Tag Archives: self assessment

Making Tax Digital: Bringing business tax into the digital age

Leave a reply

MTD

HMRC want businesses (including property rental businesses) to submit accounting records quarterly with a post year-end submission which reconciles to the annual accounts.

The Current Position

At present HMRC receive accounting information annually through the tax compliance process. This is either through the partnership tax return, an individual’s tax return or attached to a corporation tax return. HMRC do not have a feel for levels of income and expenses, and therefore tax receipts until these are submitted.

The tax return filing window for the unincorporated business opens on 6 April and closes on 31 January. A considerable percentage of filings are made in the last two months of the window and therefore it is not until nine or ten months after the end of the tax year do HMRC gain a reasonable view on profitability and therefore the quantum of income tax receipts that they can expect.

Although the largest corporate taxpayer pays tax on account during their year, the vast majority of companies pay tax nine months after the end of their accounting period. The tax return filing deadline for all companies is 12 months after the end of their year ends. As with income tax this makes it difficult for HMRC to project tax receipts.

Proposals

HMRC believe that the vast majority of taxpayers already have digital interactions with HMRC. All companies are required to interact digitally and the consultation document estimates that 92% of unincorporated businesses use the internet and digital tools. HMRC therefore believe that all sole traders, partners in partnership, landlords whose annual income is in excess of £10,000 and companies should therefore be subject to the requirement for digital interactions.

Quarterly reporting

The proposal is that these parties produce quarterly reports which provide accounting information to HMRC. Within nine months of the end of the accounting period a final report is submitted which adjusts the previous reports to reflect year end matters, such as accruals. From HMRC’s perspective this allows for a better understanding of UK profit flows and therefore a better understanding of tax receipts.

The consultation is at pains to highlight that quarterly reporting will be for the benefit of taxpayers. It states that the taxpayer will “be able to view an up to date picture of their tax affairs, providing greater certainty about tax due and entitlements …. and this will …. help businesses manage their affairs effectively and to understand their tax position more easily.

Many businesses have told us they want more certainty over their tax bill and don’t want to wait until the end of the tax year, or often longer, to find out how much they have to pay”.

The proposals are that the reporting will commence from 2018 for unincorporated businesses and companies will be required to report quarterly from 2019.

Concerns

The concerns already identified are:

  • Businesses already employ advisers to identify potential liabilities in advance of payment dates. HMRC’s perceived benefit to taxpayers is therefore illusionary.
  • Unincorporated businesses do not necessarily have an obligation to interact with HMRC electronically as they can file income tax returns in paper form. Why should those businesses be forced to convert to electronic submissions?
  • Some taxpayers do not need advance forecasting of liabilities. If the primary benefit of quarterly reporting is for the taxpayer then those taxpayers who do not want this benefit should be able to elect out of quarterly reporting.
  • It is unusual for business profits to accrue even over the four quarters and therefore the belief that tax liabilities can be identified throughout the year is not correct.
  • There is no legal requirement for quarterly accounts to be prepared and therefore why should a business incur costs for HMRC filings?
  • HMRC have already confirmed that they will not be providing the necessary software for interactions. If this remains the case then how can HMRC guarantee that developers will issue free software? Who will pay for the costs of developing and maintaining software required to produce quarterly accounts or the software to make submissions?
  • The quarterly filing dates may not be co-terminous with the VAT filing dates. Should they be aligned?
  • The consultation assumes that discretionary (often year-end) matters such as bonus posts are already known in advance. This is simply not the case.
  • The proposals are a “big-bang” change in process. Why will HMRC not have a period of piloting the proposals with a sample group of taxpayers?
  • Incorporated businesses have a greater degree of interaction with HMRC than unincorporated businesses. Why are the proposals suggesting that the order of implementation is the other way round?
  • The consultation document suggests that the changes will reduce the tax gap and contribute £945m to the Exchequer by 2020/2021. Many believe that this is the real reason that HMRC are pressing ahead with these proposals. If this is the case then it is inaccurate for HMRC to sell this process as being for the benefit of the taxpayer. Again those taxpayers who do not wish to reap this benefit should be able to elect out of it.

Summary of Consultation Questions

Acquiring Digital Tools

  • Question 1: What are the challenges for businesses that currently keep their records on paper or simple spreadsheets in moving to an integrated software package for record keeping, and what further measures or support would help businesses to meet these challenges?
  • Question 2: What information and guidance would you find helpful in choosing the appropriate software for your business?
  • Question 3: What types of business should a free software product cater for? What functionality would be necessary in a free software product?
  • Question 4: What level of financial support might it be reasonable for the government to provide towards investing in new IT, software or training, to whom should such support be aimed, and what is the most appropriate form for delivering such support?
  • Question 5: What other forms of support would help to make the transition to Making Tax Digital easier?
  • Question 6: What facilities would make it easier and more secure for businesses to enrol for Making Tax Digital and use software regularly?

Digital record keeping

  • Question 7: Do you have any comments about the practicalities of keeping evidence of transactions and trading when using digital tools?
  • Question 8: Do you agree with the minimum transaction data fields proposed for trading businesses, including retailers? What other data fields might the record keeping software usefully include as a minimum?
  • Question 9: Do you have any comments about reflecting the current VAT requirements in MTD-compatible software?
  • Question 10: Do you have any comments on the additional data capture requirements for property income and capital gains?
  • Question 11: What should the minimum categorisation in the software be? Would additional sub-categories be useful?
  • Question 12: Do you have any comments on how businesses should reflect transactions and expenditure with non-deductible elements in the software?
  • Question 13: What prompts and nudges would be most useful to businesses?

Establishing taxable profit

  • Question 14: Do you agree that businesses should have the choice as to when to record accounting adjustments?
  • Question 15: Do you agree that business should have the flexibility to reflect reliefs and allowances when they choose?
  • Question 16: What do you consider is the most appropriate approach to reflecting the effect of the personal allowance on an individual’s taxable business profit?
  • Question 17: Is this the right treatment of partnerships? Are there any additional partnership issues that need to be considered?
  • Question 18: Is this the right treatment of individuals who receive income from property, let jointly?
  • Question 19: Is this the right treatment of subcontractors within the Construction Industry Scheme? Are there any other CIS issues that need to be considered?

Providing HMRC with updates

  • Question 20: Do you have views on how detailed the summary data in the updates should be, and whether the level of summary data should be different depending on the size of the business?
  • Question 21: Do you have any comments on the categorisation of summary data in the updates?
  • Question 22: Do you have any views on what VAT data the updates should contain? Do you have any views on the advantages or disadvantages of including VAT scheme data in the updates? If so, which schemes and which data should be included in the updates?
  • Question 23: What flexibility around update cycles would be useful?
  • Question 24: Do you agree businesses should be allowed one month to submit their update? Would any problems be caused for VAT registered businesses by standardising the time limit for updates for all taxes?
  • Question 25: What method of deriving a business’s start date for providing updates under Making Tax Digital would be most straightforward for businesses?
  • Question 26: Do you wish to make any comments about the operation of ‘in-year’ amendments to updates for the purposes of profits taxes or VAT?

‘End of Year’ Activity

  • Question 27: Do you agree that the process of finalising the regular updates should be separate to the regular updates?
  • Question 28: Do you agree that businesses should have nine months to complete any End of Year activity?

Exemptions

  • Question 29: What criteria should be applied in determining whether to exempt a particular business or business type from the requirements of MTD?
  • Question 30: Should charities be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?
  • Question 31: Should trading subsidiaries of charities be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
  • Question 32: Should CASCs be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
  • Question 33: Should businesses within the insolvency process be included within the scope of the requirement to maintain digital records and to update HMRC at least quarterly; and are any special arrangements required for this group?
  • Question 34: Which businesses should be included within a consistent definition of persons ‘unable to engage digitally’?
  • Question 35: Do you agree that £10,000 annual income is an appropriate threshold for exempting businesses from Making Tax Digital? Do you have any other comments on how the exemption should operate?
  • Question 36: Should the smallest unincorporated businesses that are not exempt have an extra year to prepare for Making Tax Digital? How should eligibility for this group be defined?
  • Question 37: Do you agree that the principles set out in Fig. 7.3 are the right ones to use in determining eligibility for an exemption? Are there any additional principles which should apply?
  • Question 38: Which additional groups (if any) should be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?

Initial Assessment of Impacts

  • Question 39: Do you believe that there is the opportunity for MTD to create savings for your business? What percentage time reductions would you see from the following?
    a) Targeted software tax guidance (prompts and nudges to get information right first time).
    b) Gathering, collating and inputting data.
    c) Reporting obligations through providing regular updates.
    d) Any other potential savings not covered above.
  • Question 40: Do you think there are different business sectors or sizes likely to benefit more from MTD? If so, what would these be?
  • Question 41: What costs might you expect your business to incur in moving to the new regime? Please provide details of the costs for:
    a) Time spent in your business familiarising with the new processes and conversion to these new processes.
    b) Software expenditure costs (new or upgrading software).
    c) Hardware expenditure costs (purchase of a computer, tablet device, etc).
    d) Any other costs which are not covered above.
  • Question 42: Do you expect that your business will incur additional on-going costs as a result of these changes? Please provide the details of the additional costs or time for:
    a) Additional support from your accountant or tax agent.
    b) Additional time spent gathering, collating and inputting data.
    c) Additional time reporting obligations through providing regular updates and any end of year activity.
    d) Any other costs or time spent not covered above.
  • Question 43: Will particular businesses (e.g. partnerships) experience more difficulty in adapting to the changes? If so, please provide details, including any additional one off costs or ongoing costs.
  • Question 44: If you are an agent, please provide details of how these changes will impact on your own business, including details of any one-off and ongoing costs or savings. How do you perceive that these changes might affect your clients?

What do you think?

We will be responding to HMRC’s consultation and making representations on our clients behalf so please let us have your views by emailing MTD@goodmanjones.com.

Other areas covered by the consultation

This is only one part of the consultation.  See summaries of the other areas here.

 

Will automatic penalties be a thing of the past?

Leave a reply

I understand that just under 900,000 people missed the most recent income tax filing deadline of 31 January 2015. HMRC have announced that it is too costly to investigate reasons for missing Self-Assessment deadlines and that the £100 fine should therefore be cancelled if a reasonable excuse is given for cases under appeal.  HMRC have indicated that this move is to allow them to focus more of their resources on tax avoidance and evasion rather than penalising large numbers of “ordinary people who are trying to do the right thing”.

HMRC then go on to point out that this is “part of our planned, proportionate approach to penalty appeals, particularly for small businesses and individuals”.  Going forward HMRC intend to amend their systems so that they will be able to track patterns of behaviour and focus on those who persistently fail to pay or send their tax returns on time.

According to The Daily Telegraph, those people who fail to file their tax returns on time will escape a fine providing they have a reasonable excuse for being late which shows mitigating circumstances.  There is suggestion that a reasonable excuse is one which is outside the control of the taxpayer and which stops them meeting a tax obligation.  It is reasonable to assume that these excuses would include death of a loved one, an unexpected medical condition or a fire.

This announcement is welcome. A recent article in the tax professional press re-enforces the frustrations that tax practitioners face when dealing with the Revenue administrative machinery.  In the case the article covered HMRC were seeking to penalise a community amateur sports club with a penalty of £1,278 and were not willing to back down. At the last minute they finally acknowledged that the club’s advice had been correct and the penalty was invalid.  This was 3 days before a case management hearing.

I have also had the experience of HMRC’s bureaucracy machine being unwilling to back down.  My client’s affairs were always up-to-date and he did not owe any tax.  Due to a computer failing HMRC’s computer repaid almost £4k to my client which was not due to him.  He immediately, and voluntarily, repaid it.  This led to the Revenue issuing penalties and interest on the taxpayer.  Initially HMRC would not back down about those charges.  After many months and different individuals at HMRC being involved, they accepted their error and revoked all but a small part of the penalty.  Even while the matters were under discussion, HMRC’s computer automatically referred the disputed sum to external debt collectors.  HMRC informed us that this was standard practice and also informed us that they could not dis-instruct the debt collectors until such time as the Revenue’s computer showed the amounts being paid or waived.  We finally got the agreement of all amounts to be waived with the exception of a very small sum which would have to be argued with a different team.  That small sum was paid.  This was not because it was necessarily due but rather to close the case.  You can imagine that it was stressful for the client and a waste of both mine and HMRC’s time.

One would like to think that HMRC’s review of the automatic penalty regime would be expanded into other penalty provisions to help prevent the repeat of cases like those above. However given the importance of patterns of behaviour I shall still be encouraging my clients to meet all their deadlines.

High Income Child Benefit Charge

Leave a reply

Over the last month, HM Revenue and Customs (HMRC) have been writing to higher rate taxpayers to remind them that if their income is over £50,000 and they or their partner received Child Benefit in 2012/13 they will need to complete a tax return for the 2012/13 year. With the 31 January 2014 deadline looming we are all now becoming acutely aware of the problems and pitfalls in reporting Child Benefit.

The High Income Child Benefit  Charge (HICBC) starts to kick in on income over £50,000 and it effectively ‘claws back’ 1% of the child benefit for every 100 your income exceeds this threshold. So if you earn over £60,000 the charge becomes equal to the amount of child benefit received. The charge is disclosed on your self assessment tax return – which means anyone not issued with a return had to register by 5 October this year. The option to opt out of receiving child benefit was available however many inevitably missed this deadline and now find themselves caught in the cycle of self assessment.

This has been a popular issue for commentators since its introduction on 7 January 2013, with many describing the unfairness with the example of a couple both earning £49,950 keeping their Child Benefit, whilst a single earner on £50,500 starting to lose it.

However, it is not just the monetary charge itself that is causing issues; there are also more practical concerns to consider:

Because the child benefit charge needs to be declared on the tax return of the higher earner, the ethos of ‘self-assessment’ comes into question. For couples who do not readily share their financial details there is a problem in accurately completing their tax returns. This will be particularly noticeable if the income of one partner fluctuates year on year.

HMRC defines a ‘partner’ as a person you are married to and living with or a person you are living with as if you are married. Therefore, you may be liable to the child benefit charge for a child who is not your own.
After weighing up all the facts you may just decide to cancel the payments to avoid the extra administrative burden. However even in this scenario there are consequences. If you cancel your child benefit payments but your partner does not work they could lose their entitlement to state pension benefits.

If there are any issues above that you wish to discuss further, please do not hesitate to contact one of the tax team at Goodman Jones.

The Entertainment Industry – National Insurance

Leave a reply

Many people will be familiar with the basic difference between the National Insurance paid by employees (Class 1 National Insurance Contributions), and that paid by self-employed individuals (Class 2 and Class 4 NICs).

However, this distinction is blurred when it comes to our clients who are actors, dancers and other entertainers. They may be treated as self-employed for tax purposes, but at the same time they are deemed to be employees for National Insurance purposes.

The impact of this is that most individuals working in the entertainment industry will pay employees’ NICs at source on self-employment income. The entertainer is therefore in the unenviable position of having to pay Class 1, 2 and 4 NICs, with the result that they end up overpaying National Insurance.

The solution is to make an adjustment to the profits chargeable to Class 4 NICs on the Self-Assessment tax return. This adjustment ensures the individual does not overpay National Insurance, or suffer both Class 1 and 4 NICs on the same income.

The problem is that it is easy to forget to make the adjustment. It is also possible to claim the adjustment in the wrong box of the return, or to inadvertently make an incorrect adjustment. All of these things can increase the risk of an enquiry into the return by HM Revenue & Customs.

In summary, if you feel there is a risk that you might overpay National Insurance, you should seek specialist advice to ensure your return is completed correctly.

Five good reasons why you shouldn’t delay submitting your tax return….

Leave a reply

A press release issued by HM Revenue & Customs (HMRC) has confirmed that over half a million taxpayers submitted their 2011/12 tax returns online on the 31 January 2013, making the 31 January filing deadline the busiest day for the submission of returns.

As the 2012/13 tax year ends, HMRC will shortly start issuing tax returns to those within Self-Assessment.  HMRC’s statistics indicate that for many the completion of their return will be a low priority at this time, but there are genuine advantages to completing your tax return early.

1.    Receive your repayment as early as possible

Where a tax return shows a repayment is due, the repayment will only be issued once the return has been processed.  Therefore, any delay in the submission of the return will result in a delay in receiving the repayment.

2.    Make a reduced payment on account in July

In some cases a repayment is due where too much tax has been paid on account in the year.  One option is to complete your tax return before the second payment on account falls due on 31 July 2013.  This may enable you to make a reduced payment at that time.

3.    Spread collection of your tax liability over the next tax year, avoiding a lump sum payment in January

Where a return shows a tax liability of £3,000 or less, it may be possible for payment to be collected via your PAYE code.  Collection is spread over the course of a tax year, and no payment is required by 31 January.  However, the return must be filed online by Christmas for the liability to be ‘coded out’.

4.    Budget for any tax liabilities

The main danger in delaying the submission of your return is that you may face an unexpected tax liability.  If this happens, it is possible to agree a payment plan with HMRC, but the plan needs to be agreed before the 31 January payment deadline.  Leaving the completion of your return until the last minute gives you little scope to put an agreement in place.

5.    Avoid penalties and interest

With increased penalties for late returns, and surcharges and interest charged where tax is paid late, any delay in the submission of your tax return can also prove expensive.

All in all, there are real benefits to submitting your tax return early – not least the sense of satisfaction in knowing it’s done for another year!

Do you need to register for Self-Assessment?

Leave a reply

It’s almost that time of year again; Christmas parties, the X Factor and Strictly Come Dancing on the TV, and those television and radio adverts featuring Moira Stuart reminding us of the deadlines for submitting our tax returns.

If you have already been issued with a notice to complete a 2011/12 tax return you are probably already aware that you have until 31 October 2012 to submit a paper copy to HM Revenue & Customs (HMRC), and until the 31 January 2013 to file online.  But what do you do if you haven’t received a notice to complete a tax return, and you suspect that you should be preparing tax returns?

HMRC only issue tax returns to those already within the Self-Assessment system. This puts the onus on the individual to notify HMRC of any changes in their circumstances that require them to complete a tax return, and to register for Self-Assessment.

The deadline for registering for Self-Assessment is 5 October.  With this deadline less than a week away, it’s more important than ever that you check whether or not you should be within the Self-Assessment regime.

How do you determine whether or not you should complete a 2011/12 tax return?

HMRC have issued guidance on the reasons that an individual would be required to complete a tax return, and a detailed list can be obtained from the HMRC website.  However, some of the more common reasons include the following:

  • You were self-employed in the year (including members of partnerships)
  • You receive £10,000 or more from savings and investments
  • You receive £2,500 or more from untaxed savings and investments
  • You receive either £10,000 or more from property before the deduction of any expenses, or at least £2,500 after the deduction of expenses
  • You receive foreign income
  • Your annual income exceeds £100,000
  • You have a capital gains tax liability in the year

If you satisfy any of these criteria in 2011/12 and have not already been issued with a tax return, it’s more than likely that you will be required to register for Self-Assessment.

How do you register for Self-Assessment?

Once you have determined that you need to complete a 2011/12 tax return, the next step is to register for Self-Assessment.  This can be done in one of two ways:

The first method is to complete either form CWF1 (self-employed individuals) or SA1 (all other cases).  These forms can be downloaded from HMRC’s website by following the below links:

SA1 – http://www.hmrc.gov.uk/sa/forms/sa1.pdf

CWF1 – http://www.hmrc.gov.uk/forms/cwf1.pdf

Alternatively, you can contact the Self-Assessment Helpline on 0845 900 0444.  You will be asked to provide your National Insurance number and to explain why you believe you should be issued with a tax return.

If you have previously been within the Self-Assessment regime, you will have previously been assigned a Unique Taxpayer Reference (UTR).  This is a 10-digit reference number and can be found on correspondence received from HMRC.  It’s not necessary to have a note of your UTR to re-register for Self-Assessment, but locating this information may speed up the registration process and avoid the duplication of Self-Assessment records.

The normal deadline for the online submission of a 2011/12 tax return and the payment of any tax owing is the 31 January 2013, although a paper tax return can be submitted at any point up to the 31 October 2012.  However, where you have been issued with a tax return after 31 October 2012, you have three months from the date you received the notification from HMRC to submit your tax return (either on paper or online) without incurring late filing penalties.

What happens if you miss the 5 October deadline?

With effect from 2011/12, a new penalty regime is in place if you fail to register on time.

This penalty regime is based on late returns and potential lost revenue’ i.e. the amount of tax outstanding at the normal due date (31 January 2013). Therefore, if you miss the 5 October 2012 registration deadline, but still manage to submit a 2011/12 tax return and pay your tax liability by 31 January 2013, HMRC will not impose a penalty for late registration.

If you have any queries regarding any of the above, or require assistance with the registration process, please contact us.

Are You Losing Child Benefit?

Leave a reply

With effect from 7th of January 2013, child benefit will be reduced for families where one partner’s annual income exceeds £50,000.

The benefit will be reduced for income between £50,000 and £60,000 and will be lost completely if income exceeds £60,000.

If this applies to you, you will be expected to make a declaration on your self-assessment tax return and if you do not already complete a self-assessment tax return you may now need to complete one.

Pension contributions and charitable donations paid under the gift aid scheme are taken into account when calculating income for this purpose. It is therefore possible to reduce your income and the loss of child benefit by making such payments.

Individuals paying tax under PAYE can also apply to adjust their tax code to claw back over paid child benefit and thereby avoid the need to submit a self-assessment tax return.

If you are unsure of what this means for you or you wish to consider your options, then please contact us.