SUMMER IS HERE!
As we enter the summer season, it continues to be busy at HK HQ offices. Although transaction numbers have dropped, we are completing the tidying up and handover on the huge volume we had last tax year, in addition dealing with increased HMRC enquiry work (see later in this blog), together with normal compliance responsibilities.
Please note that our offices will be closed 16th July for team training!
THE CHANCELLOR
The Chancellor has just delivered the Labour Government’s spending statement, with some winners and losers. The outcome for HMRC can be summarised as follows:
- The plan is to make HMRC a ‘truly digital first organisation’ by investing £500m over the next five years to increase the total number of digital customer interactions from 70% to 90%.
- HMRC will also receive the previously announced £1.7bn over the next four years which will go towards hiring 5,500 more compliance officers and 2,400 debt management staff members. This is predicted to raise £7.5bn per year by 2029-30, in line with this Government’s policy of seeking to increase revenue by enquiries and more robust collection. The Chancellor has announced plans to raise over £1bn in additional gross tax revenue annually by 2029/30, part of which will be increasing the size of the fraud investigation service.
- HMRC’s annual budget under the departmental expenditure limit (DEL) will be £6.4bn in 2028-29, or a 1.8% increase a year. So, HMRC is one of the winners!
- By 2028-29 the Treasury expects shifting HMRC customer services to a predominantly online service will save £126m, while HMRC has agreed to save £773m across five areas by the same year.
- The legacy IT systems are also being overhauled in a multibillion-pound project for ‘improving and modernising the IT estate’.
In the meantime, HMRC is under fire for its service delivery, taking up to four months to process tax refunds in a report to the Public Accounts Committee. The Chair describing HMRC as a "lumbering dinosaur," highlighting the need for modernisation. The committee's report revealed that the cost of tax collection rose by 15% to £563m from 2019-20 to 2023-24, while productivity per employee declined. The report also noted that HMRC's reliance on postal communication is outdated and urged the adoption of new IT systems, including AI, to enhance efficiency and security. We see the HMRC problems and delays on a daily basis, which results in the team having to undertake further work to chase up repayments, resolve issues etc.
However, it is clear, that the increased level in compliance checks and enquiries, is increasing HMRC revenue:
- In 2023-24, HM Revenue & Customs' Wealthy and Mid-Size Business Compliance team raised over £1.5bn, more than doubling its previous year's total of £713m. This surge is attributed to a focused crackdown on high earners, with the wealthy firmly in HMRC's sights. The total revenue from wealthy individuals rose to £5.2bn, driven by advanced AI IT systems like the Connect software, which analyse vast amounts of data to identify tax evasion.
- High earners in the UK, (defined by HMRC as those earning over £200,000 or possessing assets exceeding £2m), are facing intensified scrutiny from the taxman. A report by the National Audit Office, confirms the above, showing that HMRC collected £5.2bn from wealthy individuals in 2023/24, marking a significant increase from £2.2bn in 2019/20.
We have advised previously that we have seen an increase in the amount of enquiry and disclosure work, in line with HMRC’s increasing activity. Enquiry work is time consuming, and can be costly, as you have no idea what HMRC are going to ask for and how long the enquiry will run. For our trading business clients, we are seeing HMRC asking for all bank/credit card statements for the period under enquiry, access to the financial management records, with the nominal expense code breakdown. After an initial review, a more detailed request is made for supporting invoices, reasons for the expense being incurred, and although HMRC is looking to achieve additional tax on profits, the enquiry can lead to looking at more specific areas such as VAT or disguised employment. On finding something in the year under enquiry, if HMRC believes this could be an issue in earlier years, then the enquiry can be extended.
We can only advise, as we have done for many years, that detailed records are kept, keep business and personal expenses separate, use one account for the business, as well as taking out tax investigations fee insurance to cover the cost of the enquiry. More details on the fee insurance can be found HERE!
The one outcome, which we believe comes out of the spending review, and has already started, is that no costings have been provide explaining how everything is going to be paid, this is for the Autumn Budget. We will therefore have another period of uncertainty, as we did last year, following the election, where there is a period of people guessing and making comments on what could happen, making businesses and individuals nervous, who will stop doing anything due to the level of uncertainty.
INHERTIANCE TAX - THE NEW BATTLEFIELD
A recent report from Irwin Mitchell Solicitors highlights the rise in inheritance tax (IHT) liabilities, with a prediction of a 50% increase in estates affected by 2030. The increase will be for several reasons, including some forthcoming changes announced in the Budget last year. The report shows that IHT is no longer just a concern for wealthy families, it impacts middle-income households. By 2027, the Treasury is expected to collect £9bn annually from IHT, up from £5.5bn in 2021/22.
More details on the forthcoming changes, and planning can be found in our blog.
RURAL ENGLAND PROSPERITY FUND
A number of local authorities/councils have been awarded funding for a third year through the Government’s Rural England Prosperity Fund, administered by Defra. The funding is to provide grants to small business in the eligible authorities to support capital projects for small businesses and community infrastructure which improves productivity and strengthens the rural economy and local communities. More details of which authorities/councils can be found HERE!
RESEARCH & DEVELOPMENT TAX CREDIT CLAIMS
Over the last eighteen months we have reported how the area of Research & Development (“R&D”) Tax Credit Claims has become very difficult, with HMRC looking to disallow claims, the significant increase in the level of scrutiny, and enquiries in to previous claims submitted.
It has recently been reported that thirty-three professional football clubs are under investigation by HMRC for allegedly exploiting R&D resulting in a £17.4m loss in public funds. The inquiry follows a Times newspaper investigation revealing that clubs like Chelsea, Fulham, and Nottingham Forest received substantial R&D tax reliefs intended for genuine advancements in science and technology.
As a result of the increased scrutiny, professional indemnity insurance companies have increased premiums for businesses who provide R&D advice. As a result, although Harbour Key have not had a claim refused, but based on the level of advice and claims submitted on behalf of our clients, the firm has decided, that it will not longer prepare claims for clients, and an alternative solution will be sought. We will still discuss claims, and include on the Company’s Corporation Tax Return, but the preparation of the claim will be provided by third party. The increase in the premium cost, versus the level of fee income dictated the decision to no longer offer R&D claims work. Should anyone wish to discuss, please do not hesitate to call the offices.
DATES FOR YOUR DIARY
- 31 July 2025 - Second payment on account due to HMRC for Self Assessement.
- Key Tax dates for the period 31 May 2025 to 31 December 2025.
Should you wish to speak with us about a specific matter, or just to be a sounding board or for a chat, please do not hesitate to give us a call on 01452 713277.
