This section deals with some topical issues on personal self assessment : consideration
Filing and payment dates
31st October date
Interest on overpayments and charges for late payment
New basis for taxing business profits
Company matters are noted under corporation tax.
Profits and losses are now to be calculated, broadly speaking, on the same basis as a trade. This has eased the manner in which expenses are deducted although receipt of property income is still not defined as a full "trade" unless the property is rented out as a qualifying "Furnished Holiday Let" ["FHL"].
FHL properties have greater tax advantages but, to qualify as a FHL, the property must first fulfil certain conditions. The property must be:
> in the EU
> let on a commercial basis with the expectation of making a profit in a reasonable time frame
> fully furnished
> available for holiday letting to the public for at least 140 days a year
> actually let as a holiday let for at least 70 days a year (and these must be commercial lets not at cheap rates e.g. to friends and family)
> the holiday lets must be short term not more than 31 days
> not let to the same person for more than 31 days in the year.
> over a period of at least seven months.
> If you meet all the qualifying conditions in the seven month test period there are no restrictions on longer lets in the remaining five months of the year. Such longer lets would not, of course, count as holiday lets.
> The tax incentives cannot be claimed when the accommodation is used by the owner(s) or during times when the property is not available for letting.
As a good guide we recommend all landlords become familiar with the HMRC Property Income Manual available from the HMRC website here ..... www.hmrc.gov.uk for more information.
Personal tax filing & payment dates
Any HMRC issued self assessment tax return must be filed, fully accurate and complete, by 31st January following the tax year in question IF filed electronically online. If filed in papar form the Return must be in the hands of the Revenue by 31st October following the year in question. NOTE THAT ANY RETURN FILED ON PAPER CANNOT BE WITHDRAWN. If you file on paper but file late you cannot then withdraw that form in expectation of filing online before 31st January.
All liabilities are due by the same date, 31st January after the end of the tax year. "Interim payments" (sometimes referred to as "Payments On Account" or POA) are due beforehand on most taxable amounts as the tax year progresses unless the total bill for the previous year was less than £500.
POA are not due on Capital Gains. The tax on such gains is due in one sum on the final due date, i.e. 31st January following the end of the tax year in which the gain arose.
Typically, tax will be due as follows :
31st January in the tax year - first POA, equivalent to 50% of previous year's bill.
31st July following the year - second POA, equivalent to 50% of previous year's bill.
31st January following the year - final "top up" payment must be made, if any is due.
Some important matters that need to be remembered -
The "top up" sum will usually be due if the POA amounts were insufficient to cover the entire tax bill for the year. For example, where the year's taxable amounts are higher than those for the year before.
New and expanding business will need to plan for "top up " payments (particularly if businesses are on rising profits).
The "top up" is payable at the same time as the first POA for the current year. This can be a particularly large drain on finances if proper planning is not undertaken.
WARNING IF YOU ARE NEWLY SELF EMPLOYED - New businesses will not have any "previous year" tax bill. POA are therefore not payable in the first tax year. All liabilities for this first year will be due in one sum on the relevant final due* date together with the first POA for year two. This is a relatively enormous amount and must always be considered most carefully by new businesses.
The importance of proper planning here cannot be over emphasised.
31st October date
Inland Revenue will always calculate liabilities. If a completed Tax Return reaches the Revenue by 31st October following the tax year end a calculation is guaranteed to be issued before the final payment date of 31st January. A correct payment can therefore be made on time and without the fear of interest/surcharges/penalties on this sum. This is of help to all who complete their own Returns.
However, if a Return is submitted after 31st October it must be filed online.
This is where self assessment comes in. To avoid any interest etc. on late payment it is up to each taxpayer to make their own calculation/estimate of the final amount due and send payment voluntarily without any prompting. If the true calculation, when finally issued, reveals a higher liability then there is a real possibility of interest etc. being charged.
It is vital that any and due all payments are made on time. For those filing their own Returns after 31st October without professional help this often causes great difficulties.
Interest on overpayments and charges for late payment
Self assesment causes the Revenue to behave in similar manner to a bank.Underpayments (indicating an "overdrawn account") suffer interest charges and overpayments, showing the account to be in credit, will benefit from interest added.
However, a much higher rate of interest will be charged on underpayments than will be awarded on credit balances and the rates will change from time to time as the Revenue align rates with those used by mainstream commercial organisations.
"Statements" are issued periodically by HMRC to enable taxpayers to see that tax debts and payments are registered correctly. Penalties, surcharges and all debit/credit interest amounts are also shown on these statements. Much adverse criticism has been made of these statements (poorly designed, bad layout, almost incomprehensible to follow etc.) as a result of which the forms are subject to ongoing re-design/improvement. Indeed, the same can be said of the entire self assessment system itself. All aspects of the scheme are continually monitored for improvement and any constructive suggestions for change would be welcomed by the Revenue.
Failure to meet any of the statutory deadlines could mean the incurrance of various fines etc. all of which will suffer interest charges if not paid immediately.
Penalties >> Following a lenghty review a new system of HMRC powers and penalties was introduced from 1st April 2009. The comments below concern general, continuing, fines & penalties.
Late submission of completed Tax Return, i.e. after relevant dates indicated above, will trigger a £100 flat fine. If still not submitted 6 months later another £100 fine is added to the "account". These fines can be cancelled if good reason can be given for the delay and.
Following consultation between the Revenue and magistrates' representatives new procedures have been instigated which grant tax collectors greater and easier access to courts. Outstanding debts will therefore be, apparently, much easier for the government to collect. Extended powers will mean employers will also suffer the threat of a prompt magistrate's warrant if any usual monthly payment is late.
Any liability unpaid 28 days after it is due may suffer a 5% surcharge. If still unpaid 6 months later another 5% surcharge is added. These charges will carry interest if unpaid for any length of time.
All financial records must be retained for one year, ten months from the end of the tax year in question to enable figures on a self assessed return to be proven correct. Furthermore, records of business accounts and property lettings must be kept for five years, ten months from that date.
Failure to comply can mean fines of anything up to £3,000 for each tax year involved.
Under the new HMRC penalty system fines can be varied, very draconian and, in some cases, can be calculated as a multiple of the tax in question AND/OR hefty daily fines can be imposed.
Self assessment basis for taxing business profits
Prior to self assessment income tax was charged on the profits of the accounts ended in the previous tax year.
For 1997/98 onwards, however, unincorporated businesses are, in general, taxed on profits shown by the accounts ending in the tax year. For example, the entire profits shown in accounts to 30th April 2011 are taxed in the 2011/2012 year.
Also "capital allowances" (granted for depreciation of business assets) are a deduction in arriving at the taxable profits. The importance of this may not be fully appreciated but can have a marked effect on planning to minimise tax liabilities.
There are many special rules for new or ceasing businesses, Lloyds underwriters, partnerships and other special situations.
The advent of self assessment brought a fundamental change to the taxation of partnerships.
Unlike the previous situation (profits taxed on partnership as a whole, each partner being potentially liable for unpaid tax of other partners etc.) each partner is deemed to be carrying on a separate/distinct trade. Each partner is therefore required to file details of their own share of taxable profits and will receive individual bills. Members will not now be required to meet the unpaid tax debts of their Partners.
Due to the interaction of these special partnership rules and other aspects of self assessment partners must take steps to ensure adequate funds are available to meet liabilities when needed. This is particularly so on the termination of business when someone may be faced with bills for huge amounts.
Again, here we recommend effective planning especially in the area of partnership changes. Changing the date of arrival/departure of partners can have a dramatic effect on the resulting liabilities.
An enquiry will typically involve one or two minor questions into the Return. Such questions will usually be clearly stated and refer to specific items. For example, "Please provide a breakdown of the dividends total of £(X) shown on your Return".
An investigation, however, is in more depth and can involve the provision of not only explanations but also all relevant documents.
For the purposes of this section, however, no distinction is made as the procedural rules for both are the same.
The Revenue has, usually, one year from the filing date to raise any queries into the figures. This will be extended if a Return is late or certain other conditions apply.
If no enquiries are made in the time the Return will stand unchanged unless some form of fraud, neglect or other default is subsequently discovered.
However, the new system of powers are very weighted in favour of the Revenue. Even up to the point of instant/random/unnotified access to buisness premises. Great care must be taken when dealing with enquiries and investigation under this new system. The legal apsects require careful handling.
As there is no requirement to send any other data apart from the Return itself "discovery" must be carefully avoided. It is wise to ensure all information is given to HMRC if there is any doubt about the correctness of declarations. It is also recommended all business, property letting etc. accounts be submitted with reference to any contentious issues.
Powers also exist allowing the Revenue to ask questions about claims/declarations sent in separately from the Return and the Revenue can demand to see documents relevant to the enquiries. They may even ask to see documents which you may feel are irrelevant to their enquiries but they may think otherwise.
Although appeals can be made against some demands for documents it is important to remember that paperwork needs to be kept in order.
There will always be disruption to personal and professional activities in handling these matters, especially full investigations, and frequently professional costs can be heavy. If no further profits are found after enquiry/investigation is concluded, the Revenue has announced that accountancy and other advisory costs will be tax deductible. However, where additional profits come to light no such deduction is permitted.