Two Welsh sisters were recently jailed for three and a half years after attempting to defraud HMRC out of £161 million.

The Colwyn Bay women funded lavish lifestyles by making false claims to the Revenue, including a VAT repayment scam.

The women were arrested in January 2009 after HMRC launched an investigation into the recruitment business the sisters claimed to run. In fact, they had set up fictional limited companies, which they then registered for VAT purposes, simply as a means of reclaiming VAT.

In addition to the fraudulent VAT claims, the sisters received tax credits worth £120,000 over a period of 5 years. However, Revenue investigators discovered that although Roberta Vaughan Owen claimed to be self-employed, she had also been receiving incapacity benefit since 2002.

The other sister, Andrea, attempted to get bridging loans worth £751,000 by claiming she earned between £18,000 and £22,000 a month and both of the women attempted to defraud insurance companies. Their final fraudulent act came in December 2008 when they attempted to reclaim the £161 million in VAT from HMRC.

The assistant director of HMRC, Simon De Kayne, said the sisters funded their lifestyle by spinning a complex web of deceit and fraud. They carried out a variety of criminal acts culminating in the £161 million VAT scam. However, the Revenue intends to show them that crime does not pay and will take steps to relieve them of their ill-gotten gains.

He went on to explain that HMRC scrutinises claims very thoroughly and since the department implemented a new error and fraud strategy, it has stopped tax credit payments worth more than £1 billion.

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HMRC has alerted all companies and contractor accountants that are registered for VAT that important changes to the filing process will come into effect in spring 2012.

As from April first next year, all VAT returns have to be filed online and all remittances must be made electronically. Under the present regime, only companies with a turnover of more than £100,000, and those that are newly registered have to use HMRC’s online VAT filing system.

The new regime will affect all returns for VAT periods starting on the 1^st April 2012 and beyond.

The Revenue says it makes sense to switch to the online filing system now rather than get caught up in the last-minute rush. However, before any business can take advantage of the benefits of online VAT filing, they will first need to register with HMRC’s VAT Online Service.

Whilst businesses are thinking about filing their VAT returns online, contractor accountants should be concentrating on ensuring their online Self Assessment tax return is filed before the end of next month.

Taxpayers who have previously completed a paper Self Assessment return should register for online filing as soon as possible. The registration process is simple but HMRC warns that it can take up to 10 days for the Activation Code to reach taxpayers as it is sent out by post.

People who have previously used the online filing system should make sure they have not lost their login details, as they also will have to wait up to 10 days for a replacement.

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HMRC is rubbing its hands together in glee after increasing the amount it collects from its compliance work.

In the last 12 months, HMRC’s income from investigations into tax avoidance and tax evasion rose to £16.5 billion. That’s a 37% increase on the last financial year.

Accountancy firm UHY Hacker Young said the increase was a result of the taxman adopting a more aggressive approach. Enquiries into corporation tax provided the Revenue with £4.6 billion, whilst VAT inspectors brought in £6.2 billion – up 92% on the previous year.

According to UHY Hacker Young, the government believes that if it keeps on investing in tax inspectors, the extra money will continue to flood in. In reality, a lot of businesses settle up because they feel intimidated by HMRC.

Roy Maugham said the Revenue’s aggressive stance is going some way towards helping reduce the budget deficit. However, the downside of this is that the Exchequer will find it harder to work out the total cost of compliance and the UK will become a less attractive place to do business.

A lot of UK companies have already moved their headquarters overseas to countries like Ireland, Malta and Switzerland, he continued. They have done this to escape the high business taxes in the UK and HMRC’s aggressive attitude to tax collection.

The Treasury could lose out in the long run as the lost revenues from companies relocating overseas outweigh the revenue brought in from increased compliance activity, Maugham concluded.

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HMRC has reminded contractor accountants that companies have until the end of this year to register for VAT under the Revenue’s recent initiative.

The Revenue launched the VAT initiative in July. The initiative was aimed at companies that should have registered for VAT but hadn’t and it provided them with the opportunity to put their tax affairs in order. Rule breakers were given until the end of September to confirm that they would be participating in the scheme.

Since that date, the Revenue has identified some of the people who did not come forward and they could now face significantly higher penalties, and in some cases, criminal prosecution.

The VAT campaign targets companies that have an annual turnover in excess of £73,000 and have not registered with HMRC for VAT. The sectors affected include agriculture, business services, construction, horticulture, hospitality, property and retail distribution.

Firms that did register their intention to participate in the VAT initiative must complete the registration process no later than December 31^st. Once registration is complete, they will be issued with a VAT registration number and directions on completing their first VAT return. The majority of companies will face a 10% penalty charge on their underpaid VAT.

Marian Wilson, the head of campaigns at HMRC, explained that everyone needs to pay their fair share of VAT and the Revenue will be targeting those who it believes should have come forward early next year.

She went on to urge anybody who has unpaid VAT liabilities to come forward now. The penalty imposed for owning up now will still be less than if the Revenue is forced to conduct a lengthy investigation into their affairs, she added.

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The National Audit Office has praised HMRC for persuading people to file their tax returns online, but says it is not clear whether the system provides value for money.

The NAO says that more than 11.5 million people a year now use online filing. However, some users have complained about access to HMRC’s website at busy times and the Low Incomes Tax Reform Group is calling on the Revenue to offer other alternatives to people who do not have Internet access.

Online filing has reduced processing costs, as well as postal, stationery and storage costs. Cumulative savings by the end of this financial year are expected to be £220 million and the drive to persuade people to file online is on time and within budget.

However, the NAO says HMRC is not able to draw a comparison between the costs of paper and online filing. It is therefore impossible to conclude that the benefits of online filing are being maximised and the system has been successful in delivering value for money.

Robin Williamson from the LITRG said that it should not be made mandatory to use the Internet to conduct dealings with HMRC and robust, well-advertised options must be made available to people who cannot transact online.

It’s both reasonable and sensible to encourage businesses to use digital channels to communicate with the Revenue but the government department should not forget that some individuals do not have access to the Internet or the capability to cope with online filing, he added.

Some professional organisations have also questioned whether it is cost effective to file corporation tax and VAT returns online.

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HMRC has warned online accountants not to get hit by unexpected charges if they’re doing their Christmas shopping abroad.

Angela Shephard, the head of customs policy at the Revenue, explained that a lot of people go abroad to buy Christmas presents, or shop online from countries outwith the European Union, believing that the goods are cheaper. However, the price you see may not be the final price you pay.  There is a limit to the amount you can purchase abroad before becoming liable for import duty or VAT.

People arriving in the UK by commercial air or sea transport, from a country that is not part of the EU, are allowed to bring in goods to the value of £390 duty and VAT free. Alcohol, tobacco and fuel are subject to separate allowances. Individuals arriving by other means are only allowed goods valued at up to £270.

If you purchase Christmas gifts over the Internet from a non-EU country, you will be liable for VAT if the package is valued at more than £15. Customs duty may also have to be paid if the goods are valued at more than £135.

If you receive a present from a non-EU country, you will be liable for import VAT if the value of the gift exceeds £40.

Individuals can bring back as many duty and tax paid goods as they like from another EU country providing they are for their own use. However, customs officials are within their rights to ask questions if you return from France with your vehicle weighed down with beer, cigarettes, wine and spirits.

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Accountants may be interested to read the latest Office of National Statistics research concerning UK householders VAT expenditure.

The data shows that the UK’s poorest households now pay more VAT in proportion to their total income than they did twenty-five years ago, whilst in the richest households, the proportion remains the same.

In 1986, VATable items accounted for 45% of the poorest 20% of households’ weekly expenditure. By 2001/02 they were spending 58% on items that attracted VAT. That percentage has dropped slightly, but in 2009/10 they were still spending 55% of VATable items.

Over the same period, the percentage of income the richest 20% of households spent on VATable items remained virtually unchanged. The ONS research does not take into consideration the period since the VAT rate increased to 20%.

Still on the subject of VAT, employers need to be aware that changes to the VAT regulations concerning salary sacrifice come into force from the 1^st of January next year.

In the past, salary sacrifice schemes have proved popular in part because they brought with them tax advantages, such as reduced PAYE and NIC liabilities and a VAT advantage.

However, as from the start of 2012, employers who recover VAT on benefits and then pass them on to employees under a salary sacrifice arrangement will have to pay VAT on the amount sacrificed.

HMRC says that schemes such as the Cycle to Work scheme will fall under this new arrangement, as will food and catering provided by an employer. Childcare, pensions and private health insurance salary sacrifices will remain unaffected by the new regime.

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Last week protesters, including several IT contractors, gathered outside the London headquarters of HMRC to demand that Dave Hartnett, the permanent secretary for tax, resign.

A message on the UK Uncut website said the action was taken because of public outrage at the role Hartnett played in letting mega-rich corporations off paying billions they owed in tax. Examples of these let-offs include the settlements agreed with Goldman Sachs and Vodafone, both of which were multi-billion pound disputes.

Police met protesters at the main entrance to HMRC’s HQ and minor scuffles ensued. Protesters demanding the sacking of Hartnett followed Vince Cable, the business secretary, as he walked past the building.

UK Uncut says that Hartnett is a dishonest representative of a crooked system that allows the richest 1% to routinely avoid paying their fair share of taxes.

Hartnett has built up a high profile in the last few years and his reputation as the Whitehall civil servant who is most wined and dined has been linked to secret deals that let wealthy organisations off paying billions in tax.

UK Uncut estimates that £25 billion in Treasury money has been lost to tax evasion and had this money been collected, there would have been no need for the current government austerity measures.

Meanwhile, new research claims that plans to charge banks VAT would not lead to a significant increase in revenue for the government.

The study was conducted by Ben Lockwood, a professor at the University of Warwick, in conjunction with PwC. It found that the only potential increase in revenue would come from charging VAT on consumers because both EU banks and their business customers would be able to reclaim any VAT that was levied on them.

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Contractor accountants and freelancers may have been among the 1.5 million taxpayers who received penalties for late filing and payment of self-assessment tax returns after this January’s deadline.

McGrigors obtained figures under a freedom of information request that showed 10 million self-assessment returns were issued and 15% of taxpayers were hit with penalties. That represents an increase of 8% on the previous year.

Jason Collins, a tax partner at McGrigors, said that percentage is far too high. HMRC is issuing fines at a worrying rate and now they have won the right to dramatically increase the fines they impose.

The penalty for late filing is £100, so the 1.5 million fines levied after January’s deadline represent a minimum £150 million for the Treasury. However, there have also been changes to the penalty regime that mean fines could be as high as £1,500 plus 100% of the tax due.

Rebecca Benneyworth from Tolleys explained that the government is trying to make the system of penalties consistent across all the UK’s tax regimes and we are now seeing new measures put in place on the first day of April and October each year.

As well as a change in the penalty structure for self-assessment, business owners should be aware that HMRC is planning to adopt a similar approach to the late filing of VAT returns. Late filing will attract an automatic £100 fine and penalties will increase as filing and payment becomes more overdue. It has not yet been decided when to implement this regime for VAT. The earliest possible implementation date is April next year.

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Contractor accountants may get inundated with calls from private tutors and coaches after HMRC announced its latest clampdown on tax evaders.

The Tax Catch up Plan comes hot on the heels of other recent clampdowns on plumbers, medical professions and people who should have registered to pay VAT. The TCP specifically targets individuals who have not declared the income they have received from giving private lessons.

Academic tutors, as well as personal fitness coaches and dance instructors, now have until the end of March next year to declare and pay any unpaid tax for the years leading up to the fifth of April 2010.

HMRC says that anyone who comes forward by the March deadline will be unlikely to receive a penalty of more than 20% of the tax owing. However, after the deadline has passed, the Revenue will investigate the tax affairs of people who have not made a voluntary disclosure and they could face much steeper penalties. The maximum fine for tax evasion is 100% of the tax owed, and the worst case scenario could see offenders also facing criminal prosecution.

In order to take advantage of the TCP disclosure facility, tutors and coaches must register their intent with the Revenue no later than January 6th 2012. They will then have until the 31st of March to tell HMRC how much they owe, and pay it along with any penalties and interest that may be due.

HMRC has issued the following registration phone number – 0845-601-8817, which is open from 08:00 – 19:30, Monday to Friday, for people wishing to register their intent to make a full disclosure under the plan.

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The Institute of Directors has come out in favour of cash accounting for small and medium sized enterprises, saying the system more closely reflects the way non-accountants understand profit.

The OTS recently published its discussion paper about creating a simpler income system for the UK’s smallest business. In it, the Office pointed out that a lot of SMEs probably use cash accounting already, without HMRC noticing.

Some contractor accountants have squashed the proposal, saying that we are so used to accruals accounting that it would be too complicated to change to a simpler way of doing things.

Danielle Stewart, from Baker Tilly, pointed out it doesn’t make sense to switch to cash accounting because all accounting software is geared towards the accruals method.

However, Richard Baron, the head of taxation at the IoD said cash accounting is the leading option and the OTS paper is a step in the right direction. It’s nonsensical to continue the way we are going, with thousands of small business owners struggling to get to grips with the technicalities of accountancy.

We already have a cash accounting scheme in place for VAT, whereby businesses can use cash accounting if their taxable turnover is between £1.35 million and £1.6 million.

The IoD did question the suggestion that small business owners and freelancers could claim fixed allowances for expenses, such as running an office at home. The Institute felt thus could lead to large differences in the tax charged and the amount that would be due if such expenses were worked out accurately. Baron said that profits are still the most sensible basis for calculating taxation.

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I thought it worth returning to the Agency Workers Regulations again, if only because I was ever so slightly amused by the reactions of certain agencies to them. With their industry’s usual instant and carefully controlled grasp of the subject, this week contractors started getting emails and letters from some agencies about how to manage the AWR. After the act had taken effect and therefore after the point at which you should react to it for an existing engagement. Genius, isn’t it?

Anyway, as is the way of such things, the letters are asking unanswerable questions.

The first one is “Do you work through a Limited Company or an Umbrella?”. Excuse me, but why do you have to ask? You have the contract in your filing system, along with the payment terms and the pointless fourteen pieces of ID. Don’t you know who you are dealing with? Please don’t tell me you weren’t even faintly interested in the company with whom you signed the contract. Silly old me thought you were dealing with MyCo when clearly you are only interested in dealing with me personally. OK, so that explains a lot, doesn’t it? Dropped the mask ever so slightly there, Mr Agent.

Secondly, “Do you consider yourself to be in business?”. Cue raucous laughter. I have signed a contract with you in my capacity as the Director of a UK Limited Company. A contract in which there are several clauses establishing that there is no employee-like relationship intended, which directs you to pay money into a business bank account and which charges you VAT. Does that not give you a slight hint that I’m trying very hard to be a business and not a temp from Office Angels?

Finally, “Do you consider you are operating inside or outside of IR35?”. Now you really are taking the Michael. We’re using your contract. You set up the deal with the end client, you know the requirement, you know what’s in your contract with them, and you understand how the client views the relationship between me and them. So why ask me? If I am inside IR35, it’s because you put me there, not the other way round.

Ok, so the poor dears are only trying to keep their masters happy and, as usual, de-risk everything as far as they can. Since you can’t actually opt out of the AWR anyway it’s all rather pointless, but if it makes them happy. Although there may be a different slant on this.

If the agencies, on behalf of their clients – who, we must remember, are actually those stout and highly aware souls in the Human Remains department – are concerned about the people they supply being in the scope of the AWR and so able to claim all these interesting extra benefits like holidays, there is a very simple way to prevent it. If you’re in business, you’re out of scope. It says so in the AWR itself.

So, Mr Agent, let’s make sure I am genuinely in business, as best we can, so the AWR can be ignored. This means that firstly you stop the pretence that you have this vast pool of experts at your disposal and you just send a couple of the most relevant over for the client to look at. Secondly that the client will exercise no direction and control over how the work is to be performed, beyond that minimum necessary that all workers will need to follow. And finally we drop all this pseudo-employee-with-multiple-exclusions contractual nonsense and start using simple business-to-business contracts. You know, something along the lines of “YourCo will supply these skills for this period to deliver this thing for which we will pay you this amount of money, conveniently broken down into weekly payments. The End”. It really could be that simple.

Hey, look at what we just did. We killed off IR35 as well. Gosh…

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