Tax Administration for Individuals

Self Assessment Obligation

The self assessment system in the United Kingdom requires the tax payer to calculate his own tax liability, make a return and pay any tax due. Generally, an individual will be required to make are return where

• self employed / trading/ in business
• a company director
• owns UK property with rent of £2,500+
• has income which is not fully taxed through the PAYE system
• has made a capital gain in excess of the annual exemption
• has more complicated tax affairs
• employees or pensioners with salary or pension of £100,000+
• saving or dividend income £10,000
• other untaxed income
• taxed owed that is not being collected through PAYE

The tax payer will generally be sent a self assessment return which must be completed and submitted by 31st January following the year to which it relates. This does not limit the obligation to make a return on the taxpayer’s sole initiative if the obligation to do so arises.

It is now easy to register for self assessment on line with HMRC. Most tax affairs can be dealt with through their secure HMRC personal account.

Filing Obligations

The self assessment return for the tax year (starting 6 April) is to be made by 31st January in the year after the tax year in question. Payment is also due by this date; see below.

If a paper return is made, it must be done by 31st October following the end of the tax year to enable computation by HMRC and  determination of amount or balance due which must still be paid by  31st January following.

The self assessment return comprises a main part which supplementary colour coded parts that may be applicable. The return requires the tax payer to provide all information necessary to calculate tax liability.  This will include information relevant to income, capital gains, reliefs and allowances.

Self employed people must include standardised accounts information.  Most employees pay their tax liability on PAYE and a self assessment return will often not be required for them. Although partners are dealt with individually, a partnership return will also have to be completed to aid self assessment for the individual partners. This will include details of the partners tax adjusted income and allocation.

The tax payer is to calculate his own tax liability.  This is required even if the tax due is nil or a repayment is due. HMRC may  calculate the tax liability if the return is submitted in sufficient time  This is treated as a self assessment.   In this situation HMRC does not pass any judgement on the accuracy of the figures but merely calculates liability and offers information to submit it.

HMRC usually communicates with a tax payer by issuing a statement of account.  This sets out tax charges and interest and payments made.

Either party may amend the return.  HMRC can correct obvious errors and mistakes within 9 months.  This is not to imply the return is necessarily accepted as accurate. The tax payer can amend within 12 months.

Under self assessment, the onus is on the tax payer to make the return.  If the tax payer did not receive a return, he is still required to notify HMRC if he has income or chargeable gains on which tax is due.

There are penalties for failure to make returns accurately and on time.  The initial penalty is £100.00.  A daily penalty up to £10.00 can apply after three months.  If a failure to return continues for more than six or twelve higher level penalties apply; broadly up to 5% of the tax due or £300 if greater. In seriosu cases, a further penalty of up to 100% of the tax may apply. The penalties can be mitigated under certain circumstances.

Where a self assessment return is not filed, HMRC may determine the tax due. This is treated as a self assessment. It can only be replaced when an actual self assessment is made.  There is no appeal against HMRC determination, which encourages a tax payer to displace it for the actual self assessment.

Tax payers are required to keep and preserve records to make a correct and complete return. This includes all receipts and expenses, goods in purchase, details of records of goods and purchases, receipts and expenses and supporting documentation such as vouchers, receipts etc. Tax payers must keep their records until five years after the filing date.

For non self employed persons tax documents such as P60, P11D and bank statements should be kept. A penalty up to £3,000.00 may be charged if there is a failure to keep records.

Payment

Final payment of liabilities must be paid by 31st January following the end of the tax year for income tax, national insurance and  capital gains tax.

If a tax payer had income tax liability  in the previous year in excess of the tax deducted at source, payment on account is normally required. This does not apply where the relevant amount in the previous year is less than £500.00 or more than 80% of the tax liability is not by deduction at source. Therefore most employed people will not need to have to make payments on account if 80% of their tax liability is paid through PAYE.

Where payment on account is required the first payment of 50% is due on 31st January in the tax year, the second payment of 50% on 31st July after the tax year.  The remaining balance is settled by 31st January following.

Payments on account is only required for income tax, non coded in allowances PAYE, rental income  and Self Employed National Insurance Contributions.  Payments on account is  not required for capital gains tax.

The required payments on account is based on the previous year’s liabilities. This is the previous years liability less the amount deducted at source such as PAYE, dividend tax credits etc. It is possible to apply to reduce payments on account under certain circumstances.

Payment on account is not required for income tax and Class 4 NI less than £1,000 or where 80% of liability was deducted at source.

It is possible to reduce the payment on account where it can be shown that the previous year’s liability was higher. An application must be made an approval granted.

HMRC usually issue Statements of Account setting out the amounts due at various times in the year.  This is not a precondition to liability which applies.

Interest and Penalties

Interest is due on late paid tax at a specified rate. This is the base rate plus 2.5%. It is now (2018) 3% but used to be higher. Interest runs from the due date for account to date of payment.  Interest is charged on penalties.

In addition to interest, penalties may also arise.  Interest on tax paid is not a penalty and the surcharge acts as the penalty element. Where a balancing payment is not paid when due,  a surcharge of 5% of the tax applies.  A further 5% applies if the tax is not paid six months later.  The surcharge itself is subject to interest.  The surcharge can be mitigated by the HMRC where there is reasonable excuse.  Insufficiency of funds is not a reasonable excuse.

The failure may also be a criminal offence subject to HMRC penalties and subject to fines and imprisonment and /or  administrative penalties. The administrative penalties are broadly as follows

Failure to notify tax liability;

• 30% of tax if careless oversight;
• 70% of tax if deliberate if not concealed;
• 100% of tax if deliberate and concealed.

Failure to keep records; to £3,000

Fraudulently or negligently reducing true liability; up to the difference.

There are late payment penalties due for income tax liability not paid by 31st January following the tax year.  HMRC may serve a Penalty Notice. The penalties are as follows;

• 5% of tax after 1 month
• another 5% of tax after 5 months
• another 5% of tax after 11 months.

Penalties are used by HMRC to secure compliance. They have a certain level of discretion. The penalties range are dependent on the degree of fault. A reasonable honest error is unlikely to be penalised.Careless and deliberate failures are subject to significant penalties. There is a right to appeal a penalty.

Enquiries, Repayments and Further Payments

A claim for relief allowance and repayment must be quantified when it is made.  Claims must be made on the self assessment returns.  Where a claim is made in respect of earlier overpayment,  it operates firstly as set off against current year liability.  Where an assessment is excessive due to an error or mistake a claim can be made within 5 years on this basis.

HMRC has the right to enquire in relation to the sufficiency and accuracy of self assessment returns. They do not need to state a reason for their enquiry and are unlikely to do so.  HMRC can demand a tax payer to produce documents, accounts, particulars and request replies to specific information.  A tax payer must respond within 30 days of request.    HMRC will give notice of the outcome of the enquiry.

Standard enquiries must generally be raised within 12 months of the assessment. Discovery assessment can be raised at a later date to prevent loss of tax to HMRC.  The use of discovery assessment is restricted where self assessment has already been made unless there was fraud or negligence.

HMRC will accept full disclosure has been made, if contentious items have been brought to their attention.  This may for example be set out in a covering letter or in the tax return itself. Therefore a tax payer who makes full disclosure in self assessment will generally have finality within 12 months of the filing date.  The time limit for making a discovery assessment is 5 years.  This is extended to 20 years in the case of fraud or negligence.

In addition to interest HMRC can impose a penalty for omitting information for a return or the return includes false information.  The maximum penalty is the difference between the amount paid and the amount due.  This may be reduced by HMRC depending on co-operation etc.

Appeals

The tax payer has a right of appeal against an assessment or amendment of his self assessment return,  HMRC enquiry,  a discovery assessment or a penalty. There is generally 30 days to appeal.

HMRC may offer a review, or its own accord or on request. This is done by an officer who was not involved in the original case. If the  disputes that cannot be settled it cant be referred to the Tax Tribunal.

Alternative dispute resolution is available in some kind of cases. HMRC may offer a proposal for resolution by ADR.

Generally, the tax must be paid upfront before an appeal. The Tribunal varies its level of formality depending on the the circumstances. There may or may not be an oral hearing.

HMRC and tax payer will present their case.  The tribunal’s findings are conclusive in relation to the facts but disputes and points of law can be appealed to the Upper Tribunal (Tax and Chancery). Permission to appeal is required.

At appeal stage, both sides will normally meet their own costs.  The tribunal can award costs against the party who is deemed to act unreasonably in bringing or persisting with an appeal. The costs of appeal are not allowable for tax purposes.