Self-Assessment Guidance.
The 31st January tax filing deadline may be behind us with another year out of the way. However, we thought while fresh in our minds and in preparation for the end of the 2016 tax year, which is only 2 months away, we would set out some useful tips on do’s and don’ts thus easing the pain for 2016 reporting.
Below we have listed some of the common problems and issues we came across whilst completing our client’s tax returns this year.
All income needs to be reported!
Even if you only receive a small amount of interest or a small dividend, it still needs to be reported, HMRC has no de-minus amount, as a couple of our clients thought.
Although omitting a small amount of income may only have limited tax implications with regards to lost tax, to HMRC it is an error which raises suspicions that other sources of income or gains have been missed, which means HMRC will open a tax enquiry to see if they can find more tax.
HMRC’s Connect IT system collects data from as many as 30 databases, including the Land Registry, DVLA, employer records, merchant credit card processor etc. This enables HMRC to run quick checks against the information on the individual taxpayers return. Anomalies will be flagged up and lead to an enquiry. For example, one client provided us with a P45 for an employment that ended in the year, which was reported on their employment pages, within five weeks of filing the return, an enquiry had been opened. When we enquired in to what the issue was, HMRC had no record of the employer notifying HMRC of the taxpayers employment ending. Although not serious and resolved quickly, it shows the speed that HMRC can run checks particularly for items such as employment income (P60) and employment benefits (P11D).
In respect of offshore income, see our article on HMRC’s crackdown on non-disclosure and its tax exchange agreements with over 100 countries.
Enterprise Investment Scheme (EIS)/Seed Enterprise Investment Scheme (SEIS)
EIS is a Government scheme designed to help smaller higher-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. SEIS is a similar scheme but for young companies (which means higher risk, but better tax reliefs). Until recently with the growth of crowdfunding, these reliefs were the domain of professional business angels (think Dragons Den), but with the growth of crowd funding and more structure EIS/SEIS products being offered and advised on by IFA’s, we have seen a growth in the number of taxpayers investing under these schemes.
The key message is no EIS 3 certificate, no tax reliefs! The EIS 3 certificate is supplied to the individual investor by the company who has received the investment once it has submitted a compliance statement (form EIS1) reporting the investment and investors to HMRC. HMRC check the statement, then if all is in order, issue the company one EIS 3 for each investor. The company or its advisors complete the EIS 3 and send it to the individual investors who can then claim the tax relief on their return, or submit the rear page of the form to make a carry-back income tax claim.
If the company or fund you have invested in, delays in submitting the compliance statement, then you will be delayed in obtaining your EIS 3 certificate and your tax relief. With the explosion in the number of taxpayers investing via these schemes, HMRC is struggling to turn applications around, on average 12 weeks, which again adds to the delay.
We can’t as one IFA advised a client – complete the return claiming the relief while waiting for the EIS certificate! A quick check for HMRC is to see if the EIS/SEIS investment has been registered, we pull the return. We advise to keep on top of your investments and chase up your EIS 3.
EIS/SEIS – Part 2
In follow up to above re these tax relief schemes:
- When making an investment, make sure you have sufficient income in the current year or the previous on which you can claim your income tax relief against. Otherwise it is wasted, it can’t be carried forward. Remember SEIS provides for 50% income tax relief and EIS 30% relief, however you need to hold the investments for the prescribed period of 3 years, otherwise some of the relief is clawed back by HMRC and you lose the capital gains tax exemption on disposal.
- More than missing out on the income tax relief – If you have no income and don’t claim the income tax relief, you are not entitled to capital gains tax exemption on the final sale of the investment (if the investment makes it!) and will end up paying 28%.
- Husband & wife joint investments where the investee company provides one EIS 3 per couple are also a problem. If both husband & wife wish to make an income tax carry back claim or a capital gains tax deferral claim, you only have once certificate which can only be used by one investor. We advise stressing to the company that your investment is separate so each receives a certificate.
Self-Employed & Partnerships
We struggle with the self-employed & partnerships where we receive their financial information (generally in a poor condition) in January. This indicates to us that up to date financial records are not being maintained during the financial year and we struggle to see how you can run a business without this information. If you require assistance with record keeping it is important to let us know early in the year when we have more time to help you with this.
Poor record keeping to HMRC means tax leakage, therefore a detailed enquiry with lots of records and information being requested resulting in time and cost to deal with. Although there may be no tax underpayment found, it still means the pain of dealing with the enquiry. On the opposite side, it also means that it is highly likely that some business expenses are not being captured, which could mean paying a higher tax bill and that no year-end planning can be undertaken such as reducing payments on account, consideration of tax efficient investments such as a pension contribution, EIS or SEIS.
Operating book-keeping a little and often during the trading year by using a reasonable priced software package such as Xero, saves the pain and the issues of January, or alternatively outsource to an experienced book keeper. In addition, run one trading bank account in to which all trading income is paid and all business expenses, with your profit share/drawings being transferred to a personal bank account out of which household bills etc.
Accuracy Matters
Estimates are not allowed – HMRC expect to see records to support investment income or business expenses, if they raise an enquiry. For example, if you claim business mileage using the AMAP rates (45p per mile first 10,000 miles), then you need a mileage log detailing date, total mileage and reason for trip. If you claim a percentage of your vehicle to business use then you need a mileage record to support the percentage applied.
This may look like small beer – but if HMRC find 50 taxpayers who can’t support an 80% business use case, only 50%, the revenue take increases and the reason a popular area to look at.
Keep schedules and records to support all claims and expenses.
Vehicles
Clients often get confused about cars. For sole traders you can include the car as a business asset and then put through all of the costs of running that vehicle and fuel etc. but you would need to disallow a proportion for private use.
You would also then get an annual write down for the car which is restricted for private use.
For Limited companies who operate a company car this is more onerous and expensive, you would not do a private use % but you would need to pay tax on the benefit in kind if the vehicle is held within the business. Alternatively you could use the AMAP rates of 45p per mile up to 10,000 miles and 25p thereafter, but it is an either or option, you cannot claim both.
There are lease agreements available as well but we would need to see the agreement to determine the tax treatment, if an operating lease you could claim the monthly charge but if a HP arrangement the car would be treated as purchased and owned upfront.
Home as Office
Although the man down the pub may do it, if you are claiming home as office and not using HMRC’s new statutory rates, you cannot claim what is referred to as “sunk costs” relating to the home – costs that you would pay whether or not you work from home, for example mortgage costs, council tax, in calculating the allowable expense.
Should you require further information on claiming home as office, we have a fact sheet on the subject.
Check Coding Notices
One reason for year-end tax liabilities for those employed who have the majority of their tax collected at source, is having the incorrect tax collected monthly through-out the tax year from their employment income. This is due to an incorrect coding notice which is issued before the start of the tax year. The 2017 tax year coding notices will be issued over the next two months.
Checking your coding notice should prevent any future nasty surprises. Many taxpayers pay ‘lip service’ to their coding notice and tax deductions; incorrect tax codes can lead to a reasonable sized underpayment. Those employees who use an advisor to prepare and file their self-assessment return cannot rely on their advisor to pick up the issue until it is too late, i.e. when it comes to completing their self-assessment return. Advisors do not receive copies of coding notices.
Disposal of Capital Assets
The gift of a capital asset, unless to a spouse, is a chargeable event for capital gains tax and therefore consideration needs to be given to whether it needs to be reported or not. In addition, if you have sold an asset at a loss it should be reported, firstly capital losses can be carried forward and set against future capital gains. Secondly if proceeds received for the asset, are four times the annual exemption, the disposal has to be reported.
The sale of capital assets such as property is a current favourite of HMRC and so if you have sold a property even if you think you are entitled to principal private residence relief, it is important to let us know so that we are aware and can check the facts.
Tax Enquiries
With the Connect IT system (see above), robotic tools to scan website activity such as E-bay to check for trading activities, checking social media to build lifestyle profiles, requesting records from third parties for example property management companies to identify buy to let landlords, the number of tax enquiries is on the increase.
Consider tax investigation insurance which covers the advisor’s costs of dealing with the enquiry.
Should you wish to discuss any of the above, please do not hesitate to contact us.
Harbour Key Limited
8 February 2015
(0) 1242 244115
(0) 1242 241747
