In my experience, the most common tax return errors made by taxpayers are in ten areas:
- selling a property or other asset
- one-off interest on deposits (eg when long term investments mature)
- new bank accounts or investments
- payments/benefits/expenses from other company directorships
- temporary employments
- accrued income scheme interest on government gilts
- joint ownership of rental properties or other assets
- assuming low bank interest is the same as nil
- not realising child benefit can have a tax impact
- pension contribution misunderstandings
Good ways to spot or prevent these are:
- using the checklist of 10 items above, as a prompt
- getting the tax return done early (eg August to November, not December and January)
- checking your personal bank statements for unusual credits
- giving your adviser a full list of your assets, including non-income producing ones
- regular updates to your adviser of activity and transactions during the year
- not relying on just checking comparatives with last year – instead ask “what might have changed?”
- reconciling the tax due: why is it that figure? (eg PAYE overpayment due to benefit in kind change = £A; higher rate on dividends = £B; gift aid tax relief = £C; £A+B+C = tax due)
These help prevent unexpected tax, interest and penalties.
If you have submitted your tax return with an error, speak to us about how to correct this before HMRC spot it and to help minimise potential penalties.
Those making payments on account for the first time on 31 January may be confused by the system. I hope that the explanation below is simple – but questions and suggestions are welcome:
Employment taxes collect most of your tax immediately. The tax on other sources of income (eg self employment) can take many months to collect, so the system attempts to collect it by using estimates. The first interim payment may seem to to be doubling up on your tax or paying in advance but you are actually still paying slightly in arrears.
A bit more detail
- If you are employed and suffer tax at source under Pay As You Earn (“PAYE”), you are paying tax immediately – an amount earned in May 2018 is taxed in May 2018;
- If you have non-employment income (rents, investment income, self employed income) the delay before paying tax can be many months – the tax on an amount earned in May 2018 would not be paid until 31 January 2020 (20 months later);
- The interim payments on account system attempts to reduce that delay, if that source of income is regular;
- In the first year of assessment, as well as collecting tax for that year, it also collects an estimate for the current year;
- Half of that estimate is payable on 31 January and half on 31 July;
- If the tax due on the income source is £6,000 for the year, as well as paying that on 31 January 2019, you also pay an extra £3,000 on that date and another £3,000 on 31 July;
- The first time that happens, that may feel as if you are paying a lot of tax on the income, perhaps double the amount or even paying in advance (you are not!);
- By the time of that interim payment on 31 January 2019, you will have earned income from that source in the year to 5 April 2018 and also for most of the year to 5 April 2019;
- In doing so, you will (I hope) have budgeted for tax as it is earned;
- If your income, tax rates and allowances stayed exactly the same year on year the tax payments would then settle down (eg £3,000 twice a year covering your liability in full);
- Instead, if things change, you will have a balancing payment on 31 January or repayment adjustment each 31 January;
- The tax on the income source for the year to 5 April 2019 is being paid half (estimated) on 31 January 2019 (during the year), half on 31 July 2019 (slightly after the year) and a balancing payment or repayment on 31 January 2020 (several months later);
- If your source of income rises each year, you will be paying slightly in arrears compared to someone taxed under PAYE. If your source of such income drops or ceases you should consider reducing your payments on account (but speak to your tax adviser first);
- Ask your adviser how to budget for your tax payments.
(To keep this simple, I’ve ignored some of the other complexities that arise, eg accounting periods for the self employed and the “80% test”.)
January is traditionally thought of as the busy season for tax professionals.
Many taxpayers and advisers default to January. The 2016 HMRC statistics showed “…29 January was the busiest day with 513,271 returns completed – that’s more than 21,386 returns received per hour…”
It doesn’t need to be this way.
In my view, leaving it to January creates additional tax risk. Fortunately almost all of my clients wish to submit theirs before November.
My policy on January tax returns
Before I begin work on a tax return in January, my requirements are:
- a copy of last year’s submitted tax return
- a signed engagement letter
- full details of all income and gains, with supporting evidence
- a note of all assets, including non-income producing ones
- my fee paid in advance and with a 25% premium on my normal rates
- agreement to approve the tax return electronically on or before 25th January
- all the above to be provided before 20th January
Avoiding the January rush
Other tips before getting near January are:
- offer a discount for payment of fees in advance or in instalments
- meet your client before August (go and see them, where their papers are kept)
- encourage them to do the return themselves (the HMRC software is really good, although does not cover all taxpayers)
- explain why their tax bill is that amount and how it might be reduced
- cease to act
- book a January holiday
If you require help in preparing and submitting your tax return in any month before January, and on making the process as quick and simple as possible, please contact me for my tips and advice.
HMRC have a high net worth unit to deal with those with net wealth of over £20m (although there is some flexibility on this and is falling to £10m). This was thought to be around 5,000 UK taxpayers at the £20m level when the unit opened in April 2009.
Update January 2017: HMRC agent update 57 confirmed that the £10m+ criteria is now in place, the advantages of being able to email your “customer” relationship manager and to transfer to the unit on request.
Overall my experience with the unit for clients has been excellent. They take a sensible and pragmatic approach on most matters.
Examples include those planning to emigrate with uncertain and untested aspects of the Statutory Residence Test and a share disposal that may have not qualified for Entrepreneurs’ Relief unless a shadow director argument could be sustained. I’ve even migrated clients to the unit for the better service.
One potential downside of being within the unit is greater scrutiny of the tax return but this may be outweighed by having fully-trained inspectors dealing with the return and a direct line of communication with a named HMRC individual rather than the call centre.
Each taxpayer is risk assessed, with those on higher risk ratings being given greater attention.
Should the agent for the taxpayer take the initiative and drive the process forward with HMRC, to demonstrate the genuine risk level and notify in advance potentially unusual tax return entries? You may even begin to feel like a “customer”.
The HMRC inheritance tax section is part of Trusts & Estates, so the address is:
HMRC Trusts & Estates
PO Box 38
Castle Meadow Road
(Some of us still remember it as the “Capital Taxes Office”.)
Update (2021): the new (and very short) addresss refers to Inheritance Tax again.
HM Revenue and Customs
But the “BX” postcode doesn’t allow recorded delivery on the Royal Mail system, as it is a dummy postcode for post scanning purposes, although couriers may use this:
HM Revenue and Customs
Benton Park View
Newcastle Upon Tyne