Self Assessment:- Beware the Taxman!

June 10th, 2010

The last year has seen radical changes to the rules on tax penalties and time limits with the latest rules coming into force on the 1 April 2010 – One of the key changes is a new “inaccuracy penalty” for those who have submitted incorrect returns and cannot demonstrate they have taken care to get their tax right.

For those who are required to submit a self-assessment return to HM Revenue & Customs the 31 October submission deadline (for paper returns) may seem a long way off but, in reality, some people will need to start putting their affairs in order now to be ready to meet this deadline.

Given these changes we felt it would be useful to explain who needs to complete a self-assessment return, the recent changes in respect of the taxman’s powers, and what records you need to keep if you are required to complete a self-assessment return.

Who needs to complete a tax return?

For those of us who are employed and pay tax on our earnings through PAYE (Pay As You Earn) a self-assessment return will not usually be required, although if your tax affairs are more complicated HM Revenue & Customs may need you to make a submission.   Some of the most common reasons why you may need to complete a tax return are:-

  • You are self-employed
  • You are a company director (unless you are the director of a non-profit organisation and receive no payments or benefits)
  • Your annual income is £100,000 or more
  • You have income above a certain level from savings or investments (for example, if you have more than £10,000 income from savings, investments, or property (before deductions))
  • You have Capital Gains Tax to pay
  • You have income from overseas
  • You have lived or worked abroad, or are not domiciled in the UK
  • You are a Trustee
  • You are the executor of a deceased persons estate
  • You have tax to pay that cannot be collected through you tax code.

This list is not a detailed summary although you may be surprised at some of the instances in which a submission would be required.

If I am required to complete a tax return, what records will I need to keep?

It is impossible to cover everything in a short article but we have briefly summarised what records you may need to retain.

Income from Employment

P60     This shows your total pay and tax details for the tax year
P11D     This form records all details of taxable ‘benefits in kind’ and expenses  (for
example,  company cars, private health insurance)
P45    If you have left a job this shows your pay and the tax you have paid up to the date of leaving

In addition you will also need to retain records of any other income or benefits from your employment that are not covered by the above documents (e.g. – tips/gratuities).   Other records you should keep are:-

State Benefits

Any documentation quantifying benefits such as Statutory Sick Pay, Statutory Maternity Pay, Jobseekers Allowance that you have received

Savings/Investment Income

Bank/Building society statements (for details of interest received)
Tax deduction certificates received from your Bank
Dividend vouchers received from UK companies
Unit Trust Tax Vouchers
Life Insurance Chargeable Event certificates (e.g. – for gains made on Investment Bonds)

Share Option Schemes

Copies of share option certificates / exercise notices
Details of amounts paid for shares

Rental Income

Proof of rents received and any expenses incurred with the property letting

Overseas Income/Gains

Evidence of income from overseas employment
Dividend certificates in respect of shares in overseas companies
Certificates/evidence of any tax paid overseas

Income from Self employment

Generally speaking you will need to keep records of all your sales,  takings, expenses and purchases.    The following list gives some specific examples , although all businesses are different

Cash book
Wages book
Invoices and receipts issued
Bank statements / passbooks / cheque stubs
Electronic records of sales
Details of any money withdrawn from the business for personal use

Again, this is not an exhaustive list but should give you an idea of the information you may need and the documentation you would need to keep.

What are the deadlines for submission of tax returns and payment of tax?

As mentioned earlier, the deadline for paper tax returns to be submitted is 31st October after the tax year for which you are submitting a return, although tax returns can be submitted online until 31 January. This means, for example, the latest you can submit a return for tax year ending 6 April 2010 is usually 31st January 2011.

In respect of Capital Gains on which tax is due, if you don’t automatically receive a tax return you will need to write to your local tax office with the details before 5th October after the end of the tax year in which the gain was made.  They will then decide if you need to complete a full self assessment return.

It is also important to remember that the deadline for payment of the tax itself is 31 January following the tax year in question regardless of whether you opted for a paper or online submission.  Self employed individuals will also usually have to make interim “payments on account”

Where a submission is received after the final 31 January deadline there is an automatic penalty of £100 and, where payment is outstanding, interest will accrue from 31 January until the payment is made.  There may also be surcharges of 5% of the outstanding amount levied if tax remains unpaid by the end of February and again if payment is not received by the end of July.

You mentioned the rules regarding tax penalties and time limits have been changed recently.  What are the key changes?

The main change is that the taxman used to have a right to go back up to 20 years to collect any underpaid tax if he could show you had been “negligent” in dealing with your tax affairs – This time limit has now been removed and he can only go back up to 6 years (and only 4 if he can’t prove you didn’t take “reasonable care”).

So the reduced time limits are good news, surely?  Well, yes but it is also becoming apparent that, even in cases where there has been a simple mistake made over a number of years, HM Revenue & Customs are becoming more aggressive in trying  to claim you have not taken reasonable care over your affairs.  This again stresses the need for individuals to keep good records as the burden of proof is with the taxman and good records are evidence themselves of “reasonable care”.  In addition, taking reasonable care also means

  • Checking with HM Revenue & Customs what the correct position is when you don’t understand something
  • Informing HM Revenue & Customs immediately if you discover an error or omission in a tax return you have submitted

For completeness it should also be clarified that where there has been a deliberate evasion of tax the taxman still has the right to go back over 20 years.

Unfortunately, there is also a bit of bad news.  A new “inaccuracy penalty” was introduced with effect from 1 April 2009 (initially covering taxes such as income tax, capital gains tax, PAYE, and National Insurance) which increased  the penalties for those who had submitted incorrect returns and could not demonstrate they had taken “reasonable care”. The penalties are broadly as follows

  • Up to 30% of the additional tax due if the inaccuracy is careless
  • Up to 70% of the additional tax due if the inaccuracy is deliberate
  • Up to 100% of the additional tax due if the inaccuracy is deliberate and the person tried to conceal it

Even if an incorrect tax return is submitted there is no penalty if the person can demonstrate they took reasonable care to get their tax right.

Summary

Self-Assessment can be a daunting task, particularly where you do not ordinarily need to submit a return to the taxman but are required to do so due to one-off events such as a large capital gain, or windfall payment.    It is always advisable, therefore, to ensure you safely file away any documentation issued to you in respect of things like investment gains and income so that in the event you are required to complete a tax return that this information is readily available.