Further written evidence from HM Revenue & Customs

Q239 Chair: Companies that are not within the charge to Corporation Tax

For 2011–12, HMRC issued notices to file a company tax return to 1.9 million companies. This is equivalent to 70% of the 2.6 million active companies on the UK Companies House register at 1 April 2012.

HMRC requires all companies within the charge to corporation tax to file a company tax return. All new incorporations are automatically notified to HMRC by Companies House and a record created on the HMRC database.

The department issues a form CT41G to all newly registered companies (around 460,000 in 2011–12) to enable them to notify us if they are within the charge to tax, although companies do not have to use this form. They can notify us of chargeability by a variety of means, including online, by letter or by filing a company tax return. Companies do not have to notify HMRC if they are not within the charge to tax (because, for example, they do not have a source of taxable income). Tax law imposes a financial penalty if companies fail to notify HMRC that they are within the charge to tax.

HMRC’s research shows that around 40% of newly incorporated companies do not become active in their first year. Many (about half) of these never become active; the rest take some months before commencing in business. This makes direct comparison of the Companies House register and the HMRC database of active companies difficult.

The department does not require dormant companies, or companies that are otherwise outside the charge to tax (for example, charities), to file a company tax return because this would give rise to wasteful costs for companies and HMRC. We do, however, deploy an increasingly sophisticated range of risk assessment tools, including IT systems such as HMRC’s Connect, with real time information from banks and credit card companies, to manage the risk that a company is active and has failed to notify chargeability. The tax status of all companies that have not been asked to file a company tax return is reviewed at least every five years. HMRC may issue a notice to file a company tax return to any company at any time if we feel there is a risk that they may have failed to notify us that they are within the charge to tax.

Included on the Companies House register and the HMRC database are a significant number of essentially foreign companies. Some of these trade in the UK, are within the charge to UK corporation tax, and so are subject to the same processes as UK companies. Others do not carry on any taxable activity in the UK and are not within the charge to UK tax under the terms of the appropriate double tax treaty (such as the one with Germany). Such companies are incorporated in the UK because of lower incorporation costs and capital requirements.

Independent research shows the UK as having the simplest incorporation procedures and lowest costs for both formation and minimum capital requirements as well as being a highly respected jurisdiction. Registration agents have further reduced the significance of territorial jurisdiction, some charging less than £40 plus UK VAT to incorporate a foreign company in the UK.

For these companies, as for any other UK incorporation, a record is automatically created and returns issued until we establish their status under a double tax treaty. All such cases are dealt with by a specialist HMRC unit which liaises with the tax authorities of the country of residence. The issue of returns is stopped only when we have agreed with the other fiscal authority that they are properly taxed.

A small proportion of companies file returns late. Late filing penalties were charged on around 240,000 companies for periods ending in 2011–12. The total value of those penalties was £164 million. Where failure to file a return continues after the imposition of penalties, HMRC estimates the tax due, using a variety of information sources, and makes a determination of tax liability.

HMRC recognises non-filing as a serious potential compliance risk, encompassing those companies which trade for a short period and the particular phenomenon of "phoenixism" (the practice where directors carry on the same business successively though a series of two or more companies). Each of the companies in turn becomes insolvent, involving non-compliant behaviour including debts and other attempts to evade obligations. We take robust counter action against these risks.

Failure by companies to file returns affects other duties as well as corporation tax. For example, in 2012 we protected £650 million through the use of up-front VAT and PAYE security action. Where companies fail to change non-compliant behaviour, we will prosecute. In the 12 months to 31 March 2013, 41 cases were prosecuted with a 100% conviction rate. In addition to prosecutions, we are increasingly deploying our own specialist insolvency teams to use the full range of civil recovery tools and work closely with the Insolvency Service to drive out abuse.

Q280–281 Fiona Mactaggart: The number of referrals to the Tax Commissioner between 1 April and 30 September 2013

The Committee requested updated figures for decisions made by three HMRC Commissioners in respect of the largest and most sensitive tax disputes. Figures for the period 1 April–30 September 2013 are in the table below: these figures will be included in the Tax Assurance Commissioner’s annual report next year.

PERIOD 1 APRIL 2013 TO 30 SEPTEMBER 2013

20 cases referred to the Commissioners

 

Taxpayer’s position agreed as an acceptable basis for settling the dispute

11

Taxpayer’s position accepted with conditions

1

Taxpayer’s position rejected

6

Commissioners remitted the case for further work and re-consideration

2

 

Total cases referred in the period

20

Q343 Chair: Of the 15 HSBC cases, how many resulted in settlements that incorporated both penalties and interest charged?

At the time of the PAC hearing in 2012 HMRC had 15 live individual criminal investigation cases. Of those, six are now currently under civil investigation and where irregularities are identified tax, interest and penalties will be charged.

The other nine have entered the Liechtenstein Disclosure Facility (LDF). Three have already made disclosure reports, two contending that they have no outstanding UK liabilities and one admitting tax irregularities and making a payment on account. These disclosures are currently being looked at to ensure they are correct and complete.

The other six have registered with the LDF and their reports are due to be sent to HMRC by 21 November 2013. These will then be risk assessed in the same way.

Q437 Guto Bebb: …. The first question is about the total tax take. It appears that the money coming in from personal taxation fell in 2011–12. That is primarily blamed on a fall in self-assessment or the tax collected through self-assessments. Is the number of people registered for self-assessment higher or lower during that year? Obviously the employment figures, which have been very strong, have been driven primarily by an increase in self-employment. I am curious as to whether the Revenue has seen more people registered for self-assessment even though the total tax take has fallen.

The table below details the number of Self Assessment Tax Returns (all types) issued for the tax return years 2009–10 to 2012–13 with a filing deadline of 31 January following the end of the tax year.

Filing Deadline

31 Jan 2011

31Jan 2012

31Jan 2013

31 Jan 2014

Tax Return Year

2009–10

2010–11

2011–12

2012–13

Issued

10m

10.5m

10.34m

11m

(Note-a number who no longer needed to be in SA were taken out after 31 January 2012)

Although the number of Self Assessment tax returns issued has risen, tax paid under SA during 2011–12 would not fully reflect people who newly registered for self assessment during the period 6 April 2011-5 April 2012. This is because most people new to self assessment during this period would not be required to complete their SA tax return and pay any corresponding amount due until 31 January 2013.

The Committee may like to be aware a publication was issued by HMRC on 31 July 2013 entitled "Income Tax Receipts" which provided some insight into why the income tax receipts fell between the tax years 2010–11 and 2011–12. Further information is available on page 13 of the document linked at: http://www.hmrc.gov.uk/statistics/income-tax-receipts/latest-stats.pdf

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Prepared 17th December 2013