The modern world is incredibly complex and is getting more so as technology takes over our lives. But just as technology has opened up new opportunities, so it’s made it easier for HMRC to get a handle on how taxpayers are managing their affairs.
The tax body frequently ﬁnds errors, and I spoke to Helen Thornley , a technical ofﬁcer at the Association of Taxation Technicians (ATT), about her view on where they are frequently being made and what tax payers need to do to stay out of harm’s way.
Failing to keep records
It is absolutely crucial that any business, however small, keeps good records for tax purposes.
The consequences of failing to keep records can be signiﬁcant. In a recent tribunal case, Sean Convery, a haulier and vehicle repairer, failed to keep records of business sales for a number of years. HMRC raised an assessment of the lost VAT amounting to over £46,000 based on two invoices which was the only information available to it in the period. When the taxpayer challenged this assessment, the tribunal upheld the assessment as the judge considered that HMRC had made a reasonable estimate on the limited evidence available.
For Helen, records are everything and she advises the self-employed to “keep records separately from personal records in the event of an enquiry”. The same applies to companies which, as Helen explains, “should have their own bank account and records as they are a separate legal entity to shareholders and directors”.
Firms need to retain enough information – such as details of sales, purchases, stock, capital assets used in the business and details of any funds taken out by the business owner – “to,” as Helen says, “accurately calculate their tax position”. She adds that although businesses can keep their records in any form, “owners need to think about what taxes they pay and be aware of the implications of HMRC’s Making Tax Digital (MTD) when they are considering how they keep business records”.
Helen explains that “at present, VAT registered businesses with a turnover of £85,000 are required to comply with MTD rules, which means they must keep their record digitally – either on a spreadsheet or software package – and submit VAT returns to HMRC electronically”. The problem is that MTD is going to be rolled out further and to other taxes.
As for how far back records must go, Helen tells that “the self-employed should keep records for at least ﬁve years after the 31 January submission deadline for the relevant tax year. In comparison, a company must preserve its ﬁnancial and accounting records for six years from the end of the ﬁnancial year that they relate to.”
And for both, records of assets such as property and capital which the company expects to last for more than six years should be kept for longer.
Poor record keeping can lead to a world of pain. Says Helen: “HMRC can charge penalties of up to £3,000 for each failure by a business to keep and preserve suitable records. Worse, a company director risks disqualiﬁcation.”
Missing income off from self-assessment
A common mistake made by self-employed individuals who also have earnings through PAYE is to complete their self-assessment for the business income, but leave off the PAYE earnings, thinking it has already been taxed.
The problem is, as Helen Thornley explains, “while tax may well have been taken from the salary under PAYE, it is quite possible that this is not the right amount, as an individual’s tax rate depends on their total income, including both PAYE, self-employment and any other income sources such as dividends”. In other words, all income should be detailed on a self-assessment return, even if tax has already been deducted at source, to ensure that the ﬁnal tax bill is calculated correctly.
Missing reporting deadlines
It’s important not to overlook deadlines for the reporting of tax, noting that different taxes have different reporting requirements and deadlines.
Helen points out that “those within self-assessment must report their taxable income annually via self-assessment”. The deadline to report, she says, is 31 January following the tax year – so for the current 2020/21 tax year ending on 5 April 2021, the deadline to complete a self-assessment return is 31 January 2022.
In contrast, Helen says that the deadline for an incorporated business to ﬁle a corporation tax return is 12 months from the end of the accounting period. For VAT registered businesses, reporting is generally quarterly.
And for any business with employees, reports on payments must be made through the Real Time Information (RTI) system on or before each payday.
Again, there are penalties for non-compliance, and they vary on the nature and sometimes the amount of tax.
For an individual who ﬁles their self-assessment late, the initial penalty is £100 if the return is up to three months late. After that, HMRC can charge daily penalties of £10/day for the next 90 days. If the return is still outstanding after six months, then the penalties will be the greater of £300 or 5 percent of the tax outstanding.
For corporation tax, the penalties start at £100 for a late return, with a further £100 charged once it is over three months late. Once the return is six months late, HMRC will estimate the corporation tax due and add a penalty of 10 percent of the unpaid tax.
The penalty regime is the reason why Helen suggests businesses “keep a diary of deadlines and start gathering information well in advance to ensure that they can ﬁle on time”. On top of that, she warns that “HMRC systems and helplines can also get very busy near to deadlines, so it is best not to leave to the last minute if you think you will need further assistance to ﬁle.”
Failing to save for tax
Payment schedules can, reckons Helen, be complex: “For those in self-assessment, tax is payable in instalments in July and January each year. The ﬁrst payment on account is due on 31 January in the tax year, the second by 31 July after the tax year and the ﬁnal balancing payment on the 31 January following the end of the tax year – at the same time as payment on account for the next tax year.”
Further complexity is added in that payments on account are based on previous year’s proﬁts, so in the ﬁrst year of trade there are no payments on account, and all the tax for the ﬁrst year is paid on the 31 January following the tax year that trade started.
Life for all but the largest companies is much easier to comprehend as corporation tax is payable nine months and one day after the end of the accounting period. Company directors who also take dividends from the company will probably have to complete a self-assessment to pay tax on any dividends over £2,000; they will have to comply with both corporation tax and personal tax deadlines.
As to reducing risk, Helen recommends that “taxpayers siphon off enough to go into a separate bank account purely for tax bills”.
Not taking good advice
Taking advice from friends and other business owners is another mantrap. As Helen says, “there are times where advice from friends with relevant experience on commercial matters is helpful, but tax is both complex and very fact speciﬁc and it is entirely possible that what might be the best course of action for one person is not the right approach for another”. It follows that following inaccurate, incorrect or incomplete advice can lead to penalties and interest for incorrect returns and late paid tax.
Apart from seeking good paid-for advice from a professionally qualiﬁed tax adviser or accountant, Helen says that there are lots of useful sources of reliable free guidance on tax issues on gov.uk and also tax charities such as LITRG (the Low Incomes Tax Reform Group) – “this may not sound appropriate for a successful business but the basic tax guides here are sound even if you are not on a low income”.
Claiming tax reliefs wrongly
The last area Helen covers is claiming for costs which are not allowable. She gives the example of a self-employed individual “who can claim tax relief on the costs of training which refreshes their existing knowledge, but not for learning an entirely new skill”.
She continues: “Exactly what is allowable can depend on the structure of the business; the rules are much more generous for companies and a company can pay for an employee or director to learn new skills relevant to their work and claim relief for the cost against corporation tax all without creating a beneﬁt in kind for the individual receiving the training.”
Another point to consider is not claiming relief for costs which are personal which do not relate to the business. Helen’s advice is that appropriate adjustments or charges need to be made for private use of business assets in an unincorporated business. And in an incorporated business, where a beneﬁt is made available to an employee or director of a company such as a company car, a beneﬁt in kind will apply which must be taxed and reported to HMRC.
Penalties will be higher if HMRC spots the error before the business corrects it. But just as overclaims can be made, it is very easy to miss off genuine business expenses especially where the business has not kept detailed records of its expenses. Helen’s view is that “under-claiming genuine allowable business expenses will unnecessarily increase the tax bill”.
Tax has the potential to be difﬁcult and expensive if errors are made. However, taking professional advice or reviewing the rules on gov.uk will pay dividends. Don’t make assumptions or ignore obligations; it will be costly.