Write a tax ladvice letter to a client explaining the following details below…

DearCustomer

You asked yesterday about some subjects and I thought I would drop you a line to explain matters as far as I can at the moment.

1. Disclosure requirements for taxable income -

All taxpayers have a duty to self assess their total taxable income for each year to 5th April (after having advised HMRC by 5th October following the year that any new source has commenced). The return for the year to 5th April 2008 has to be submitted online by 31st January 2009 and if you are going to be late then it is an idea to pay sufficient tax over to HMRC before that date to minimise any interest and surcharges/penalties on any tax paid late.

If any taxpayer becomes aware that he/she has not made a full return of their income on any tax return then they must make a full disclosure to HMRC of each irregularity without undue delay. Any delay will lead to the increased likelihood of penalties being charged and also increased interest and actual penalties when matters are ultimately discovered/revealed. Also sadly HMRC have 20 years that they can go back when they discover that understatements have been either fraudulently or negligently made. Penalties for understatements of income can be up to 100% of the unpaid tax OR worse if it is fraud potential imprisonment. The tax geared penalties can be mitigated by Ful disclosure on Challenge, Full Coperation wit the HMR&C Enquiry and also depends on the size and gravity of the offences.

an updated essay on the illegal profits see HMRC Guidance manuals and the BIM references relate to the Business Income manual and the sections e.g. http://www.hmrc.gov.uk/manuals/bimmanual/BIM20100.htm relates to BIM20100

The test as to whether or not an illegal activity is assessable is as Rowlatt J summarised the issue in Mann v Nash [1932] 16TC523 at page 528:

"Is this a trade within the meaning of Income Tax Acts or is it not?"

Lord Reid in Ransom v Higgs [1974] 50TC1 at page 78I defined trade as meaning:

"..operations of a commercial character by which the trader provides to customers for reward some kind of goods or services" (see BIM20100).

In deciding whether or not an activity is a trade, you should follow the guidance at BIM20050 onwards.

There is only a limited amount of guidance from the Courts on the type of illegal activities that amount to a trade:

Smuggling alcohol for sale is a trade (Lindsay, Woodward & Hiscox v CIR [1932] 18TC43).
Operating illegal gaming machines is a trade (Mann v Nash [1932] 16TC523).
In addition there are also a number of obiter statements:

Drug dealing is a trade (Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18TC43 at page 56).
Burglary or housebreaking is not a trade (Lord Denning, in J P Harrison (Watford) Ltd v Griffiths [1962] 40TC281; Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18TC43 at page 56 and Finlay J in Southern v AB [1933] 18TC59 at page 73).
Receiving stolen goods may be a trade (Denman J in Partridge v Mallandine [1886] 2TC179).
There is little supporting reasoning to these statements, the view being expressed as if it was self-evident.

When the examples given are considered against the guidance in BIM20050 onwards, we find that the opinions expressed are in line with the general Case Law on trading. For example, Lord Denning, in J P Harrison (Watford) Ltd v Griffiths [1962] 40TC281, at page 299, considered the operations of a gang of burglars.

"take a gang of burglars. Are they engaged in trade or an adventure in the nature of trade? They have an organisation. They spend money on equipment. They acquire goods by their efforts. They sell the goods. They make a profit. What detail is lacking in their adventure? You may say it lacks legality, but it has been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the question: If it is not a trade, what is it? It is burglary, and that is all there is to say about it."

Comparing this with the badges of trade (see BIM20200 onwards) we find that:

The team is providing goods to a third party customer (the fence) - see Lord Reid's definition above.
They are seeking to make a profit by their activities - see BIM20210 for profit seeking motive.
They have an organisation and use specialised equipment - see BIM20280.
They carry out repeated operations - see BIM20235.
What is lacking is the commercial character. They do not obtain their goods by normal commercial means such as buying or growing them. As noted at BIM20315, it is difficult to argue that someone who acquires an asset as a gift or inheritance is trading when they come to sell the asset.

Similarly in Partridge v Mallandine [1886] 2TC179, Denman J suggested that someone carrying on a "systematic business of receiving stolen goods" (a "fence") would be taxable. This is entirely in line with the guidance at BIM20050 onwards. If the activity is carried out as a business it will be assessable under Case I of Schedule D. If it is not, then the transaction is not liable to Income Tax. Rowlatt J said in Ryall v Hoare [1923] 8TC521 at page 525:

" a casual profit made on an isolated purchase and sale, unless merged with similar transactions in the carrying on of a trade or business is not liable to tax."

The conclusion is that the test is simply whether the activity involves the acquisition and provision, on a commercial basis, of goods or services to a customer for reward?

Pure crime (extortion or burglary) does not involve the commercial acquisition and provision of goods or services.

Selling controlled drugs and smuggling goods for sale (as opposed to personal consumption) may well involve the commercial acquisition and provision of goods or services.

"Illegality is no bar to assessment" and it is not so much a question as to whether profits are illegal but whether the operations amount to carrying on a trade that governs the taxability of illegal profits

4. The taxation of property income - self assess on the gross rents less any allowable revenue repairs. If proerty is let furnished then can claim 10% of the gross rents instead of the actual expenses on replacements of fixtures and fittings. Costs of alteration extension or improvement of the property are not deductible in arriving at the property income profit see the link http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

5. The responsibilities of employers under the PAYE system

To fully operate and declare and pay the tax & NIC that is properly due under the PAYE regulations. See the HMRC booklet 480 which you can finsd at this link http://www.hmrc.gov.uk/guidance/480.htm

6. Penalties for getting PAYE wrong - again can be liable to penalties and you might find the attached link helpful http://www.hmrc.gov.uk/manuals/echmanual/ECH21000.htm

7. VAT penalties - again these can be either tax geared or for fraud can lead to imprisonment- you might find that the attached link will give you a head start on the new penalties regime for cases worked after 1st April 2009. http://www.hmrc.gov.uk/briefs/vat/brief1908.htm