Tax man set to reclaim £500 from small companies

HM Revenue & Customs (HMRC) may claw back £500 from thousands of small companies that have filed their PAYE returns on line, PKF Accountants & business advisers have warned. The move is a further blow to the relationship between the Treasury and small business.

HMRC has announced that, on "legal advice", it has re-interpreted the anti-avoidance provisions on cash incentives given to employers that file their PAYE returns online. The wording of the HMRC notice suggests that small businesses that have filed online in good faith stand to lose up to £500 for returns they have already submitted and a further £325 for filing their PAYE returns online up to 2010*.

The change could hit thousands of small companies that have struggled with HMRC's online return systems believing that the incentive payments would offset some of their administration costs.

The anti-avoidance rules were introduced in March 2005 to prevent businesses splitting up into a number of small employers to make multiple claims for the £250 incentive payments. In its original guidance on the rules, HMRC stated that it would not deny companies the payments where the business had been incorporated to take advantage of other tax breaks, for example, where the directors take dividend payments instead of salary to reduce NIC costs.

However, yesterday it announced that it would now be interpreting the rules strictly and that it would deny the payments to any company where it considers that the company was formed to obtain "an advantage in relation to income tax, corporation tax or national insurance contributions".

Peter Penneycard, National Director of Tax at PKF accountants and business advisers said, "The way this announcement is worded, stating that HMRC 'will withdraw or prevent payment' of the incentive, suggests that payments already made will be clawed back'.

"In the Pre-Budget Report the Treasury announced that it would continue to look for ways to attack 'tax-motivated incorporation' by small businesses but few expected such a retrospective and petty attack on small companies who are simply using the tax law to their advantage.

"If the Government does not like the tax laws that govern small companies then it should change them – not make petty attacks that move the goalposts after the match has started. Few small business trust HMRC as it is: this sort of announcement is hardly likely to encourage them to cooperate with HMRC in the future."

* The PAYE online filing incentives for employers with less that 50 employees are as follows:

£250 for filing online for 2004-05
£250 for filing online for 2005-06
£150 for filing online for 2006-07
£100 for filing online for 2007-08
£75 for filing online for 2008-09