This is the paper guidance, repeated word for word, HM Revenue & Customs (HMRC) officers have been giving to High Volume Agents (HVAs).
The following guidance has been compiled by HMRC’s Tax Agent Initiative Team. It provides agents with a brief general outline of:
- HMRC’s Agent Initiative
- The Taxpayers Record Keeping obligations
- A summary of the guidance that is already available on the HMRC website (mainly in the Business Income Manual) to help with the preparation of Returns.
The guidance quoted refers to clients in the construction industry in particular but the principles apply to Returns for any client.
This general summary is for guidance only. It is issued without prejudice to any enquiry which may be made by an individual officer of HMRC into any individual Return. You will need to apply the guidance on a client by client basis by reference to the individual circumstances of each client.
1. The work of the HMRC Agent Initiative Team
The HMRC Agent Initiative is an ongoing project to establish the future business based relationship between the tax agent community and HMRC. The project flags up HMRC’s intention to engage with the paid tax agent community. The project is wide-ranging and covers a number of areas. The area of interest to this team is that relating to the professionalism of paid tax agents.
Professionalism includes the meeting of the minimum standards of technical competence to assist clients in fulfilling their tax obligations and in the manner in which they engage with HMRC and its officers.
The project looks to engage mainly with the circa 20% of the paid agent community who are not members of any Tax Professional body.
We are particularly interested in engaging with those agents who represent what we might describe as ‘bottom end clients’ so adopt a ‘large client base modest fee approach.’
We recognise and value the work undertaken by these agents who represent clients who might otherwise deal with there (sic) own affairs personally. We are looking to engage with these agents to establish the basis of a relationship which will result in an expectation that all Tax Advisers will know what is required and should meet the minimum level professional standard.
The Agent Initiative envisages:
- Recognition of HMRC’s charter which explicitly respects the right of any individual or business to appoint any agent to act on their behalf.
- Recognition that an agent does not in most instances assume any responsibility for the correctness of any return, that responsibility always is that of the customer, but must be in a position to advise and instruct a client to make that client aware of their tax obligations and ensure technically competent returns based on accurate records are submitted on behalf of each client they represent.
- Tailoring HMRC support to paid agents to reflect the compliance risks inherent in their client portfolio.
- The provision of support for agents whose standards fall below those expected in the tax agent community.
- That we will identify and tackle those few agents who are found to be acting dishonestly.
Currently HMRC do not insist on a requirement that a Tax Agent is accredited or holds a recognised tax qualification. We are presently happy for that situation to continue if all Tax Agents apply at least the minimum level of professional standards to the work they do in representing their clients.
There is an expectation that a process of engagement with any agent will identify who is performing at or above the minimum level of professional standard expected and those who fall below that minimum level.
Engagement enables the identification of those agents whose work can be ‘Trusted’. Engagement will identify any deficiencies which can be addressed and remedied and put that agent in a position to achieve a ‘Trusted’ agent status.
The Tax Agent initiative is a start to applying a sufficient degree of governance and in a form that provides:
- an identification of the riskiest cases
- an engagement process
- with an education element
- corrective action for inaccuracy
We are looking to convert the riskiest agents into ‘Trusted Agents’ or identify those unwilling to be converted.
2. Record Keeping
During our discussions thus far, we have placed a good deal of emphasis on the importance of clients keeping contemporaneous records of income and expenditure and to retain all invoices, receipts etc so there is documentary evidence to support the figures on the return.
It is important that this message is given to your clients at every opportunity and that clients need to provide you with the records to enable you to review them and give careful consideration to the figures entered on the return and in any accounts prepared.
Your review of income and expenditure should include a robust discussion with the client to establish the facts and a note of the discussion should be retained for future reference in case of HMRC enquiries.
3. Technical Guidance
This guidance will refer to the Business Income Manual (BIM) which is accessible through the HMRC website. It is advisable that you become familiar with BIM as it contains very useful, detailed guidance (including reference to Tax Legislation and Case Law) which is shown in summary form in the guidance below.
Income Tax is charged on the full amount of the profits of the tax year in accordance with S.7 ITTOIA 2005.
In arriving at those profits, deductions are prohibited for any expense which are not ‘incurred wholly and exclusively for the purposes of the trade’ (S.34 (1) (a) ITTOIA 2005). This wholly and exclusive test is covered in more detail at BIM 37007.
3.1 Establishing Income
Clients should keep an accurate and contemporaneous record of all income in whatever format suits the particular client. Often a simple summary sheet or notebook will suffice. These records should be reviewed by you in preparation of the return/accounts. It is advisable that any periods where no income is recorded is discussed with the client and the outcome of that discussion recorded.
For CIS subcontractors, CIS pay and deduction statements should be retained. Many recent enquiries into returns of CIS subcontractors relate to failure to declare all CIS income (as reported by contractors returns) and so it is good practice for clients to keep a simple diary (weekly/monthly) showing where they worked, for whom and the amount paid and tax deducted as well as the CIS pay and deduction statements so you can reconcile at the year-end.
It is also good practice for agents to reconcile declared income with bank statements particularly as many contractors pay by BACS.
Finally, remember it is imperative that all non-CIS income is included on the return e.g. taxable state benefits and income from private work.
3.2 Travel expenses
Before making a claim, on behalf of clients, to travel costs from home to site Tax Agents should be aware of BIM 37675. This specifically refers to travel costs for subcontractors who work at the same site (or very few sites) during the year and whose business base is not in fact at home. In the circumstances described in BIM 37675 no claim for travel should be made.
By way of an example:
If you have a client who lives in Watford but who worked exclusively at the Olympic Site in Stratford throughout the year then no claim can be made for travel costs from Watford to Stratford.
3.2.1 Motor costs (mileage rates)
Business mileage claims at the appropriate rate are acceptable provided there is an accurate, contemporaneous record of the business mileage undertaken. An end of year reconciliation of mileages incurred on business journeys to the various sites throughout the year (by reference to the record at 3.1 above) alongside route finder etc on the internet is good practice.
Any contribution towards costs of travel by car sharing work mates should be netted off against the amount claimed.
Contributors can claim their reasonable contributions actually paid over which of course should appear in the contemporaneous records as such.
3.2.2. Motor costs (based on expenditure incurred)
Receipts for fuel, road tax, insurance, MOT and expense invoices for repairs etc should be obtained and retained.
An accurate, contemporaneous record of business mileage should be maintained throughout the year. Again an end of year reconciliation as suggested at 3.2.1. above is good practice.
The total mileage undertaken by the vehicle used should be established by MOT certificates or reference to the odometer at the start and end of the year and thus an accurate business use ratio can be established to apportion the business cost to the overall cost of the vehicle (see BIM 37600).
Ownership of any vehicle should be established as being with the claimant.
The cost of vans/cars even old/low cost vehicles is a capital expense. There is an expectation that in all cases an invoice to evidence the cost price of the vehicle will be available. A bill of sale should evidence the proceeds of any disposal not subject to a P/X. Scrapped vehicles invariably command a scrap value which is often overlooked.
Again, any contribution towards costs of travel by car sharing work mates should be netted off against the amount claimed.
3.2.3 Public Transport Costs
Tickets/Receipts should be retained. If Oyster cards/Season Tickets are used, remember to adjust the cost for any private journeys.
3.3 Cost of temporary accommodation when staying overnight (see BIM 37670)
Receipts should be retained to support all cost of overnight accommodation, when temporarily working away from home.
If a room/flat is shared and a contribution is made towards the cost by a workmate this should be netted off against the claimed cost. Note the distinction of rents disallowed in the Prior v Saunders case referred to in BIM 37665.
3.4 Cost of subsistence with overnight accommodation
Receipts should be retained and should be reviewed by you as any reasonable costs for subsistence alongside accommodation are allowable – see BIM 37670.
4. Cost of food consumed during the day
These costs are generally not allowable – see BIM 37920.
5. Use of Home
5.1 Storage of tools
This is covered in part in BIM 37665. Unless a separate building is rented out solely to store tools and materials e.g. a lock-up, then use of home to store tools would not be an allowable deduction.
5.2 Writing up records
This is covered in BIM 47815 and BIM 47825 and more specifically for subcontractors in BIM 66215.
It should be noted that if the client uses a room in the house solely for business use for a short period to write-up records, the small amount to cover additional costs incurred may be claimed.
However, if no records are actually written up and all that the client does is store records in a box file, drawer etc for production to you at the year-end, then no use of home should be claimed.
Only in exceptional cases where a room in the home is solely used as an office and there is a clear commercial driver to that being the case should expense based upon a proportionate cost of the residence be contemplated.
6. Wife’s Wages
This is covered at BIM 37735.
Whether a deduction is admissible depends on firstly there being evidence of an amount actually being paid (or to be paid out). Then that the amount was at a commercially reasonable rate for the duties actually performed. Claiming a ‘notional’ deduction for wife’s wages or a sum merely to make use of unused personal allowance is not allowable as this cost is not wholly and exclusively for the purposes of the trade.
7. Cost of tools
This expense is allowable (There is an expectation that the costs will be receipted) for small consumable tools e.g. hand tools, screwdrivers, paint brushes etc.
The cost of the larger tools and equipment including power tools and those expensive tools with a useful economic life of over two years is likely to be capital in nature. Capital costs should be included within the appropriate Capital Allowances claim.
8. Protective/Specialist Clothing
You should consider carefully what claims can be made under ‘workwear’.
Costs of protective gloves, hard hats, overalls, safety boots etc are allowable. The cost of ‘Everyday’ clothing such as jeans, shirts and jumpers even if used exclusively for work are not allowable.
Ordinary clothing is covered at BIM 37910.
9. Phone costs
It will be necessary to apportion the cost of phone using a reliable method of apportionment – see BIM 37600.
This will necessitate a robust discussion with the client to identify business and private use of the phone throughout the year. It is not acceptable to use, say, an arbitrary 10% private use adjustment without a robust discussion with the client to establish the correct apportionment. A note of the discussion should be made and retained along with any records maintained by the client to substantiate the apportionment.
10. and finally…..
It is good practice to consider whether the level of net profit once the return is complete is commensurate with the apparent lifestyle of the client taking into account any other relevant factors such as earnings of others in the household.
If the net profit is low and there is no other household income could the client and his family live on that amount and do you need to reconsider the amounts on the return by further discussion with the client.
Whether you agree with the content or not, the guidance above has been prepared by the HMRC Tax Agent Initiative Team.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.