Welcome to the February 2018 newsletter from Chamberlains
We finally got through the last tax returns in January (well – virtually all; there are still one or two new ones coming out of the woodwork) and most people paid their tax. What happens if they (I’m sure not you!) didn’t? See below…
To be honest, so many tax return late-comers caused a bit of a strain on our resources (you may have missed our monthly newsletters) to maintain our normal high quality of service to our clients. We’re tackling this in two ways.
Firstly, we were delighted to welcome Nikki Crumbie at the start of January. She’s another qualified and experienced accountant who’ll be helping with all sorts of work for clients – already proving very valuable.
And secondly, in common with many other firms of accountants, we’ll be increasing our fees for late tax returns to try to get people to send in tax returns early. In our letters of engagement we’ve always said that we couldn’t guarantee to deal with tax returns if the information came in after the end of September – although in practice we’ve almost always managed to cope. However, from this year, fees will increase 25% for anyone after the end of September and by 50% for anyone after the end of November. So you’re warned…
LATE PAYMENT AND PENALTIES
So what happens if you send in your tax return late or don’t pay your tax on time? (Not you, of course! But maybe you can feel smug about someone who you suspect may not be as good as you…)
A personal tax return needs to be sent to HMRC by 31 October after the end of the tax year if on paper, or the next 31 January if online. Most tax returns are submitted online – it’s more convenient and helps to avoid processing errors. If you miss these deadlines, there’s an automatic penalty of £100 which increases to an extra £10 per day after three months to a maximum of £900. After six months there’s another lump sum of £300, and the same again after 12 months.
So this maximum basic penalty, if you submit your 2015/16 tax return today, more than 12 months late, would be:
More than three months £900
More than six months £300
More than twelve months £300
This assumes that there’s no tax to pay. But if you owe any tax, there are extra penalties. Let’s assume that the tax return, when eventually sent to HMRC, shows that you owe £1,000. If you pay after the end of February, ie. one month after the initial deadline for the tax return, there’s an extra 5% of the tax due, ie. £50, and there are extra 5% penalties after the end of July and the following January – a total of £150.
Finally, there’s a little interest, but that’s the least of your problems – it’s currently only 3% for a whole year. On the other hand, there could be worse penalties if HMRC decides that you’ve been deliberately been withholding information. But this can be quite complicated, and it’s a matter for negotiation.
PAYMENTS ON ACCOUNT
You may remember that I’ve talked about payments on account (“POAs”) that many people have to pay in January and July. These are HMRC’s best estimate of the tax that will be due for the following tax year. For example, if your tax liability for 2016/17 was £5,000, you have had to pay £5,000 in January plus £2,500 at the same time, and you’d expect to pay another £2,500 in July towards the expected 2017/18 bill of £5,000.
If the liability is less than £1,000 or 25% of the tax that was deducted before it reached you, no POAs are necessary. Likewise, if part of the liability results from a capital gain, this can be ignored.
We can make a claim to reduce the POAs if we know that your liability is likely to be lower in 2017/18 – perhaps your income has reduced or you know that more tax is being deducted along the way by PAYE. Or it may be that you’re making extra pension contributions to reduce higher rate tax. However, if the taxman decides that this is being abused – ie. that you’re just reducing your POAs to delay payment of tax for no good reason, there can be a penalty of the amount that should have been paid, plus interest for late payment.
If we’re not sure how much to reduce the POAs, we’ll sometimes suggest that we leave the January POA as is, but that we complete your tax return before the end of July, so that we can reduce the July POA to an exact amount, or even get a refund. Another good reason for completing tax returns early!
AND TALKING OF REFUNDS,
Payments on account and tax deducted through the year from pensions or employment income are inevitably provisional. Until your income is brought together via your tax return or through the workings of the mighty HMRC computer systems (but they won’t necessarily have the full picture), nobody can be quite sure how much tax you’ll need to pay. It’s highly unlikely that the tax due in 2017/18 will be exactly the same as in 2016/17, but the POA system is HMRC’s best guess unless we tell them otherwise. Likewise, the PAYE codes used to deduct tax from employment income or pensions are also a way of setting aside the estimated amount of tax due.
In other words, the tax due is almost always different from what’s been deducted during the year. If too little has been paid, there’ll be extra to pay by the following 31 January. But if too much has been deducted – which often happens – this is normally refunded as soon as your tax return is submitted. Hence my comment about early completion of tax returns.