What are the 10 most common tax misconceptions?

1.  Only scientific industries can claim R&D tax credits

R&D tax credits are not only available to companies employing people wearing white lab coats. We have helped companies across all sectors to get access to R&D tax credits, with an average claim of £100,000.

In order to qualify, a project must achieve ‘an advance in overall knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainty’. Qualifying projects include software development and although not all the activities that fall under this heading will qualify under the scheme, a lot will. To find out more about whether your company qualifies read our blog, everything you need to know about R&D tax credits.

2. A limited company can avoid paying tax

Every profit making company is chargeable to corporation tax. Running your business through a limited company provides flexibility over the ways in which you can take your income; this in turn affects the tax liabilities arising at different times in the financial year. For example, many company owners chose to take a small salary and dividends which are based on company performance. No personal tax liabilities arise on gross dividends which fall within an individual’s basic rate band (currently £31,865). Gross dividends falling within the 40% rate band (up to £150,000) are be taxed at 25%, and dividends falling within the 45% rate band are taxed at 30.5%.

Whilst these rates of tax are more attractive than the rates applying to earned income, the company paying the dividends is not able to claim a corporation tax deduction.

3. You can get things for ‘free’ by putting them through a company

All expenses must be wholly and exclusively business related in order to qualify as a business expense. It might be tempting to go on holiday for example and pass it off as a business expense, but if you cannot legitimately demonstrate the trip was wholly business related, you are committing fraud and are likely to alert HMRC. Submitting suspiciously high expense claims is a common factor behind HMRC identifying a possible enquiry candidate and they have benchmarked each industry sector to use as a comparison to identify possible fraudsters.

There are however exceptions where it is beneficial for a company to pay expenses such as mobile phones, pension contributions and certain insurance premiums.

4. HMRC gets everything right

Sadly this is not the case, they make mistakes, and perhaps even more so as a result of the highly publicised job cuts and IT changes in recent years. The staff who answer their call centre enquiries are not necessarily highly trained staff; the advice given in such calls cannot necessarily be relied upon and is no substitute for proper professional advice.

HMRC also tend to make assumptions – in particular when it comes to enquiries – and the onus is on the taxpayer to prove those assumptions are incorrect.

Their reputation for making errors is one of the main criticisms raised by accountancy bodies in response to the Government announcement that it was considering giving HMRC the power to take unpaid taxes directly from offenders’ bank accounts.

5. HMRC will be accommodating if I make a genuine mistake with my taxes

Claims of ignorance or not understanding the rules are not considered to be reasonable excuses, regardless of the complexity of the issue in question. Taxpayers now have a legal obligation to act with due care and attention, and take an active responsibility in ensuring they meet their administrative and financial obligations.

6. All company accounts need to be audited

The accounts of smaller companies with a turnover below £6.5m and assets of less than £3.26m, are not legally required to be audited.  Of course there may be other reasons for requiring an audit, such as external shareholders or bank requirements, but it is not always a legal requirement.

7. I don’t need to make a will because my wife will inherit everything anyway

This is not necessarily the case – when a person dies without leaving a valid will, their estate must be shared out according to the rules of intestacy. Your assets may not go where you want them to go, and your estate may pay more inheritance tax than need be the case. If you have even moderately substantial assets and or children, it is essential to make a will.

8. If I give away my home to my children I can avoid paying inheritance tax on it

This is only true to a degree; if you gift an asset and you want that gift to be effective for inheritance tax purposes, you must gift it absolutely and cease to receive any benefit from it. If you move out of the property and do not benefit from its use or receive any rental income, this may be the case. If not, it will be classed as a ‘gift with reservation of benefit’ and will continue to fall within your estate for inheritance tax purposes.

9. Company secretarial is just admin and has no impact on the value of my company or its tax position

If the company secretarial function is not carried out properly – encompassing matters such as maintaining statutory records, ensuring all matters are properly minuted, and paperwork such as dividend vouchers is properly prepared, there will be an impact on the value of the company. Potential purchasers will want to see the company has been run properly, and if this area has not been covered effectively they will assume other areas have similarly not been properly dealt with. In the event of an HMRC enquiry, vouchers will be required to support dividends paid. Areas such as dividend waivers, different classes of shares, and ensuring sufficient reserves are available are all especially vulnerable to incorrect or incomplete paperwork.

10. If my business is loss making I don’t need to file tax returns

Loss making businesses are not exempt from tax obligations, but they will be able to claim tax relief for losses incurred. Accounts need to be prepared and tax returns filed in the usual way. Losses can be relieved in a number of ways and the most beneficial claim should be calculated.

For further advice on tax matters or any aspect of tax planning, please contact Lesley Stalker by emailing las@rjp.co.uk.