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Background
Self-Assessment
constitutes the biggest change to the way in which income tax is collected
since the introduction of PAYE in 1944. Simply stated the onus for driving the
assessment and payment of tax has been shifted from the Inland Revenue to the
taxpayer and to "encourage prompt and accurate assessment and payment of tax";
a new system of interest charges, surcharges, penalties and also random audit
powers have been introduced.
There have been
knock-on effects for employers. Whilst employers are not directly affected by
Self-Assessment, because employees need a large amount of information to enable
them to self assess themselves, the rules regarding the provision of
information by employers to employees has had to be changed. Accordingly, there
are new rules concerning the production of forms P45, forms P60 and forms P11D
all of which add to the PAYE compliance burden of employers.
Self Assessment
commenced on 6th April 1996 and the first Self-Assessment tax returns being
those for the tax year 1996/97 will be issued on or around 6th April 1997.
Unfortunately it was not deemed possible to introduce the rules fully for the
1996/97 tax year. Thus, certain transitional provisions apply to 1996/97. These
particularly affect the basis on which income tax payments on account for
1996/97 are due and partnerships which were in existence before 6th April 1994
are also treated for 1996/97, broadly as if Self-Assessment did not
exist.
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Calculation of Tax Due
It is at first
worth stating that if the taxpayer does not wish to do so he or she does not
have to self-assess in the literal meaning of that phrase. An individual can
request the Inland Revenue to do the calculations; however, this does not mean
that the old rules will continue to apply in such circumstances.
On the
contrary, whilst the Inland Revenue will calculate the amount of the tax due
under Self-Assessment providing they have all the information on time (see
below) the calculation will still constitute a "Self-Assessment" and all the
rest of the Self-Assessment legislation will apply.
The previous
tax legislation was based on a so-called schedular system under which different
parts of the tax code applied to different types of income. For example,
employment income was assessable under Schedule E whereas income from property
was assessable under Schedule A. These rules were a throwback to the days when
a gentleman did not want a single Inland Revenue official knowing the whole of
his affairs. Accordingly, different parts of his affairs would be handled by
different tax offices raising different assessments. Clearly such a system was
anachronistic and under Self-Assessment a single calculation will be undertaken
to arrive at the appropriate tax liability. The result is that the Inland
Revenue will no longer issue a multitude of assessments against which the
taxpayer can appeal before a further multitude of revised assessments are
issued. Accordingly, it will no longer be appropriate for a taxpayer to wait
until the Inland Revenue issues an assessment before deciding whether to make a
payment of tax or to submit his accounts, tax return etc. Under Self-Assessment
the onus of paying the right amount of tax at the right time and for submitting
the Self-Assessment tax return lies firmly with the taxpayer and a stringent
system of surcharges and penalties will apply if this does not take
place.
Previously,
certain sources of income were assessed on a so-called prior year basis of
assessment. This particularly applied to income from trades and professions
assessable under Schedule D Cases I and II and also to untaxed interest and
foreign sources of income assessable under Schedule D Cases III, IV and V. As
part of the movement towards Self-Assessment, the prior year basis of
assessment has been abandoned and now all such income is assessable on a
current year basis. Special rules have had to be introduced to manage the
transition from the prior year basis of assessment to the current year basis of
assessment. The effect of these rules is that for continuing sources of trading
income or investment income, a proportion (generally one-half) of income
receivable in 1995/96 and 1996/97 will be taxable as 1996/97's income. The
rules in this regard are complex and if anybody requires detailed guidance of
how they apply in particular circumstances they should obtain suitable
professional advice.
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Submission of S-A Tax
Returns
Any taxpayer
issued with a Self-Assessment tax return is under a legal obligation to
complete it and return it to the Inland Revenue. If a taxpayer intends to
calculate his or her own tax liability (this will normally be the case) the
Self-Assessment tax return must be submitted to the Inland Revenue by 31
January following the end of the tax year. Thus, for the 1996/97 tax year,
Self-Assessment tax returns will be issued on or around 6 April 1997 and these
must be fully completed and returned to the Inland Revenue by 31 January 1998.
It should be noted that the tax return must be fully complete in all
respects.
A tax return
which includes incomplete information or with information labelled "to be
advised" or "to follow" will not be regarded as a complete tax return and will
therefore be liable to the imposition of penalties.
For individuals
who are directors or employees, it will no longer be possible for them to mark
their tax return "per PAYE", "per P11D" etc. They must report the precise
quantum of their taxable income including expenses payments and
benefits-in-kind; failure to do so will mean that their Self-Assessment tax
return is incomplete and invalid. There is now a requirement for employers to
provide employees not only with forms P60 but also with copies of forms P11D
(providing they are employed at 5 April at the end of the tax year).
Furthermore, the new style form P45 has a further part (part lA) which is for
the employee to keep so that employees are aware of how much income they have
received from each employment during the year and how much tax has been
deducted therefrom.
If a taxpayer
requires the Inland Revenue to calculate the tax liability, the tax return must
be with the Inland Revenue by 30 September following the end of the tax year
concerned. Thus, for a 1996/97 Self-Assessment tax return, this would have to
be with the Inland Revenue by 30 September 1997 if the intention was for the
Inland Revenue to calculate the tax liability.
What if no
Self-Assessment tax return is received? If the person has no liability to tax,
or has a liability to tax which is fully settled by tax deducted at source (eg
under PAYE) or tax credits on investment income, the person need do nothing.
However, if the person has an income tax or capital gains tax liability for the
year, he must notify the Inland Revenue of this liability by 5 October
following the end of the tax year. Thus, for 1996/97 anybody who does not
receive a Self-Assessment tax return who believes that they have a liability to
income tax or capital gains tax must notify the Inland Revenue of this
liability by 5 October 1997. Failure to do so will result in interest and
penalties being charged.
In the case of
partnerships, each partner must enter on his or her Self-Assessment tax return
their share of the partnership's assessable profits for the year. It will no
longer be possible simply to note the tax return "per accounts" or something
similar. The partnership itself will have to make a partnership tax return
giving details of the partnership income for the appropriate year together with
details of how this is to be split between the various partners. The
partnership return must be submitted to the Inland Revenue by 31 January
following the end of the tax year. Thus, for 1996/97, each partnership must
ensure that its partnership tax return is submitted to the Inland Revenue by 31
January 1998.
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Payment of Tax
It should
firstly be stressed that Self-Assessment has in no way affected the rules
regarding the deduction of tax at source under eg PAYE or from eg interest
payments or royalties; nor has it affected the so-called imputational system of
corporation tax under which dividends paid by UK companies have an associated
tax credit which can be used to satisfy all or part of the income tax liability
arising in respect of the dividend payment. Thus, a large proportion of the
working population will not be adversely affected by Self-Assessment. They will
continue to have a code number operated against their wages and, hopefully, the
correct amount of tax will be deducted from their wages under the PAYE
regulations. It is likely that these people will not receive a Self-Assessment
tax return to complete in the same way that most ordinary employees do not
receive annual tax returns under the existing system.
However,
individuals with substantial amounts of investment income in respect of which
higher rate tax is payable, or individuals with sizeable and varying
benefits-in-kind which often give rise to income tax underpayments, or
individuals with self employed or untaxed investment income in respect of which
they have hitherto paid tax by assessment will be affected by
Self-Assessment.
The tax
payments under Self-Assessment fall into two distinct categories:-
a. the final
payment necessary when the Self-Assessment return has been completed and the
tax calculation has been performed; and
b. any payments
on account which may also be necessary.
Let us look at
each of these categories separately.
Final Payment
The final
payment due when the Self-Assessment return has been completed and when the
calculation has been performed must be paid by 31 January following the end of
the tax year. This payment will include any additional income tax due for the
year plus any capital gains tax due. It does not matter whether the individual
is doing the self-assessment calculation himself or whether, having submitted
the Self-Assessment tax return to the Inland Revenue before 30 September, the
Inland Revenue have done the calculations for the individual.
Thus, there
will be a great many people whose only effective contact with the Inland
Revenue will be on or around 31 January following the tax year. That is the
date by which they must submit their Self-Assessment tax return to the Inland
Revenue and that is also the date by which they must pay the balance of any
income tax due for the year together with any capital gains tax due for the
year.
Payments On Account
It is possible
that individuals will also have to make payments on account of the ultimate
income tax (but not capital gains tax) liability. These payments on account are
based on the income tax liability for the previous year. The question of
payments on account for 1996/97 is somewhat complex because it is the so-called
transitional year, however 1996/97 payments on account may be necessary in
respect of certain sources of untaxed income, the payments being based upon the
liability on such untaxed income as shown by the final tax assessments for
1995/96. If anybody is in anyway unsure as to their payments on account
position for 1996/97 they should immediately contact their Barnes Roffe client
liaison partner or their own accountant.
For 1997/98 and
subsequent years, the position is more straightforward. Effectively, there are
two rules which need to be considered when determining whether payments on
account of the ultimate income tax liability must be made.
These are as
follows:-
a. Is the tax payment due for the previous year less
than £500? If so no payment on account is necessary for the year in
question. Thus, if the 1996/97 Self-Assessment tax return reveals an income tax
liability of £450, that amount would have to be paid on or before 31
January 1998 but no further income tax payment would be necessary before 31
January 1999 which tax would then be based on the 1997/98 Self-Assessment tax
return. However, if the tax due is £500 or more, payments on account may
be necessary- see question b.
b. Is the net
income tax due for the previous year greater than 20% of the total income tax
liability before account is taken of tax deducted at source or tax credits? If
not, no payments on account are required.
However if it
is, payments on account are required. If payments on account are required,
because the net tax due for the previous year is both greater than £500
and greater than 20% of the total tax liability before credit is given for tax
deducted at source, how much has to be paid on account and when? Two payments
on account are required, one on 31 January during the tax year and one on 31
July following the tax year. The payments on account are each 50% of the net
income tax liability for the previous year. Accordingly, let us suppose that a
person's Self-Assessment tax return for 1996/97 shows income tax due of
£2,000. This is obviously greater than £500 and let us assume that
it also fails the 20% test mentioned in (b.) above. The individual will have to
pay the following amounts: -
Re 1996/97 -
£2,000 on 31 January 1998
Re 1997/98 -
£1,000 on 31 January 1998 and £1,000 on 31 July 1998
As mentioned
earlier payment on accounts do not apply to capital gains tax. Capital gains
tax will always be payable as one sum on 31 January following the end of the
tax year in question.
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Penalty Procedures
The Inland
Revenue have extensive powers to police the Self-Assessment rules. There are
powers to charge interest and surcharges in respect of late paid tax and also
to charge penalties in respect of late or incorrect Self-Assessment tax
returns.
a. Interest
The Revenue
have long had interest charging powers which have been progressively tightened
since 1975. Under Self-Assessment, interest will automatically accrue if any
payment is made late. This applies not only to the final balancing payments but
also to any payments which should have been made on account. The rate at which
interest will be charged has recently been revised; it will now be charged at
2.5% over the average base rate of the six leading banks. Previously the rate
was discounted to reflect the fact that interest on overdue tax is not tax
deductible but that discount has recently been abolished. Accordingly, the rate
of interest chargeable is currently 8.5%
b. Surcharges
The Inland
Revenue have never regarded the interest which they charge as being in anyway
penal. They regard it as commercial restitution for the use of the money.
Accordingly, under Self-Assessment any balancing payment shown as payable by a
Self-Assessment tax return which remains unpaid for more than 28 days shall be
liable to a surcharge equal to 5% of the tax unpaid. Additionally, where the
tax still remains unpaid six months after the due date, a further 5% surcharge
may be imposed. If after the surcharge has been imposed, it remains unpaid 30
days after its imposition, interest will be charged on the
surcharge.
c. Penalties
There will be an automatic penalty of £100 if a
taxpayer fails to deliver his Self-Assessment tax return on time. If the return
is over six months late the penalty automatically increases to £200.
Additionally, if the failure persists an officer of the Board of the Inland
Revenue can apply to the Tax Commissioners for further penalties of up to
£60 per day to be charged for each day in which the failure to submit the
return continues.
If the return is over a year late, the Inland Revenue
can then impose a further penalty of an amount up to the amount of tax
liability revealed by the Self-Assessment Return.
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Random Audit Powers
A further, and
very important, weapon in the Inland Revenue's armoury to police
Self-Assessment is the power to investigate a taxpayer's affairs at random
without giving the taxpayer any reason for doing so.
The Inland
Revenue have to give formal notice of their intention to enquire into a tax
return and this must be made by a specified time. Broadly speaking, for a
Self-Assessment tax return filed on time (ie before 31 January following the
end of the tax year) the Inland Revenue must give notice to enquire into the
return before the following 31 January. If they do not do so, the return can be
regarded as final subject to the Inland Revenue's power to "discover" if a
taxpayer has been guilty of negligent or fraudulent conduct.
Whilst the
Inland Revenue will apparently select cases at random, common sense dictates
that they will actually select cases which they consider to be ripe for
investigation. This will be based on information which they receive from third
parties or from their knowledge of the activities of a particular
individual.
The disturbing
thing is that up to now the Inland Revenue have been somewhat inhibited from
embarking on unwarranted "fishing expeditions" due to various Inland Revenue
codes of practice on investigations. These will no longer apply and the Inland
Revenue will be able to launch an investigation into a Self-Assessment tax
return without giving the taxpayer or his agent any reason for doing
so.
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Record Keeping
The
self-assessment legislation introduces a legal requirement for taxpayers to
keep the records on which the Self-Assessment tax return is based.
The records
must be kept for a minimum period of time which depends upon whether the
taxpayer in question is or is not engaged in a business. It should be borne in
mind that a business activity is deemed to include the letting of property; if
someone is engaged in a business activity the requirement to maintain records
extends not only to the records of the business itself but also to all the
other records necessary for the preparation of the Self-Assessment tax
return.
Broadly
speaking, a "non-business" taxpayer must keep records at least until the first
anniversary of the filing date for the Self-Assessment tax return. Thus, for
1996/97, records will have to be kept at least until 31 January 1999. However,
records may have to be kept for a longer period if the tax return was issued
late or if an investigation has been commenced into the tax return.
For a taxpayer
with a business connection, the time limit for which records must be kept is
the fifth anniversary of the normal filing date. Thus, for 1996/97, records
would have to kept until 31 January 2003.
If suitable
records are not kept or preserved, a penalty of up to £3,000 may be
imposed for each failure. Thus, a taxpayer who fails to maintain appropriate
records for a number of years could in theory be faced with penalties running
into many thousands of pounds.
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