Tax file reviews – top 5 points arising so far in 2020

We’ve always previously undertaken tax file reviews onsite – either looking at paper files (getting rarer) or having a firm’s IT team set us up with access to tax software and files on a spare computer/laptop. The 2020 lockdown has therefore challenged us to think outside of the box and it has been great to see each and every one of our tax file review clients find ways to facilitate remote access.

The Mercia review involves looking at the tax workings, the financial statements (where applicable), the final output (return or advisory report) and relevant client correspondence. Seeing the agreed engagement terms is useful as well.

Undertaking the file review debriefs virtually (usually a couple of days after the review) has meant they can be scheduled at a date and time to suit all interested parties and by screen share we can look at points arising together. By discussion we then agree the recommendations to be made and the Mercia report then follows shortly afterwards.

Having now undertaken a number of remote tax file reviews while on lockdown, we wanted to share some of the key themes arising.

• Professional Conduct in Relation to Taxation (PCRT) – with this being under the ICAEW QAD spotlight at the moment (see our separate article on tax compliance) our reviews have been considering how tax files demonstrate compliance with these professional body requirements and suggested best practice. The following are worthwhile points to consider:

Do you / does your firm:

• Undertake training in PCRT, to include the new guidance around Research and Development tax credit services?
• Have engagement terms (or other correspondence) that confirms that the firm will act in accordance with professional body ethical guidance and has authority to correct errors with HMRC?
• Have planning procedures that involve consideration of the competency of the team to undertake the required tax services?
• Stress to clients that they remain responsible for their returns?
• Undertake a minimum level of reasonableness checking before submitting returns and documents to HMRC?
• Make appropriate disclosures where HMRC will need more information that otherwise contained on a submitted return or document?
• Ensure that all tax planning is:
  • Client specific;
  • Lawful;
  • Not contrary to the clear intention of Parliament in enacting relevant legislation;
  • Not highly controversial or highly contrived; and
  • Documented to includes notes of any areas where professional judgement has been applied?

The above is by no means a complete list of considerations when working under PCRT (or even a list of mandatory areas) but these have been the basis of the conversations we’ve been having this year.

• Corporation tax losses – we’d recommend keeping an eye on the documentation on returns and client correspondence around corporate losses. We saw the rules for carried forward losses of companies change substantially in Finance (No 2) Act 2017 and the post 1 April 2017 rules are still not always properly described. Tax software is certainly the accountants’ friend in this regard but, of course, the tax advisor must understand what the software is doing.
• Plant and machinery capital allowances – it is important to document the tax review of new capital expenditure and claim plant and machinery allowances where available. A couple of specifics to jog memories:

• Expenditure on kitchens and bathrooms can constitute fixtures and therefore plant and machinery
• Décor can be difficult but if it is creating an ambience, a claim may be possible.
• Loans to participators – A couple of practical reminders on this topic:

• The definition of a participator is wider than just the directors of a company. So, if a shareholder owes the company money, s455 Corporation Tax Act 2010 could be in point.
• Even if a loan to a participator is repaid to a company within 9 months of the year end, disclosures should be made on form CT600A.
• Deferred tax – until Finance Act 2020 was substantively enacted on 17 July 2020 the rate of corporation tax at which timing differences could be expected to reverse would be based on the rate for Financial Year 2020 previously set by section 46 of Finance Act 2016, namely 17%. We should only revert to providing for timing differences reversing after 1 April 2020 at 19% (per Finance Act 2020) for balance sheet dates of 17 July 2020 or later.

Of course, a wider range of technical areas have been looked at and discussed in our reviews but the above are points that have arisen in a number of cases and so a useful reminder for all.

Our reviewers are now looking forward to reviewing 31 March 2020 year ends and onwards as accounts are prepared and returns are filed containing the various COVID-19 support packages. We’ll report back on this and other topical areas later this year.

To see more about our tax file reviews, please see this webpage or contact us on 0330 058 7141 or by way of our online enquiry form.  Mercia members with “technical support days” in their package are able to use their support day entitlements to receive tax file reviews.