Thousands of taxpayers across the UK have received ‘nudge letters’ from HM Revenue & Customs (HMRC) encouraging them to declare unpaid tax.

The reasons for being targeted vary but the impact of being contacted by HMRC can cause a lot of stress, leaving many taxpayers unsure about what they should do.

Who is HMRC targeting with nudge letters?

HMRC has said there are a number of reasons why they may issue a nudge letter to a taxpayer, but a large number of these communications seem to come from HMRC obtaining information that suggests a taxpayer has overseas income or gains.

They are also concerned that some taxpayers may not have paid the remittance basis charge – a flat rate tax charge on overseas income and gains for particular qualifying individuals living but not domiciled in the UK.

HMRC has said that its letters may not indicate what year income or gains were realised, which means their enquiries could relate to multiple tax years and more than one asset.

This lack of transparency has left many nudge letter recipients bemused.

What should you do if you receive a nudge letter?

The first thing is not to panic. HMRC has said taxpayers may be contacted because of:

• Discrepancies in the data received from overseas tax authorities;
• Changes to an individual’s personal circumstances or tax laws; or
• New information supplied to them that requires clarification.

HMRC typically gives taxpayers 30 days to respond to a letter before it begins to take any action, although in some cases it may ask you to respond sooner.

While it is important to respond quickly, if you cannot provide a suitable answer within this timescale, HMRC may offer an extension if one is requested.

Who can help with HMRC nudge letters?

If you receive a nudge letter from HMRC you should seek help from a tax adviser at the earliest opportunity. They can communicate with HMRC about its requirements, assess the reason for the letter and calculate what tax may be due.

In some cases, taxpayers that have undeclared overseas income and gains may be able to use the Worldwide Disclosure Facility, which could help to reduce penalties and the tax bill.

Link: HMRC sends ‘nudge’ letters to non-doms over unpaid tax

The Coronavirus Job Retention Scheme (CJRS) ended in September but many firms could still be subject to a CJRS compliance check in the weeks and months ahead.

HM Revenue & Customs (HMRC) has been sending out letters to employers throughout the year telling them they need to pay back CJRS payments because they claimed too much or are suspected of furlough fraud.

What is a compliance check?

In addition to checking CJRS payments, HMRC could write or phone to say they want to check:

• Any taxes you pay
• Accounts and tax calculations you have submitted
• Your Self-Assessment tax return
• Your company tax and VAT returns
• PAYE records and returns, if you employ people.

These compliance checks can even be sent at random where there is no suspicion of illegal or inappropriate activity.

How does HMRC determine CJRS fraud?

HMRC classes furlough fraud as:

• Not paying employees the full amount they are entitled to
• Employers claiming furlough payments for workers who are still working for them
• Claiming payments for non-existent employees
• Not telling staff they are furloughed, who only find out when they receive their wages
• Backdated claims that include periods in which the employee was working.

What if my firm was not entitled to payments?

HMRC can claw back any money paid out which the employer was not entitled to via a 100 per cent income tax charge whether the claim was made innocently or deliberately. This includes overpayments of a CJRS grant due to errors.

The compliance check will request details of staff members and how much money they received while furloughed. HMRC will typically give a short timescale to provide this information – usually around 30 days.

HMRC will write to tell you the results of the check. You will then be:

• Told no additional tax is due;
• Repaid if you’ve paid too much tax – you may also get interest on the amount you’re owed; or
• Asked to pay additional tax within 30 days if you owe more ­– you’ll normally have to pay interest from the date the tax was due.

You may also have to pay a penalty. When issuing fines HMRC will look at:

• The reasons why you underpaid or overclaimed the tax
• Whether you told HMRC as soon as you could
• How helpful you’ve been during the check.

If you have problems paying, you should tell HMRC immediately, as it may be possible to arrange a time to pay arrangement.

If I am penalised, how much will I pay?

The penalty percentage will fall within a range and depends on the type of behaviour and whether the disclosure was unprompted or prompted. They fall broadly into three categories:

• Deliberate
• Non-deliberate
• Deliberate and concealed or treated as deliberate and concealed

Each carries a different penalty, which can be seen here.

If you do get a letter or phone call about a CJRS compliance check then you should seek immediate assistance from an accountant.

Link: Flood of HMRC fraud enquiries expected as furlough finishes

Unincorporated businesses have heaved a sigh of relief after the Government delayed the date for the implementation of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) by one year to 2024.

Hit hard by the pandemic, it will give these businesses, including the self-employed and landlords, an extra 12 months breathing space to prepare for the changes.

What are the changes?

The self-employed and landlords with a gross income from their business or property of more than £10,000 per annum will need to follow the MTD for ITSA rules from 6 April 2024.

It will not be necessary for general partnerships to join MTD for ITSA until the tax year beginning 6 April 2025, while the date other types of partnerships will be required to join is yet to be confirmed.

The Government introduced a more favourable system of penalties for the late filing and late payment of tax for ITSA in March 2021.

This penalty scheme is for those who are required to comply with MTD for ITSA and will now also come into force in the tax year beginning April 2024 for the self-employed and landlords, and April 2025 for all other ITSA taxpayers.

There will be the chance to explore the benefits and challenges of MTD early if you are an eligible business or landlord, via the Government’s pilot scheme.

This is already underway and will be increasingly expanded during the 2022/23 tax year, preparing for a greater scale of testing in the 2023/24 tax year.

How can you prepare for these changes?

It’s vital that businesses use the correct software to meet the new requirements, such as HMRC approved cloud accounting software or a set of compatible software programs that can connect to HMRC systems via its Application Programming Interface (API).

The software must be able to:

• Keep records in a digital form
• Preserve digital records in a digital form
• Create a VAT or tax return from the digital records held in functional compatible software and provide HMRC with this information digitally
• Provide HMRC with VAT and tax data on a voluntary basis
• Receive information from HMRC via the API platform that the business has complied.

Will you be ready?

MTD is the first step in HMRC’s shift towards an innovative, digital tax service, supporting businesses through their journey in the ever-evolving modern world.

Although the initiative has been postponed by a year, taxpayers must be fully prepared, as they could face fines or penalties if they do not abide by these changes.

It is important that they implement suitable software, such as an HMRC-approved cloud accounting solution, and migrate their information across to the new systems in advance of the new deadline.

This may require additional training and changes to existing accounting processes and procedures.

Link: Businesses get more time to prepare for digital tax changes

Have you ever considered buying a business? Whether you are an experienced entrepreneur or just starting out, acquiring a ‘ready-made’ business offers a number of advantages.

For established businesses, buying a second company can help them break into new markets or acquire machinery, skilled workers or innovations that can help their operations grow.

Meanwhile, new entrepreneurs can acquire a ‘turn-key’ business that requires minimal work to start generating profits.

However, the process of buying a business is not without risks, especially at the deal-making stage, so we have put together some quick tips to help.

Research, research, research

Before even approaching another business do as much background research as you can.

Find out exactly who owns it, look into its previous accounts, speak to its suppliers – don’t be afraid to ask questions.

Once you make that initial contact with a seller you will need to obtain as much information as you can from them.

Check to see whether they have recent management accounts you can check and find out if the company has any debts or obligations that could create risk.

Some owners may be selling for retirement, others may think that a new owner could help the business grow, while some may have concerns about the business and are seeking a quick exit. Learning more about the reasons for a sale could alert you to issues within the business.

Be open, be honest

Try and be as transparent as possible with a seller as it encourages them to be honest and open with you as a buyer. Trust is important when securing a deal, as both parties face risk during a transaction.

You should also be honest with yourself and ask whether the deal is suited to your needs and whether any issues can be feasibly fixed.

It sounds a bit cliched but try to make decisions with your head, not your heart. If you are unsure, why not ask a trusted friend or adviser for their independent opinion?

Check suitability

Not every business is going to be suited to your goals. There are a number of factors that can be difficult to identify at first, but once you open up a dialogue with a seller, you should check:

• Sales revenue or cash flow
• Its ability to be relocated
• Debts and obligations
• Ownership of property and assets
• Rights to patents and intellectual property
• The existing management team.

Draw up heads of terms

If you are serious about purchasing a business create a heads of terms agreement. This should set out the points that have been agreed in principle between parties during the course of negotiations.

Heads of terms provide serious intent and have moral force, but do not legally bind the parties to conclude the deal on those terms or even at all.

Despite this, they are a great first step in setting out the intended purpose of the transaction and the aims of each party.

Make sure you have access to sufficient finance

Once the basic terms of the sale have been agreed you will need to ensure that you have sufficient funding to cover the costs of the transaction.

Few business owners fund the whole of a sale out of their existing personal or business funds.

Instead, many seek out a loan or investment that allows them to access the funds they need.

Of course, this requires lenders and/or investors to sign off the investment in the new business, which can be challenging and take time.

Most lenders and investors will not only want to know about your own financial position but they will also want to know more about the health of the business you are buying so that their money isn’t at risk.

Entrepreneurs should factor this process into the timeline for their transaction and ensure they have the funds they need to complete it.

Don’t be afraid to walk away at any stage

Possibly one of the most important tips is to walk away if the deal isn’t right. Transactions have been known to fail at the last second, perhaps after due diligence uncovers an unexpected issue.

By this stage, both the buyer and seller may be emotionally and financially committed to the deal but that doesn’t mean that it has to go ahead.

Until a final contract is signed and funds are transferred a deal can always be cancelled or, in some cases, renegotiated.

Signing up to a deal that leaves you, your existing business and finances at risk is rarely worth it.

Ask for help

If you haven’t bought a business before, or even if you are an experienced entrepreneur, it pays to seek out help from a professional.

Working with an accountant can help you to structure a better deal, acquire finance and identify potential risks.

Lots of businesses are seeking out finance at the moment, whether to fund an acquisition or finance investment, but given the challenges the economy faces, it is becoming increasingly difficult to secure the right deal.

If a business hasn’t sought out finance for a while or there has been a significant change to their operations since they last requested funding, then there are a few steps they should consider to improve their chances of success.

Review your business plan

A business plan is often one of the first documents that a potential lender and/or investor will want to see, as it clearly lays out your vision for the company.

Having an up-to-date business plan will show financiers that you have a path to profitability and growth, giving them the confidence to invest or lend you the money you require.

If you haven’t reviewed your business plan in a while, take the time to review it and update it, highlighting potential future risks, as well as opportunities.

Investors or lenders will appreciate transparency as it makes it easier to calculate the benefits and disadvantages of a deal.

Get the figures to back you up

As well as having an effective business plan, businesses will need to be able to demonstrate that they can service the debts of any loans that they make or offer the right level of return to investors.

A key aspect of this is demonstrating financial health and positive cash flow. Although not essential, it is highly recommended that you produce detailed management accounts in the months leading up to seeking finance.

This should demonstrate profitability, cash flow, debts and sales. Doing this over a period of several months will give a lender or investor confidence that the business is stable.

Be realistic

If you are borrowing for a specific reason, such as investment in a particular piece of equipment or to hire a certain type of employee, borrow as much or a little more than you need.

Lenders will want to check the value of the investment you are financing and may be concerned if you borrow too little or far too much.

Both may indicate that you are taking on too much additional risk, which could affect your ability to repay them.

Prepare for due diligence

At some point during the lending or investment process, the other party will want to conduct financial and legal due diligence.

It is unfortunately fairly common for deals to fall through at this late stage because a detail has been missed.

Remember, lenders and investors tend to be risk-averse. If they feel that something uncovered during due diligence should have been revealed to them earlier it can put them off entirely.

Try to be as open as possible early on and you should avoid any complications during this stage that may prevent you from obtaining the finance you need.

Try alternative finance

If you can’t get a loan from a traditional lender or you are struggling to find investors that will finance you, then you may want to consider an alternative form of funding.

There are a growing number of alternative finance options out there to help. If you need money in the short term, for example, you could use invoice finance.

This allows a lender to effectively ‘purchase’ your unpaid invoices for a fee. Then when the invoice is paid by the customer, you get the remaining balance minus the fee.

If you need to borrow a larger sum then you could borrow against your existing assets or property owned by the business. This could help you secure a larger sum over a longer period but may put the assets you own at risk.

Finally, there is crowdfunding and peer-to-peer lending. This approach allows businesses to seek finance with a number of individuals, often online.

Typically, investors will be offered a small percentage of equity in the company in the case of crowdfunding or will see numerous lenders loaning money and earning interest on repayments.

This allows investors and lenders to share the risk, which makes it easier for them to lend the money.

Seek help

Possibly one of the most important steps you can take is to seek corporate finance advice from an experienced expert. They can help you to find the best deal and assist you with preparing the information that lenders and investors need – brokering the best outcomes for you and your business.