HMRC Penalties: a carrot or a stick?

HMRC Penalties

In a recent document inviting views and comments by 11 May 2015, the Revenue ask taxpayers and agents what they think about ideas they are having on potential changes to the penalty regime, introduced under the HMRC Powers Review 2005-2012.

As HMRC become more digitally savvy, in an attempt to help taxpayers get more things right first time, they are inviting comments on how tax penalties are to be applied, if the nature of the punishment should fit the nature of the crime and the deterrent effect of the severity or size of the penalty. Are warnings followed by financial pain a better option in keeping the majority of taxpayers on-side?

It’s unclear whether HMRC’s penalties are more useful in showing the compliant majority that the tardy minority don’t get away scot free, or as an incentive to the majority to pull their finger out. It’s the principle, not the money, say HMRC.

HMRC’s master plan is to promote good compliance by giving explanations and information; prevent mistakes early by identifying risks and correcting errors; and respond in a tailored manner using better data. This entire compliance strategy is based upon their successful transition into a digital services provider maintaining accurate and up to date records of their ‘customers’’ tax affairs.

In an organisation as large and complex as HMRC, that digital conversion cannot be taken for granted. Remember the introduction of RTI? The penalty regime had to be continually delayed by because the Government’s reporting systems were unprepared and unsuitable for meeting their own deadlines. I don’t recall them imposing a penalty on themselves however!

That said, there is much that is sensible in a discussion of high level issues. The implication is that the highest penalties should apply to deliberate cases of evasion or avoidance and should increase based on the scale of tax lost and in cases of persistent or recurring offences. Deliberate and concealed mistakes should attract the biggest punishments whilst simply being careless does not necessarily incur a penalty.

There is clear intention in the words to not portray penalties as a means of collecting revenue. They have far greater value in acting as a deterrent in the face of abuse and I am happy to support a tax regime which protects the vulnerable taxpayers from forgetfulness, careless mistake and aberration and at the same time heavily punishes deliberate or persistent delay in the provision of required information.

If this sentiment translates into an environment where HMRC use their ever growing digital prowess to warn taxpayers in advance that they are about to miss a filing deadline, have just missed one or need to act before they receive an automated penalty then HMRC may be able to have their cake and eat it by driving up compliance and timely filing without having to issue and administer thousands of fixed penalties for small amounts that are difficult to collect or in some cases justify.

If HMRC are truly exploring a digitalised customer service approach to dealing with taxpayers, that genuinely helps us understand our obligations, merges all taxes, payments and compliance into a single enjoyable experience for all, and is one which accepts that on occasion humans forget or just run out of time maybe the carrot is mightier than the stick after all?

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Payment difficulties – Self Assessment 2015

Payment difficulties – Self Assessment 2015

Many contractors and freelance workers submit a Self-Assessment Tax Return. The deadline for filing the Return for the year ended 5 April 2014 and also for having paid any additional tax that’s not collected via the PAYE system is the end of this month (January 2015).

The tax system requires that you pay not only any balancing tax liability but can also require that you make a second payment on account for the current tax year (5 April 2015), both at the end of January, with a second payment on account for the current tax year next July.

If you don’t pay your tax liability on time HMRC will automatically charge you interest from 1 February at 3% per annum, and you would expect that to be the case, but what many contractors don’t realise is that there are additional surcharge penalties that are automatically charged for unpaid tax after 30 days, 5 months and 11 months.

Each penalty is 5% and so your unpaid tax liabilities can rapidly increase significantly.

So, what do you do when you cannot pay?

key-points4

Our advice for contractors who find themselves in the unfortunate position of not being able to meet their tax liabilities in time there are a few points to consider which might help:

Speak with your contractor accountant – as soon as you’re aware that you will have difficulty with paying your tax liabilities let your contractor accountant know. They will be able to advise you in detail of the options available as they apply to your specific financial position and can help you establish exactly how much tax is due and by when.

Contact HMRC – There is some flexibility possible, depending on your circumstances, so it’s worth exploring your options.  For example:

  • If your notice of tax changeability was issued late in the year, you have three months from the issue date until the tax is due. If this is the case, it may mean that your personal tax due date for the current tax year is after 31st January.
  • If amendments are made to your tax changeability after 1st January additional tax chargeable as a result will not be due until 30 days after the amendment was made. There will, however, still be interest charged if you pay the additional amount after 31st January.
  • HMRC will usually accept if you cannot pay by 31st January but promise to pay the full amount owed within  30 days.
  • If you cannot pay within  30 days HMRC will consider special circumstances and may reduce penalties in some cases, so speak with them if this might apply to you.
  • There are also a number of schemes available which can help you spread out your tax payments as long as you are currently paid up to date. HMRC are obliged to at least consider reasonable payment arrangement proposals. However, if an arrangement is spread over more than 3 months, HMRC will want evidence of income, expenditure and any savings you have.

 

Being unable to pay your tax liabilities can be extremely stressful, but by taking action as you soon as you become aware there’s an issue you may find there are workable solutions available.

Are you a contractor in need of some advice on your Self Assessment Tax Return? Intouch Accounting are contractor accounting experts, able to provide professional support to Limited Company contractors – leaving you to focus on the matter at hand without needing to worry about your finances.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Student loans

Student loans

It’s fast approaching tax return season here again at Intouch, so we’re focusing our attention on the things you’ll need in order to complete your return.  It’s useful if you have everything to hand before you start your return as it saves going back and forth gathering information – especially if you leave it until the last minute and suddenly find that you cannot get the documents you need in time to meet the deadline.

It’s pretty well known that your accountant will need the usual copies of your previous P45, bank account interest summaries, dividend vouchers and rental property details, but one thing that often gets overlooked is the necessity to declare a student loan.

These days a student loan is usually collected in one of two ways if it is an “income contingent” loan:

  • If you’re an employee it will be deducted from your salary by your Employer and paid over to HMRC along with the normal Tax and NI each month or quarter;
  • If you complete a tax return the loan repayment will instead be calculated as part of that process, and you will pay it over to HMRC along with your usual tax payment by 31st January.

Whichever way the loan repayments happen, HMRC will pass the amount over to the Student Loan Company who will then (in due course) update their records.

There are issues with this process because HMRC do not know how much your loan is, they simply deduct a flat 9% of your income above £16,910.  If you are toward the end of your loan this could result in you overpaying, and having to wait until the Student Loan Company process your payments to then repay any excess to you.

To avoid overpaying you should keep an eye on the balance, as you can then judge the point at which it’s better to repay it in full rather than suffer the 9% deduction from your income.  You can either give the Student Loan Company a call to find out your balance, or set up an account on their website that will enable you to log in and view your loan at any time.

If you fail to declare your loan on the return then HMRC will, when they realise, open an enquiry and write to you to ask why it was omitted.  You will then need to pay the amount due, but may also incur penalties and interest on top if you’re deemed to have been careless or negligent.

It’s interesting to note that income for student loan repayment purposes and for child benefit purposes includes your dividend income and salary income, whereas your income for childcare voucher purposes is based on your salary only.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Personal tax calculations and payments on account

Personal tax calculations and payments on account

If you are a director then you will be obliged to file a tax return each year, and will need to pay any tax that is due thereon as a lump sum on 31st January.  You normally have to wait for your contractor accountant to calculate your tax for you, but if your income is a simple mix of salary, bank interest and dividends then it’s easy to estimate the amount yourself.

Calculation

Dividends are tax free in the basic rate band, and then taxed at 25% of the net value in the higher rate band.

To work out the amount of your dividends that fall into the basic rate band you simply take the higher rate limit of £41,450 (for 2013/14), reduce by any other gross income, then divide by 10 and x by 9.

 

So £41,450 less a salary of say £12,000 and gross bank interest of £400 leaves £29,050 /10×9 = £26,145.

 

If you’ve taken dividends of £40,000 then deduct the basic rate amount of £26,145 to leave £13,855.  Your liability will be 25% of that, so £3,463.75.

 

This will be payable in the January following the end of the tax year – so for the year to 05/04/2014 the tax will be due by 31/01/2015.  HMRC will pay you interest if you pay early, and probably at a higher rate than your bank would!

 

If you have income exceeding £100,000, benefits in kind, self-employment, foreign income, rental income, other dividend income, capital gains etc. then the calculation gets more complex, so discuss with your contractor accountant if you want an early estimate of your liability.

Bear in mind that your liability may also be increased if you have a student loan to repay, or you have Child Benefit that is being reclaimed.

Payments on account – a word of caution

What catches many people unaware is the additional tax that may be due because of payments on account, especially if it’s their first year in the self-assessment system.  You may have to pay not only the tax due on your higher rate dividends as above, but also a 50% payment on account.  If your liability is already significant, this can increase it further and come as quite a shock if you don’t find out until the last minute.  A further 50% is then also due in July of the same year.  These payments will be offset against your liability next year, but can still cause a major cash-flow issue in the meantime.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Tax return pitfalls

Tax return pitfalls

We’re now into the 2014/15 tax year, which must mean it’s time to start thinking about the joy of completing your 2013/14 tax return!  Many contractors will leave this task to their contractor accountant, but if you do complete it yourself you should be mindful of a few common mistakes.  Here’s our lucky top 13.

  • tax return is a summary of all income received during a year, regardless of whether or not it has already been taxed.  Make sure to include bank interest and other taxed income as it can affect the rate of tax you pay on your untaxed income.  You can however ignore an ISA.
  • If you had a student loan with a balance outstanding during the year make sure you include it.  You will need to repay the loan at the rate of 9% on any income above £16,365, so check now to see if you’re better off simply repaying the loan in full – the tax return will calculate the 9% regardless of the loan balance, and it’s a long process to get any overpayment refunded.
  • Do you own a property and receive rental income, but make an overall loss?  If so, make sure it is included so that HMRC are aware you have losses to carry forward against future profits.
  • If this is your first year of filing a tax return, have you got a Government Gateway account, and registered for Self Assessment?  If not, do it now.  It can take weeks to set up, so leaving it to the last minute could mean you’re unable to file on time.
  • Do you want your tax collected through your tax code?  Make sure you file by 30thDecember (not the 31st!)
  • Changes to the Self Assessment system in 2013 mean that you now have to declare Child Benefit if you or your partner earn over £50,000.  Make sure you know the rules of who has to declare and repay the benefit.
  • If you were in a Partnership during the year make sure you file a return for the Partnership itself too.  If you don’t, it will be subject to a £100 late filing penalty just like an individual would.
  • Have you included all employments during the year?  One of the common mistakes we see with new contractors is that they include their own company income but forget to include the details from their old employer (check your P45 for the information you’ll need).
  • Remember that dividends are received net of a 10% tax credit and must be grossed up before being added to your return.  A dividend of £1,000 is actually £1,111 with tax paid of £111.
  • Did you receive Jobseekers Allowance or other taxable benefits in the year?  Make sure these are included too.  You should have a P45 or P60 from the Job Centre with the details.
  • Do you pay into a personal pension?  Include the details on your return and it will increase your basic rate tax band, potentially decreasing the tax you owe.  Be careful though, pension contributions made by your employer do not get included here.
  • Donations to charity also increase your basic rate band and should be included on your tax return.  If you’re not a UK taxpayer though you should check whether they are being made under the gift aid scheme, as you’ll be liable to pay the tax on the donation if they are.
  • If you owe tax for a prior year make sure it’s included on your return, otherwise HMRC could refund you only to ask for it back later, which confuses things all round.

 

Remember that even if you do ask a contractor accountant to complete the return for you, it’s still your legal responsibility to check it is correct as you will be the one held accountable for any errors or omissions.  Review the return and check it through before you sign it!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

HMRC’s bank raiding powers

HMRC’s bank raiding powers

George Osborne announced a proposed new system during the 2014 Budget that would allow HMRC to seize assets from anyone that owes more than £1,000 in tax or tax credits.  That in itself isn’t really anything new, HMRC can already seize property or cash if they go through the Courts, but these changes would allow HMRC to simply to take money from a taxpayer’s bank account with no Court approval!

HMRC, who say they lose £35 billion a year by cheats who refuse to pay their taxes or find ways to avoid them, have stated:

“Most people pay their taxes on time, but a minority do not and some refuse to engage with us at all. It is wrong that this should hand an advantage to those who simply dodge their obligations, and is unfair on the vast majority who pay their taxes in full and on time,” he said

“We will shortly be consulting on a new measure with appropriate safeguards to help level the playing field, and tackle those who have the means to pay but are choosing not to. These are people who have, on average, over £20,000 in their accounts but are refusing to pay their debts.

“This will only affect a tiny number of debtors whom we have contacted a minimum of four times to ask for payment.”

Details of what the safeguards will be have not been released, but we do know that HMRC will have to leave a minimum balance of at least £5,000 across all bank accounts.

Frank Haskew, head of the tax faculty at the Institute of Chartered Accountants in England and Wales, says “it is a fundamental tenet of our English law and our democratic society that money cannot be grabbed from somebody’s account without a judge agreeing to the move”.

He said the change, which could come into force in just 12 months’ time, would be “unprecedented in the UK”.

And that: “At the end of the day, we can’t have HMRC as judge and jury on this.”

Mr Haskew also highlighted the fact that HMRC have a long track record of making mistakes and harassing innocent taxpayers – something that sadly most accountants will have seen first-hand.

Finally, this change would effectively see HMRC reinstated as a preferential creditor, a status that was removed from them in 2003, thus violating insolvency law.

Thankfully these new powers are not yet law, but are subject to Consultation.  With the ACCA calling the measures “seriously draconian” we can hope that they won’t become law without a fight, but with similar systems are already in place in countries such as France and the US it may be a forgone conclusion…….

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Do you need to file a tax return?

Do you need to file a tax return?

Each year HMRC send a Notice to Complete a tax return to anyone they think requires one, but be careful because it still remains your responsibility to inform them if you need one, and you’ll still get a penalty if you fail to complete one when necessary.  These days penalties will apply even if the tax due is zero.

The most common reasons you’ll need to complete a return are:

  • You are self-employed.
  • You’re a partner in a partnership.  The Partnership itself will have to file a return too.
  • You’re a company director.
  • You have annual income of £100,000 or more.
  • You have annual income of £50,000 or more, and you or your Partner was in receipt of child benefit.
  • You have rental income.
  • You need to claim expenses or reliefs, or you’re a Trustee.
  • You have Capital Gain’s Tax to pay.
  • You have £10,000 or more in dividend or other investment income.

 

Technically, the last has no basis in the actual legislation; it’s simply HMRC adding on another category of people that they want a return from!  That being said, if it’s a simple return then there’s no harm in filing one anyway, and it prevents any arguments at a later date.

If HMRC send you a return to complete but none of the apply to you then just give them a call on the Self Assessment Helpline.  You may find that it’s an error, and that you don’t need one after all.

If you think you need a tax return for the 2013/14 tax year, which ended on 5th April 2014, then you have until the 5th October 2014 to tell HMRC.  If you don’t there could be penalties.

Your contractor accountant can of course help, so if you’re not sure you can always give them a call.

Intouch Accounting currently offer the completion of a personal self-assessment tax returns for one employee as part of our comprehensive contractor monthly service please call us to find out more.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

New contractors’ guide to Tax Return Deadlines

New contractors’ guide to Tax Return Deadlines

With the 31st of January deadline for online self-assessment fast approaching, it is important that all new Limited Company contractors are aware of all personal and company tax return deadlines.

Filing all personal and company tax information required and making payment to HMRC within their specified deadlines is vital. Firstly, it ensures you don’t end up having to pay out for late penalty amounts. It’s also good business practice to keep within these deadlines as it will mean that you’re generally keeping your contractor accounting and tax affairs fully up to date. Ideally you should be aware of the key deadline dates which apply to you, but if you’re unsure a contractor accountant will be able to help.

As a Limited Company contractor you will be required to file a number of different types of tax return. The specific returns applicable will partly depend on the size and type of business involved but most contractors will usually need to file the following:

  • Self-Assessment tax return – relating to your own personal taxable income.
  • Employer related tax returns e.g. National Insurance Contributions (NIC), Pay as you earn (PAYE) and other employee related returns for yourself (as an employee of your own company) and any other employees.
  • Company tax return for your business.
  • VAT return(s) for your business if your company is VAT registered.

HMRC specifies a number of different deadline dates for each of these returns. A list of key dates for the main tax return categories is given below.

Tax Return filing and payment deadlines

Self Assessment Tax Return:

The end of the tax year is 5 April. The start of each new tax year is 6 April. You will need to notify HMRC that you need to complete a self-assessment tax return for the previous tax year’s income.

Table 1

Employer related filing and payment deadlines

 Employer PAYE submissions in real time became effective from 6 April 2013. Employers now report their payroll information online directly to HMRC by submitting Full Payment Submissions (FPS) and Employer Payment Summaries (EPS).

table 2

Company Tax Return filing and payment deadlines

Corporation Tax is payable by all active profit making companies. The amount owed must be paid nine months and a day after the end of the company’s accounting period end date. This means that the actual deadline dates will vary from business to business.

box 3

 VAT Return filing and payment deadlines

There are no fixed dates in the year for paying VAT.  However, depending on the type of business and the VAT options you choose you could be filing and paying monthly, quarterly or annually.

box 4

Intouch Tax Returns Service

At Intouch Accounting we make your life easier, we offer tax return administration as a standard part of our comprehensive Monthly Service package (£98 + VAT per month). This includes filing all HMRC and Companies House tax returns, including your personal self-assessment tax return. Contact us to find out more about our services.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Getting ready for the end of the tax year – 5 things to think about

Getting ready for the end of the tax year

Contractors naturally spend most of their time either working hard for income, marketing and networking to win the next piece of business. After all, ensuring the business keeps rolling in is what keeps the money coming in! However, as a result, the tasks of doing accounts and keeping tax matters up to date can end up taking a back seat and important items can get left un-done. Unfortunately, leaving these things to the last minute not only creates a stressful rush to get them completed at the end of the tax year; it can also end up costing contractors’ money. This could be from missing out on tax breaks and paying more tax than is necessary or simply because returns are filed late and incur HMRC penalties. Even those who have a contractor accountant could potentially lose out, as they will still need to submit the right information, in good time, to benefit from their accountant’s knowledge and expertise.

If you are a contractor with a Limited Company set up, taking into consideration a few key points in advance of deadline dates can really help.

 

5 things to think about for the end of the tax year

  1. Check that you have fully utilised your personal tax allowance and taken all of the tax free dividends available – if you’re not sure then ask your accountant to double check for you.
  2. Make sure you have made full use of your ISA allowances to get the most of your tax free savings and interest.
  3. Confirm that you have maximised your pension contributions. You can contribute up to £50,000 per year.  Any employer contributions will also help to reduce the corporation tax for the company.
  4. If your income is close to the higher tax rate threshold, or has slightly exceeded it, consider making a charitable donation to extend the basic rate band.
  5. In preparation for the self assessment, allow enough time to request and receive all the relevant paperwork for your income and investments, such as interest statements. This will make sure that it can be prepared by you or your accountant without delays.

All of these points will contribute to making sure you are getting the most out of your income as well as allowing plenty of time for you and your accountant to get the relevant information together. Overall these will help to make the tax year and the submission of your self assessment tax return an easier, more relaxed process.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Personal Service Company – Tax returns

Personal Service Company – Tax returns

Answering the question about PSC (personal service companies) when I complete my personal tax return. Do I have an IR35 issue when I tick this box as a “yes”. Is it anything to worry about? Or is it just a simple “yes” answer? What is the definition of a PSC?

Ticking ‘yes’ to the PSC (personal service company) question on your personal tax return does not mean that you will have an IR35 issue. It is nothing to worry about as the term ‘PSC’ simply describes the type of company you have and is a separate matter to the issue of IR35 compliance.

A Personal Service Company is an HMRC description which helps them define what kind of business you are and it’s set-up so that they can make the relevant tax deductions on your income. IR35, on the other hand, is specifically about whether work done by an individual complies with the criteria of being ‘employed’ or not. For IR35 purposes being deemed a PSC doesn’t make any difference to the compliance criteria which must be met. Compliance is only concerned with whether the services you carry out for your client are done in a way which could be deemed as ‘self-employed’ and therefore outside IR35 or ‘employed’ and inside IR35. If you are deemed to be ‘employed’ then your tax payable will be determined by the Deemed Salary calculation whether you are a PSC or not.

The key point for a contractor with a Limited Company is to make sure that you are clear on where you stand. This is the safest way to avoid potential IR35 concerns.

 

What is the definition of a PSC?

The term ‘PSC’ was introduced by HMRC around the same time as IR35 came into force.  It is used primarily to describe the one person Limited Company type that many contractors have. Pre-IR35 Limited Company contractors were more or less automatically deemed to be ‘self-employed’ for tax purposes. IR35 changed this and all types of contractor have come under increasing HMRC scrutiny. The definition has been redefined over the years but generally agreed elements of a PSC are the following:

  1. You provided services for a client or clients.
  2. There was a contract between the client and the company of which you were a shareholder during the tax year.
  3. All or most (more than 50%) of the company’s revenue was earned through services carried out personally by the shareholders of the company.

If your business operation has all of these characteristics then it is most likely that yours is a PSC.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.