HMRC Toolkits – boon or bane?

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By Philip McNeill, Head of Taxation (Tax, Practice & Owner Managed Business Taxes)

28 May 2019

HMRC Toolkits are designed to highlight areas where HMRC frequently finds errors in returns. Can you afford to ignore them? HMRC has refreshed eight of its twenty agent toolkits. Philip McNeill discusses their strengths and weaknesses and which ones may be most useful.

HMRC has refreshed eight of its twenty agent toolkits. Which ones, if any, should you be looking at and why?

Checklists in context

Opinions among practitioners are divided when it comes to tax checklists and HMRC agent toolkits. For some, reliance on checklists may appear to produce a tick-box approach that is backward looking. A minimum compliance attitude to tax, rather than a forward-looking, creative reassessment of clients’ tax positions. For others, a checklist is a useful risk management tool to ensure key tax aspects are covered.

Tax solutions in the round

Many tax issues and solutions arise only by looking at a wider context, by considering not just the specific issue under the microscope but the context. What new legislation is in view, and what is its likely impact? What changes are expected in the client’s business or personal tax affairs? What possible knock-on consequences could there be? Have all relevant past and current factors been considered?

Client-focused solutions are likely to consider ‘what if’ scenarios, knowledge of the client’s specific circumstances and objectives, and the impact of each transaction on a range of taxes.

The ‘right’ solution for one client might not be suitable for another. Focussing too narrowly on one tax liability may miss potential impact on others.

Risk management

Whatever attitude one has to checklists, risk management suggests that HMRC toolkits should not be completely ignored. HMRC uses its data on identified errors in submitted returns to inform its Agent Toolkits. This means that even the topic list for toolkits is of interest: it highlights where and how HMRC is likely to challenge a return.

As it focusses on submission by agents, it would be wise to take note and avoid potentially expensive challenges with their consequent negative impact on client relations.

Key areas of attention

The toolkits come in seven areas: Capital gains; Companies; Employers; Individuals; Property rental; VAT; and Trusts and Estates.

Looking at the detail, the picture emerging is not unsurprising. Under Companies, topics are the expected thorny issues of chargeable gains, losses and directors’ loan accounts. There is nothing on Research and Development or EIS schemes.

Business tax issues come, perhaps surprisingly, under the ‘individuals’ heading. Again, losses is on the list, along with the ‘grey area’ issues of private and personal expenditure; capital v revenue expenditure; capital allowances; and business profits.

Other categories to watch are Property Rentals and VAT partial exemption.

Using HMRC Agent toolkits successfully

Given the data analysis that has gone into the HMRC Agent Toolkits, firms would be wise to have a senior member of their tax staff review the new toolkits and see if there are any HMRC-identified risk areas where the firm could strengthen its own procedures.

The toolkits could also be used as a learning aid for staff, broadening experience in familiar areas and providing an introduction to new areas.

Each toolkit comprises three parts:

1. an introduction with general guidance on the topic and links to HMRC’s online manuals
2. a checklist which lists perhaps 20 or more specific questions, with tick boxes for completion and a heading to record the period and the client name
3. explanatory notes linked to the individual questions. These notes have web links to further guidance, HMRC Online Manuals and legislation.

Section 2 could be printed as a standalone hardcopy checklist.

Limitations on toolkits

A major limitation on HMRC Agent toolkits is their retrospective focus: HMRC is focused on past errors, rather than future uncertainties. This comes out very clearly in some areas of recent change, for example, Entrepreneurs’ Relief.

Entrepreneurs’ Relief was significantly impacted by changes announced in the Autumn Statement. The initial changes were then modified in December 2018. Some of these changes apply from 29 October 2018.

The Agent Toolkit on Capital Gains Tax for Land and Buildings Toolkit includes Entrepreneurs’ Relief (in the checklist question 28 and in the notes on page 30), but neither the Chargeable gains for companies toolkit nor the Trusts and Estates Toolkit mention it. It is mentioned in the Capital Gains Tax for Trusts and Estates Supplementary Toolkit.

This coverage reflects the focus of the toolkits on submitted returns, rather than on client issues. While it could be argued that Entrepreneurs’ Relief does not strictly apply to chargeable gains in a company, in an OMB context it would be prudent to check that assets sold actually belonged to the business, rather than to the business owner. In the latter case, as assets used in a business, they might qualify for Entrepreneurs’ Relief. Thus a client-focused checklist might have a wider remit and a different starting point.

Turning to the toolkits where Entrepreneurs’ Relief is mentioned, the toolkits do not highlight the important changes in October 2018 – the economic interest tests - or the changes from 6 April 2019, which bring in a two-year holding period; while the footer on the toolkits ‘Effective from 6 April 2019’, could be a little misleading in this context as it really means ‘to be used for 2018-19 returns’, rather than suggesting that it summarises the law as it applies from 6 April 2019.

In order to find out the detail on Entrepreneur’s Relief changes in 2018-19, it would be necessary to follow the link to the HMRC Helpsheet HS275 Entrepreneurs' Relief (2019).

Conclusion

HMRC Agent toolkits are a not-to-be-overlooked resource but need to be treated with caution when it comes to supporting client-centred tax compliance. They will help identify high-risk areas in submissions and flag HMRC’s view of some contentious issues. They should be considered in the wider context of current and forthcoming legislative changes as well as your own knowledge of your clients.