period of account (ideally before they are delivered, or in a prominent note when they are), and
  • the start and end dates of the period of account.
Doing that will enable us to
  • pdate the company's AP record on COTAX, and
  • amend the filing date for the initial AP in the period of account.

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London - Corporation Tax Work

Item number 8.5 of the Register of Issues concerns "Transfers of CT work from London to other Regions". With the exception of changes which have come about as the result of boundary changes ( to align Regional boundaries with those of the Department of the Environment, Transport and the Regions) there has been no programme to transfer CT work out of London, and none is planned.

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ITSA Enquiry Opening Letters - Copies for Clients?

As reported in the last edition of "Working Together", work on the ITSA Enquiries Review with the Operations Consultative Committee (OCC) continues. The sub-group from the OCC with the Revenue, Trade Union representatives and Working Together will meet again shortly.

We would be interested to receive feedback from agents on whether it might be helpful or unhelpful for the Revenue to send copies of the detailed opening enquiry letter to the client as well as to the agent. Although there may be some variation locally, normal practice currently is to send this letter to the agent alone. The only direct communication with your client would usually be the formal Section 9A notice opening the enquiry, enclosing a copy of one of the two Codes of Practice.

We are aware of two opposing views amongst practitioners, often strongly held. Some agents believe that the agent/ client relationship is undermined by direct communication with their clients who expect the Revenue to deal directly with the agent. Others clearly believe that it would improve the enquiry process if the client were to receive a copy of the detailed opening letter, with the formal notice at the outset.

We will be discussing this again within the sub-group from OCC but, bearing in mind that it may not be possible to please everyone, feedback on this specific point would be very welcome.

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SA Statements of Account and Agents - Feedback

In our last issue we asked for feedback on how the Revenue might improve its service to agents whereby the Self Assessment Clients' Account Information sheets (SA327) are sent by post, en bloc. These are not a true copy of the client's Statement of Account.

Your responses were overwhelmingly against receiving statement information in separate envelopes. Although there was a majority in favour of receiving such information in advance of clients, some considered it unrealistic to expect agents to make effective use of so much information received altogether.

Whilst there was an overwhelming desire to receive true copy statements, almost every response also mentioned the complexity of the client's own statement - this came as no surprise to Working Together. We have recieved much correspondence on this issue and efforts are being made to improve the situation although this will take time.

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SA Returns and Payments

Last April , the Revenue set up an outbound Call Centre called the Receivables Telephone Centre (RTC) to pursue SA debt and Return cases.

The new process known as RITA (Receivables Individual Telephone Automation) is a two staged approach to improve payment and filing compliance by making earlier contact, by phone wherever possible.

The first step in the process is the automated issue of one of two types of letter. One letter is for debts (RITA 500) and the other for returns (RITA 508). At the end of March 2001 we issued around 600,000 of these letters to taxpayers who had either not paid their

  • Payment on Account (POA1) and/or balancing payment due on 31 January 2001

and/or

  • any Fixed Automatic Penalty

or

  • had not sent in their tax return due on 31 January

We were pleased by the response the letters prompted. However because people phoned even sooner than we expected, for a short time our offices in Cumbernauld and Shipley were stretched to the limit and as a consequence many calls spilled over to our SA Helplines and Local Offices.

In response to the letters, more than

  • 150,000 debts were cleared
  • £230 million extra SA payments were received in April 2001.

Those cases that were not cleared by the letter, moved on to the second stage in the RITA process and were passed to the RTC for a telephone call. Currently the RTC is open for business six days a week, from 8 am to 8 p.m. Monday to Friday and from 10.00 am to 4.00 p.m. on Saturday.

We are now preparing for the next large batch of cases following POA2 which was due on 31 July 2001.

For late POA2 payments we will be telephoning wherever possible, starting soon after you receive this newsletter. Where we do not have a contact telephone number, we will issue RITA letters towards the end of August. We do not expect the volume of cases to be anywhere near the number that was passed to the RTC in April 2001.

RITA is not standing still as we plan to make improvements over the coming months. In particular, for new debts and Returns arising from November 2001 we will synchronise the issue of the RITA letters with the SA Statements to ensure a taxpayer will not receive a RITA letter until after he/she has received an SA Statement.

Earlier this year when planning to send out the RITA letters for the first time, we overlooked the need to tell tax agents about this initiative. It was always inevitable that some of your clients would be contacted direct and we apologise for not telling you in advance what we were going to do.

With this next phase it would be helpful if you could encourage any of your clients who are unable to pay on time to contact us as soon as possible. They can do this by telephoning the payment enquiry number shown on the top of the client's statement.

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Update on Electronic Lodgement Service

We promised in the last issue that we would keep you informed on the future of the Electronic Lodgement Service (ELS). We will continue to support ELS up until at least April 2003. This means we will offer a full ELS service to cover the 2001/2002 Tax Return.

Although we are continuing to support ELS, from late August 2001, agents can use the new Internet service to file Tax Returns on their client's behalf. Please see the article Filing by Internet - the ITSA Internet Service for Agents. As with all our services we will continue to monitor ELS on a year on year basis and will keep you informed of any future ELS developments.

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Tax Deducted from Trading Income - Electronic Lodgement System (ELS) and Filing by Internet (FBI)

There has been some confusion over the use of box 3.98 in the Self Employment page and 4.75A in the Partnership page (3.120 or 4.75A for 1999/2000). Use of these boxes is expected to be very rare; the main use is for tax on patent royalties.

ELS is the same as FBI in that entries cannot be made in box 3.98. Any entry which may need to be made in these boxes, should be made at box 3.97 or 4.75 (3.92 or 4.75 for 1999/2000) with a note in the Additional Information box (23.6) on the Return, as to what the payment(s) relate. This information is given in the ELS and FBI Technical Packs which are provided for software suppliers and is also included at Appendix C of the ELS Step by Step Guide which we provide for all ELS agents.

PAYE tax should not be shown in box 3.98. The Notes on Self Employment, Page SEN10 clearly state that tax deducted under PAYE should not normally be included here, it should go on the Employment Pages.

These boxes can of course be completed on a paper return. However, the same principle applies and when the Tax Office is processing the Return, it should follow the instructions in the Self Assessment Manual - where there is an entry in box 3.98, add the amount to any entry in box 3.97 and enter the total figure in box 3.97 on screen.

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Employer's Annual Packs

A push last year to reduce your paper mountain, and cut down on the waste and handling of returned items, resulted in over 100,000 fewer Employer's Annual Packs going out to agents. But there is still a sizeable number drifting back 'not required' or 'undelivered'. If clients have ceased, moved on, or you are still getting more Packs than you need, please let your Inland Revenue Office have details.

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Use of Authorised Mileage Rates by the Self Employed

In our last issue, we reported that the Government plans to introduce a new statutory system of tax-free and NICs-free mileage rates for business journeys in employees' own vehicles from 2002/2003. A description of the current system of Authorised Mileage Rates appeared in Tax Bulletin, issue 22, published in April 1996.

We have been asked whether the authorised mileage rates can be used if the vehicle is owned or registered in the name of a spouse. Although there is very little coverage on this particular point, our guidance does not impose a test of ownership. Working Together has therefore obtained confirmation that a car registered, taxed and insured in the name of a spouse can have the benefit of the concession provided all the other conditions are met.

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PAYE Estimated Underpayments from New Car Benefits - Feedback Please!

If an employee is allocated a company car for the first time part way through the tax year, as soon as we become aware of this, current Revenue practice is to code out only the actual part year's benefit based on the start date. Employers are then instructed to operate the new code on a non-cumulative basis for the rest of the tax year, unless specifically requested otherwise by the taxpayer/agent.

Because the PAYE code is not being operated cumulatively, only the extra tax due from the date of the code change is collected during the remainder of the tax year. The estimated additional tax that would have been paid had the new code operated from the beginning of the tax year is then collected in the following year (year 2) - this code will then typically be reduced to reflect both:

  • a full year's benefit in kind for the car
  • and the coding out of the estimated underpayment

In the third tax year, the full year's car benefit, only, will be coded out.

From April 2002 this will only be relevant to non SA taxpayers (see article, SA Cases - Estimated Underpayments from April 2002) as these estimated underpayments will no longer be coded out in SA cases.

Spreading the collection of the extra tax on the company car in this way generally works well in practice and is convenient for most employees.

It has however been suggested to Working Together, that this long-standing practice may be unhelpful to some taxpayers because of the way that tax, and consequently take-home pay, are distorted in both the first and second tax years. An alternative might be to code out a full year's car benefit in the first year, instead of only the actual amount, and then tax that on a non-cumulative basis for the rest of that year. This would help to reduce any underpayment caused by the current procedure but it is unlikely to avoid it altogether. In the real world there is always a delay between the start of a new car benefit and operation of the new code, not least as forms P46(Car) are only submitted quarterly by employers.

Working Together would welcome feedback as to whether tax agents generally believe this is an issue that might be worth looking at more closely bearing in mind that we are unlikely to be able to eliminate year 1 underpayments altogether.

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Speeding up your Clearance Application - S703 ICTA 1988

Section 703 is concerned with the cancellation of tax advantages from certain transactions in securities.

Section 707 - A person who has carried out, or proposes to carry out, certain transactions in securities may apply to the Board for a clearance that the transactions are not caught by the provisions of ICTA88/S703.

We receive around 6,000 S707 clearance applications each year. We try to deal with all such applications within the shortest possible time. But sometimes the transactions are so complex that we need to consider the matter in depth and on occasion we need to request further information before we are able to reach a decision.

However many agents need to make applications infrequently and in some cases we find that applications do not include information which, had it been given, would have enabled us to issue clearance quicker or possibly avoid issuing a conditional clearance.

The following aide-mémoire will help you avoid the most common causes of delay-: -

Information

The application should include

  • The latest accounts for companies involved in the transaction(s)
  • The names of all parties to the transaction(s) Mergers and Acquisitions
    If the transaction involves the acquisition by one company of another, the application should show:
  • The nature and extent of any interest held by the vendors in the purchasing company (both before and after the transaction(s)
  • The form and amount of the sale consideration If the consideration includes the issue of shares The application should state

  • Whether they are redeemable or irredeemable Liquidations Where the transaction involves liquidation or informal striking off , the application should state:
  • Whether the company's trade has ceased, or
  • Whether the trade will be carried on in non-corporate form and if so by whom
  • If the transactions include a S110 liquidation the application should show what the members receive in addition to consideration shares. Trusts. Where shares are being sold by a trust the application should state:
  • The identities of the trustees, settlor and beneficiaries
  • The family relationship or connection between those persons and the continuing shareholders
  • The date of birth of any beneficiaries who are minors
  • How the trustees intend to apply the sale proceeds

In the case of a purchase of own shares, if none of the continuing shareholders has any interest in a trust a statement to that effect will suffice.

Layout of Application
 In many applications we receive, the details of the transactions are combined with narrative explanation as to why they are being undertaken. It would help us if a schedule of the transactions were provided (say, as an appendix to the application) with any explanation e.g. as to the commercial reasons being given separately in the covering letter.

Where no Market sensitive information is contained within the application it should be sent to Clearance and Counteraction at the following address: -

HM Revenue & Customs
Clearance & Counteraction Team, AAG (Intelligence)
1st Floor
22 Kingsway
London WC2B 6NR

We take the security of all applications very seriously. Where the information contained within the application is Stock Market sensitive the application should be sent to Team Leader at the address above

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Revenue Calculation - Top Slicing Relief

There have been a number of articles in the media recently concerning problems with the Revenue Calculation (SA302) for 2000/2001 where Chargeable Event gains are present.

Appropriate Fraction

Section 6(3) TCGA provides for Chargeable Event gains (CEG) to be reduced to the Appropriate Fraction when calculating any higher rate liability arising on Chargeable Gains (CG) and this is shown in the Revenue Calculation. However there were circumstances when the computer calculation failed to reduce the CEG to the Appropriate Fraction. This was when the taxpayer's taxable income (including CEG) was below the higher rate limit but adding the assessable CG took the total above the higher rate limit. This problem has now been fixed. Where we have already processed 2000/2001 Tax Returns with this rare combination of income and gains, we will automatically identify and correct them.

Top Slicing Relief

There has been speculation that the Revenue Calculation of Top Slicing Relief (TSR) is incorrect. We have no evidence that this is the case. The cases we have been asked to look at because TSR appears to be wrong have proved to involve the Gift Aid legislation at Section 39(6) Finance Act 2000. Higher Rate relief for Gift Aid payments is given by extending the Basic Rate Band, however S39(6) FA 2000 specifically prevents Gift Aid payments extending the Basic Rate Band in the calculation of TSR. When the higher rate limit is revised to remove Gift Aid payments, TSR is clearly not due. Conversely there can be rare situations when the income tax calculation shows no higher rate liability but TSR is due. In all the cases we have looked at the calculation of TSR is correct.

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ITSA Unique Taxpayer References

We have received a number of queries about the format of ITSA Unique Taxpayer References (UTR). This is a typical example:

"The IT Self Assessment statements of account etc show tax references as two lots of five digits whereas correspondence shows four digits and six digits, i.e. 12345 66789 and 1234 566789. Are both correct?"

When ITSA was introduced taxpayers were given a 10 digit Unique Taxpayer Reference (UTR). In the case of Schedule D taxpayers, this was made up of a lead number, the 3 digit District number and then the old Schedule D reference number. So a reference number in St Albans District (District number 634) would be something like 1634 followed by 123456. There were a few exceptions - mostly partners and partnerships.

From the outset, the SA system printed the reference number either as an uninterrupted run of 10 digits or as 2 lots of 5 digits. Schedule D files were traditionally filed under the pre-SA 6 digit reference number, so when it came to local output Districts would break up the UTR into the first 4 digits followed by the last 6. This aided the District in allocating the post and locating and subsequently filing the taxpayer's file.

There were complaints from our staff at the time and it was admitted that the failure to show the UTR as 4 digits, then a space and then 6 digits, to aid filing was an oversight. Since then, time has moved on, files have been transferred, offices have closed, amalgamated and so on and the traditional way of handling a taxpayer's file in many offices has changed. Obviously there is more of a chance now that there will be more than one file with the same last 6 digits in the same office.

So the short answer is that both are correct, but the correspondent from the local office would prefer you to answer with the 4 and 6 digit combination.

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Scottish Widows Treatment of Windfall Payments - Joint Accounts

We have been asked to give the Revenue view on the taxation treatment of the windfall payments made to policy holders with Scottish Widows when it involves a joint life policy.

For members who chose to receive cash, the total amount received is a chargeable gain, with no allowable expenditure to reduce the gain. If members chose to receive loan notes, no gain arises until the loan notes are sold or redeemed for cash. When any of the loan notes are redeemed or sold, the amount received is a capital gain of the year in which the redemption or sale occurs.

The payments will only be made to the first-named policy-holder. However, if the joint holders are in agreement that the payment is received by the first named holder on behalf of both of them, the cash or loan notes can be treated as received equally by both holders, so that the gain would be divided equally between them.

Editorial

Working Together is a joint initiative with the CIOT, ICAEW, ATT, ACCA and ICAS. Although the material in this publication obviously reflects discussion and consultation with these bodies, the Revenue is solely responsible for its contents and for the views expressed in it.

Contact details & back issues

Back issues can be downloaded from our featured area on this website.

If you would prefer a paper copy, please write to or e-mail the address below.

Copyright

Working Together is covered by Crown Copyright. There is no objection to firms copying the publication for their own use.

Anyone wishing to re-publish Working Together or extracts more widely, should write for permission to Greig Rattray,

Working Together Team, 7N South West Wing, Bush House, London WC2B 4RD or e-mail: Greig Rattray.