Is your business prepared for HMRC’s scrutiny as their spotlight focuses on rural diversification?

HMRC is running a project to create a level playing field and has set out together with representative bodies to educate and encourage voluntary compliance from rural taxpayers to make sure that those paying less tax don’t benefit at the expense of their more diligent neighbours.

For many businesses the prospect of a visit from HMRC is a terrifying prospect. HMRC is concerned that many rural taxpayers do not understand their tax obligations and that tax declarations are being made inconsistently across the sector. However, help is at hand and these fears can be easily alleviated by speaking to a specialist tax adviser.

Penelope Lang, tax director at Smith & Williamson says; "The prospect of a Revenue enquiry may sound daunting to many businesses, but provided the business is up together, there is nothing to fear. Rural businesses need to be aware that HMRC is focusing on its affairs. Speaking to a professional will help to identify the tax implications for individual cases. After that it’s simply a matter of good housekeeping."

Penelope continues; "One of the first areas businesses need to look at is the employment of staff. Business owners need to establish whether the people working for them are self-employed or employees. HMRC are not always sympathetic where cash payments are made to people who claim to be self employed but no checks have been made to make sure this is genuinely the case."

There are certain criteria that HMRC will use when determining whether a person is an employee or self employed, and the distinction will determine who is liable to collect the tax, and the level of National Insurance Contributions.

HMRC will consider various tests such as

• Is the worker obliged to turn up when the business owner wants or when it fits in with the rest of the individual’s business activities?

• Is the business owner obliged to provide work for the individual? If it’s raining when the individual was due to paint fences, does the owner have a responsibility to find other work or will the individual simply find alternative work from someone else?

• Who bears the risk of the rain? If the individual who was to paint the fence doesn’t get paid because the fence hasn’t been painted, then he bears the risk. If the owner still has to pay him, then the owner bears all the risk.

• If the individual has an accident can he simply send someone else in to do the work?

A well run business should have the correct procedures in place when the taxman comes calling. For example, employers need to be sure the correct forms are in place for their employees from the start of the employment through to their departure from the business and for every instance in between. This includes the employment of students, annual tax and NIC deductions, year end PAYE and NIC returns, and details of benefits and expenses.

The benefits an employee receives from their employer is another area frequently reviewed by HMRC. Many businesses could potentially find themselves in hot water if they do not identify the correct treatment for the benefits they are providing.

One benefit which always needs to be thought about is employee accommodation. In this case the nature of the particular business needs to be considered carefully. If the employee is obliged to live in the property in order to do his job properly, and it is customary in that industry for people to live in a house on site, for example a stud manager, then generally the accommodation will be tax free. However, regardless of whether the accommodation is exempt or not, electricity, heating, TV licences and other expenses met by the employer will always be liable to tax and national insurance.

Where benefits are received by an employee, case law has provided that it is the extra cost of providing the benefit that is taxed. If a show-jumping trainer includes one of his employees in a class lesson, because someone else dropped out at the last minute the additional cost of giving that person a lesson is zero.