?What is Self-Assessment?
Self Assessment (SA) was introduced in the 1990s. It puts the onus on taxpayers to “self assess” their tax liability. That means that it is the responsibility of the taxpayer to be aware of their obligations and whether they need to file a tax return.
?Who needs to file a Tax Return?
Below is a list of circumstances which require the taxpayer to file a tax return. The list is not exhaustive but any of our UK tax team can clarify anything you’re not sure about. You need to file a UK tax return if:
?When do I need to file a UK tax return?
The tax year ends on 5 April. If you are filing on paper you must file before 31 October following the end of the tax year. If you are filing online you must file on or before 31 January following the end of the tax year.
Any balancing payment of tax is due to HMRC by 31st January following the tax year in question.
From your second year of self-assessment, HMRC may ask you to make payments on account. These are estimates of what your tax bill will be at the end of the year, based on the previous year's return. You will usually make two separate payments, one on 31 January, one on 31 July. You will still need to file a tax return, but the payments on account count towards the final bill.
This is best illustrated by the table below:
| 31 January 2016 | 1st Payment on Account (POA) for 2015/2016 |
| 31 July 2016 | 2nd POA for 2015/2016 |
| 31 January 2017 | Balancing payment for 2015/2016 and 1st POA for 2016/2017 |
?When do I pay any tax due?
Any balancing payment of tax is due to HMRC by 31 January following the tax year in question
From your second year of self-assessment, HMRC may ask you to make payments on account. These are estimates of what your tax bill will be at the end of the year, based on the previous year's return. You will usually make two separate payments, one on 31 January, one on 31 July. You will still need to fill in a tax return, but the payments on account count towards the final bill.
This is best illustrated with an example. Consider the tax year which started 6 April 2015 and ended 5 April 2016 (aka 2015/2016 tax year).
| 31 January 2016 | 1st Payment on Account (POA) for 2015/2016 |
| 31 July 2016 | 2nd POA for 2015/2016 |
| 31 January 2017 | Balancing payment for 2015/2016 and 1st POA for 2016/17 |
| | Et cetera |
?What if I miss the filing deadline? Is there a penalty?
Yes. HMRC introduced new penalties effective 31 January 2012 which are more draconian than before:
| Length of delay | Penalty you will have to pay |
|---|
| 1 day late | A fixed penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe. |
| 3 months late | £10 for each following day - up to a 90 day maximum of £900. This is as well as the fixed penalty above. |
| 6 months late | £300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above. |
| 12 months late | £300 or 5% of the tax due, whichever is the higher. In serious cases you may be asked to pay up to 100% of the tax due instead. These are as well as the penalties above. |
?What if I pay my tax late? Are there penalties?
If you pay your tax late then you will be subject to interest (accruing daily) and possibly surcharges. The interest rate is set by HMRC and is linked to the Bank of England Base Rate.
Surcharges are levied as follows:
| Length of delay | Tax year ended on |
|---|
| Thirty days late | 5% of the tax you owe at the date |
| Six months late | 5% of the tax you owe at the date. This is as well as the 5% above. |
| Twelve months late | 5% of the tax unpaid at the date. This as well as the two 5% penalties above. |
?What if I make a mistake on my Return? Are there penalties?
Yes. HMRC has introduced a new penalty regime for inaccuracies. It works as follows:
| No Penalty | Max 30% | Max 30% | Max 70% | Max 70% | Max 100% | Max 100% |
| Reasonable care | Careless Unprompted | Careless Prompted | Deliberate Unprompted | Deliberate Prompted | Deliberate & Concealed Unprompted | Deliberate & Concealed Prompted |
| No Penalty | Min 0% | Min 15% | Min 20% | Min 35% | Min 30% | Min 50% |
?Are there any other penalties of which I should be aware?
Yes. Penalties can also apply in the following situations (not an exhaustive list):
It should also be noted that HMRC has introduced a special penalty for those evading tax using offshore tax havens. Penalties can be up to 200% of the tax at stake.
Finally, HMRC now also has the power to name
?What is IR35?
IR35 is a piece of anti-avoidance legislation introduced c.1999. Its aim is to counter tax planning which aims to reduce NIC and tax by inserting a corporate entity between the taxpayer and the 3rd party receiving the services.
Using such a set-up is perfectly legitimate in many circumstances; IR35 only seeks to counter those circumstances where there is disguised employment. This means that IR35 seeks to counter those situations where the taxpayer is in reality an employee of the 3rd party not a self employed contractor.
In determining whether the reality is in fact one of employment, the employment v self employment tests above are what is relevant. If IR35 applies then the effect is basically to ignore the corporate intermediary and charge tax and NIC as if the taxpayer is an employee
?I am not sure if I am self-employed or whether I am an employee. How can I tell?
It is vital that you are clear on your employment/self-employment status, for the purposes of understanding what tax and NIC you should pay/how you should pay them, what expense rules are applicable to you and what your legal rights and obligations are. A person's work status is a matter of general law and depends on the overall circumstances. In most cases the answer is clear. However sometimes the distinction is blurred - this can be particularly pertinent to contractors who seek to use a Private Limited company as an intermediary to save on NIC and tax.
?What is a self employed sole trader?
A sole trader is someone who carries on a business in their own name which is not conducted through a limited company.
?What expenses can I claim as a sole trader?
The general rule is that expenses incurred wholly and exclusively for businesses purposes can be taken as a tax deduction.
For more information you can read our Guide to Allowable Self-employment expenses.
In some cases, i.e. with capital items like plant and machinery, cannot be written off against income in one tax year. The cost is written off over several years. The mechanism for this is Capital Allowances – basically tax approved depreciation.
?What records do I need to keep if I am Self Assessed or Self-Employed?
If you are a self employed sole trader you will need to keep all invoices, receipts, bank statements etc to prove the income and expenses declared on your tax return. In general, HMRC advises that you keep sufficient records to support any figures on your return for a minimum of 6 years after it is filed.
As mentioned above HMRC can levy penalties for inadequate record keeping; this is an area of particular interest to HMRC at present and they intend to check 200,000 small business records between 2011 – 2015.
?For how long can HMRC investigate my return?
The general rule is that HMRC can open an enquiry into your return anytime within 12 months after the filing date if the return is filed on or before the deadline.
If the return is late or amended then HMRC have until the quarter day next following the first anniversary of the day on which the return or amendment was made. Quarter days are: 31 January, 30 April, 31 July and 31 October.
After the enquiry window has closed, HMRC can only investigate your return if they can raise a “discovery” assessment. If there is no fraud or negligence the discovery window is 4 years. If there is negligence (carelessness) the window is 6 years. Otherwise it is 20 years.
HMRC can raise a discovery assessment if:
The phrases ‘reasonably expected’ and ‘made available’ have been the subject of a lot of litigation – what do these mean? While the topic is too broad to cover here, in general terms HMR should be reasonably expected to know if there has been a full disclosure on the Return.
If HMRC cannot show this, then they cannot raise a discovery assessment and the taxpayer should have certainty of his tax position after the enquiry window closes.
?How can HMRC raise a discovery assessment?
HMRC can raise a discovery assessment if:
If HMRC cannot show this, then they cannot raise a discovery assessment and the taxpayer should have certainty of his tax position after the enquiry window closes.
?Do I have to fill out a tax return just because I receive child benefit ?
You may. From 7 January 2013, Child Benefit will be withdrawn gradually from families where one parent or partner earns more than £50,000 and withdrawn entirely from those where someone earns more than £60,000 a year.
The charge is equal to 1% of the amount of child benefit of every £100 of income above £50,000 and will be on the full amount of child benefit where income exceeds £60,000.
Example
A taxpayer has income of £58,000 and receives child benefit for two children of £1,752 for a complete tax year. The percentage charge is calculated as follows: £58,000 - £50,000 = £8,000 /100 = 80%. Thus the charge equals 80% of £1,752, i.e. £1,402.
It is an 'earn now, pay later' system – the taxpayer above will get the full benefit up front, but will pay tax through a tax return to effectively reduce or cancel out the gain. The 80% claw back essentially leaves the taxpayer above with £350 of the original £1,752 child benefit.
HMRC suggest that 500,000 parents will have to fill out a self-assessment form, who previously didn't have to, to declare the charge.
If you are one of these people who find they face the nightmare of having to fill out a 2012/13 self-assessment tax form to declare the charge for the period 7 January 2013 to 5th April 2013, Taxback.com offer a fully compliant and efficient tax return preparation service for a flat fee of £149 including VAT – one of the most competitive on the UK market.
Cookie preferences
