The self–assessment system imposes the major burden for tax compliance on the taxpayer, rather than on the tax authorities.
What is self–assessment?
The UK self assessment regime for individuals has now been in place for over a decade.
Self assessment puts the onus on the taxpayer to complete returns accurately and on time. Tax must be paid on set dates but HM Revenue and Customs (HMRC) can be asked to compute the amount. Penalties may be charged for failing to comply with the requirements of self assessment.
Who is affected?
Self assessment affects all non–corporate UK taxpayers, including executors, trustees and individuals. It particularly affects those who:
- are sent a tax return each year
- have income which is not taxed at source
- are liable to higher rates of income tax
- are either self–employed or company directors.
The strict deadlines imposed by the system mean that taxpayers should organise their records of income, gains, deductions and reliefs so that tax returns can be prepared on time. Failure to comply with the rules is likely to lead to interest charges and/or penalties – even if mistakes are made innocently.
How does it operate?
Under self assessment taxpayers (who may be assisted by their advisers) are asked to work out the amount of tax payable for each period. The return form itself contains the ‘self assessment’ so Officers of HMRC will not usually need to issue an assessment. However, there is an option to have Officers of HMRC calculate the tax payable if the return is submitted earlier. A statement of account is sent to each taxpayer to show HMRC’s record of liabilities and payments.
For the tax year 2004/05 onwards, HMRC has issued a ‘Short Tax Return’ to certain taxpayers who generally have less complex tax affairs. However, if you receive this four page return you should be aware that it is your responsibility to review the accompanying guidance to ensure you are eligible to complete this form, rather than a full tax return.
HMRC will also seek to remove individuals from the self assessment system when it believes a tax return is no longer required. Again, you should be aware of the need to check your own position each tax year to confirm that this is in fact the case.
What are the HMRC procedures?
HMRC will not examine the returns as they arrive. Instead a ‘process now, check later’ approach is in operation. HMRC will make enquiries into returns which it believes contain inaccuracies.
Can the tax bill be altered later?
Yes. An Officer of HMRC can give notice of his or her intention to raise queries within 12 months of the submission deadline (later if the return is not sent in on time). For 2007/08 and subsequent years’ tax returns, HMRC will have 12 months from the date the return was delivered to make enquiries into the return.
This means that amendments can be made by Officers of HMRC to the self assessment. If amendments increase the tax liability, interest will automatically become due on any underpayment. The interest rates, which are set by HMRC, are variable and the interest is not tax deductible. The taxpayer can also amend the return within 12 months of 31st January following the year of assessment (eg to make further claims).
The self assessment is generally regarded as final once the 12 month deadline has passed if no notice is issued by Officers of HMRC. However, the self assessment can be reopened if HMRC ‘discover’ that tax has been under–assessed because of:
- fraud or neglect – if discovered within twenty years of 31st January following the year of assessment
- incomplete disclosure – if discovered within five years of 31st January following the year of assessment.
These time limits are set to reduce in the future to:
- six years after the end of the year of assessment for careless actions
- twenty years after the end of the year of assessment for deliberate actions
- four years after the end of the year of assessment for incomplete disclosure.
Will penalties be payable on increased tax bills?
Possibly. Finance Act 2007 introduced legislation for a new penalties regime that covers inaccurate documents and underassessments relating to a range of taxes, including self assessment. This regime came into force in respect of return periods commencing on or after 1st April 2008 for returns filed after 31st March 2009. The maximum penalty can be as much as 100% of the underpaid tax.
There are fixed penalties for late returns which are automatic and it will not normally be possible to get these reduced later.
What are the penalties?
The penalties for late returns are:
- £100 (automatic) – return up to six months late
- £200 (automatic) – return more than six months late
- 100% of tax due (maximum) – return more than 12 months late
- £60 per day (maximum) for continuing delay – if approved by the Commissioners for HMRC.
Apart from the interest mentioned above, there is also a fine for late payment of tax – called a ‘surcharge’. A surcharge is payable on tax underpaid and if it is overdue for more than 28 days, as follows:
- After 28 days – 5% of the tax unpaid
- After six months – a further 5% of the tax unpaid
When must the returns be submitted?
The deadlines for sending in tax returns for 2007 are:
- 31st October after the end of the tax year if you are submitting a paper return (you can also ask HMRC to calculate the tax if you submit your paper return by this date)
- 31st January after the end of the tax year if you are submitting your return online
When must the tax be paid?
The dates for paying income tax are:
- 31st January within the tax year. This is a first payment on account (if due), usually half the tax due for the previous year
- 31st July after the end of the tax year. This is the second payment on account (if due) and will normally be the same as the first instalment payment
- 31st January following the end of the tax year. This is a balancing payment (or refund) and will be based on figures in the tax return. This is also the date by which capital gains tax should be paid.
In practice, two elements of tax will be due on each 31st January being the first payment on account for the current year and the balancing payment (if any) for the previous year.
How does the return form work?
The return comprises the basic return plus additional pages covering different types of income. HMRC sends the pages it thinks you need, but you are responsible for obtaining any other pages necessary.
What steps should I be taking?
There are two areas that require organisation by taxpayers to comply with the requirements of self assessment.
You need to collate the information and make the return in sufficient time to meet the deadlines mentioned above. This involves a lot of work and is likely to require specialist advice unless your affairs are quite simple.
You should produce and retain records showing information in sufficient detail to disclose all income and gains and to support all claims for expenses and tax reliefs made in the tax return. The selfemployed and those with any rental income must keep records for five years after 31 January following the end of the tax year, other taxpayers one year after 31st January following the end of the tax year.
Failure to comply with the record keeping obligation can result in a penalty of up to £3,000 per tax year.
What are the PAYE requirements?
Employers are required to supply copies of the PAYE forms P60, P11D and P9D to employees by the following deadlines (to enable them to complete their tax returns within the time set out above):
- 31st May – final date for forms P60 to go to employees still employed as at 5th April
- 6th July – final date for forms P11D and P9D to be submitted to HMRC and a copy of the information to employees.
Who should I contact?
If you need advice on self assessment please contact Accountant, Independent Financial Advisor or Find an IFA.