Tax return online filing, NRCGT penalties, and Money laundering supervision

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In our latest tax tips email for accountants we said:

Halloween normally marks the end of the paper tax return filing season, but this year that may not be the case. HMRC has amended its software to allow more tax returns to file online, but problems remain. We have some good news concerning late submission of NRCGT returns. Finally, the fees for supervision under the money laundering regulations are increasing, which may impact your practice and some of your clients.

Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Tax return online filing

HMRC implemented an in-year fix to the official 2016/17 personal tax calculation on 23 October, and all tax return filing software should now have been updated to align with the new version of that tax calculation.

Contact your software provider if you haven’t received a notice to update since 23 October, but beware of links in emails which may be spoofs from software companies. The fraudsters are keen to gather login details from accountants in this way.

The revised tax calculation should allow SA tax returns to be submitted online which fell into exclusions numbered: 48 to 56 and 58 to 59 (see exclusion list version 7). This should cover the majority of the excluded tax returns. However, the exclusion list has been extended by four more categories which came to light due to work on the tax calculation fix.

There are also significant problems with exclusion number 68 which concerns the reallocation of the savings rate band and personal allowance where there is significant dividend income. Software providers have found it very difficult to program this wide exclusion. As a result, their software may block online filing of tax returns based on exclusion 68, when in fact the revised tax calculation would produce the correct result, and online filing should be permitted.

For most of the live exclusions HMRC has provided an estimate of the amount of tax which would be overpaid if the tax return is submitted online. This is useful as you can have a sensible conversation with your client about the amount of tax at stake versus extra costs for submitting a paper tax return.

Where tax returns have already been filed on paper or online, HMRC will review the tax computation and amend it where necessary to align with the fixed version of the tax calculation. If an adjustment is needed, the taxpayer, and you as their agent, should receive a revised SA302 computation and a letter advising of the correction.

Problems with SA filing, What are the facts?, Money laundering regulations

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The P11D and P11D(b) forms should be completed by now as the deadline was the end of June, so you can turn your attention to the SA tax returns. But before you plough ahead read our update on the latest software issues, and how to avoid them. We also have a tale of what can go wrong where your client doesn’t provide all the facts about the land he has sold. Finally, you need to be aware of new anti-money laundering regulations.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Problems with SA filing

Personal tax is now so complicated that it can require a complex algorithm to work out the most beneficial off-set of allowancesagainst classes of income for an individual taxpayer. We explained the problems this is causing in our newsletters on 30 March and 27 April 2017.

HMRC’s current work-around is to issue a list of SA exclusions for online filing. If the taxpayer’s circumstances fall within one of those exclusions, the SA tax return for 2016/17 should be filed in paper form, not online. HMRC has recently issued version 4 of this list (see below).

The list of exclusions covers much more than incorrect allocations ofreliefs and allowances. For example, averaging for farmers and artists (exclusion no.61), and trade or property losses broughtforward into 2016/17 (exclusion no. 58) may cause problems. If your client has any unusual circumstances to report on their 2016/17 tax return, check the exclusions list before attempting to file online.

All software providers should have incorporated HMRC’s exclusionslist into their 2016/17 tax return software, but as version 4 of this list was published on 19 June, it will take sometime for all tax return software to be updated. In the meantime, the advice from the professional bodies is to wait a few weeks before filing in paper form, as an electronic solution may become available.

HMRC has some other problems with its online SA service.Taxpayers who access the service through the GOV.UK Verify (identity checking service), can’t request reductions to payments on account or set up a direct debit to pay their tax. A work-around is to set up a one-off tax payment through the taxpayer’s bank account, and used the paper form SA303 submitted by post to reduce a payment on account.

When is a tax return needed?, How to make a tax claim, How to get a CIS repayment

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We examined three basic tax compliance tasks last week: who needs to submit a self-assessment tax return, how to make a tax claim, and how to apply for a CIS tax repayment. HMRC’s guidance on the first question is not in line with tax law. The second question has a surprising answer derived from a recent tax case, and a new procedure for obtaining CIS repayments has just been announced.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

When is a tax return needed?

Accountants are often asked whether a SA tax return is really necessary, particularly where all the taxpayer’s income is fully taxed under PAYE. The correct answer is that a tax returnshould not be necessary for such a taxpayer, unless he also has capital gains or child benefit to declare, or his income is over £100,000.

However, HMRC insist that all company directors should register for self assessment and submit a SA tax return every year. An exception is specified for directors of charities who don’t receive pay or benefits. This reasoning is based on the guidance on gov.uk under directors’ responsibilities, but a recent tax tribunal case has shown that this guidance is does not accurate reflect what the law says.

Mr Kadhem was appointed as a director in May 2014, and HMRC apparently sent him a notice to file a SA return on April 2015. Kadhem insisted that he didn’t receive this notice, and was not aware that he was required to submit a return as all his income was taxed under PAYE. Only after a late filing penalty was issued did he submit a tax return, but he appealed against the penalty.

The tribunal squashed all the late penalties as HMRC could not prove that the notice to file was sent to the correct address. If a person does receive a notice to file a SA return, that tax return must be submitted, unless the notice to file is withdrawn. The taxpayer (or you on their behalf) can ask HMRC to withdraw a notice to file, but the call-centre operative may not agree to this request, as they can only see HMRC’s incorrect guidance on the issue.

The list of who must file a tax return has been updated for 2016/17 to include individuals who have either:

· dividends from shares of £10,000 or more;

· interest from savings or investments of £10,000 or more.

This arbitrary £10,000 threshold is odd, as someone whose personal allowance has been covered by earned income would have to pay tax on dividend income exceeding £5,000. The same taxpayer would have a tax liability in respect of interest over £6,000, if the savings rate band was available, and he was a basic rate taxpayer.

Where the taxpayer has untaxed income, you can report this to HMRC using the agent’s dedicated line, or on the general HMRC contact number: 0300 200 3300.

Employee expenses, Tax deducted by banks, Donations by a company

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Some clients may have already sent you their tax papers for 2016/17, so last week we examined two issues that crop up on relatively simple tax returns; employee expenses and tax deducted by banks. We also had a quick reminder of what donations a company is permitted to make and whether they are tax deductible.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Tax deducted by banks

Since 6 April 2016 interest paid by most deposit takers: banks, building societies and NS&I, should be have been paid without tax deducted. This doesn’t mean you can ignore the interest certificates issued by deposit takers, as the interest must be declared on the taxpayer’s SA return.

The interest is taxable, if it is not paid out of an ISA account, but in most cases the tax rate will be 0%. This zero rate applies where the interest is covered by the taxpayer’s personal savings allowance of £1,000 (£500 for higher rate taxpayers), or their savings rate band of £5,000. Additional rate taxpayers are not entitled to a savings allowance.

It’s worth noting that many PAYE codes for 2016/17 and 2017/18 have not taken account of the available personal savings allowance or savings rate band, and have incorrectly set the taxpayer’s personal allowance against estimated amounts of interest received. Such taxpayers should be due a tax repayment if the personal allowance could have been set against taxed employment income.

Look closely at the bank interest certificates, as those issued in respect of payments into “reward” current accounts may have basic rate tax deducted for 2016/17. The “reward” paid by the bank is not interest, so it can’t be paid gross, and it is not covered by the personal savings allowance or the savings rate band. The reward is an annual payment and it should be declared on the tax return under “other income”, with the tax deducted also reported. A higher rate or additional rate taxpayer will have more tax to pay on such a “reward”.

Confusingly cash-back payments are not “rewards” and are not interest either. They do not have to be reported on the tax return if the cash-back is paid in respect of a personal account. However, if the cash-back is received on a business bank account (which is unlikely), it should be declared as part of the trading receipts (see BIM100210). The bank concerned should issue guidance as to the tax treatment of its current account rewards or cash-backs.

What’s not happening, PAYE codes, Paper tax returns

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We normally warn you about imminent changes in tax law and practice, but this week we have to tell you about several things which may not be happen, although the start date for the change has already passed. We also have news of an upheaval in PAYE codes, and provide a reminder of which SA tax returns can’t be submitted online.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Paper tax returns

Every year there are a number of circumstances in which a taxpayer’s SA tax return will not be accepted by HMRC’s systems as valid, and so it must be submitted in paper form. These circumstances are listed by HMRC as exclusions for online filing, see link below.

This year there are more exclusions than usual because the HMRC software has not been written with the flexibility to match the tax law, and as a result a correct tax calculation performed by third party software will be rejected as incorrect by HMRC. Alternatively, if the third-party software has replicated HMRC’s errors, the SA tax return will be accepted but the tax calculation will be incorrect.

The key issue is that tax law allows the personal allowance to be allocated in any way which is beneficial to the taxpayer. Traditionally this allowance has been allocated against income in the order of; non-savings, savings and then dividend, but for 2016/17 that may not be the most advantageous allocation. For example, it may be beneficial to set the personal allowance against dividends first leaving savings income within the saving rate band.

We explained two of these new exclusions in our newsletter on 30 March 2017. There also is a third new circumstance where the HMRC systems will reject the tax return:

Where the taxpayer’s non-savings/savings/dividend income amounts to less than £11,000 plus savings rate band (£5000), but the taxpayer also has a chargeable event gain. HMRC’s software incorrectly extends the basic rate band by the SSR of £5,000, but that is actually part of the basic rate band.

If your client has an unusual mix of savings income, and very little earned income, you should check the list of exclusions for online filing to see if a paper tax return will be required.

Early tax returns, PAYE penalties and information, Deceased estates

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Last week we explained why you should not rush to submit 2016/17 tax returns, in case they are not needed. We had an update on HMRC’s position concerning PAYE penalties, and on providing pay details over the phone. Finally, we referenced an extended concession for income received by estates of deceased persons, and new probate charges to look out for.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Early tax returns

We told you about the new HMRC power to raise a “simple assessment” in our newsletter on 3 November 2016. HMRC has still not published guidance on how to deal with such assessments, but they will shortly issue the first simple assessments for 2016/17.

The recipients are likely to be pensioners who receive a state pension which is not covered by their personal allowance, and hence have a small tax liability. Normally the only way to assess this tax is to complete an SA tax return. Completing these returns are stressful for the taxpayer, and viewed unnecessary, as HMRC should already know the level of the individual’s state pension.

For 2016/17 HMRC has issued notices to file a tax return to pensioners in this position. However, in May 2017 HMRC will issue simple assessments to pensioners who have a tax liability in respect of their state pension, and who have no other income. HMRC will write to those taxpayers informing them that they do not have to submit an SA tax return for 2016/17 after all.

Our advice is to hold-off completing the SA tax returns for pensioners with simple tax affairs until the end of May, and tell those clients to look out for further letters from HMRC.

Deregister for VAT, IR35 for public sector contracts, Penalty notices

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Our most recent email contained tips on how to manage a smooth withdrawal from VAT for those clients who are only VAT registered in order to take advantage of that scheme. Clients who have contracts for services with public sector bodies need advice about the new IR35 rules, so we examined the HMRC guidance in this area. Finally, we shared a warning about inaccurate penalty notices.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Penalty notices

HMRC has a number of legacy computer systems, which don’t always talk to each other effectively. This has caused problems with class 2 NIC liabilities disappearing from taxpayers’ records, as we reported in our newsletter on 8 December 2016.

A work around invented by HMRC staff is to issue a temporary NI number for the taxpayer, so class 2 NIC can be paid alongside his SA income tax liability. However, in some cases the temporary NI number has triggered the creation of a duplicate UTR number for the taxpayer.

When the taxpayer’s 2015/16 tax return was submitted only one of their UTR numbers recorded the receipt of that return, so the HMRC computer has issued a late filing penalty for the other duplicate UTR number. What a mess! Your only option is to appeal against the incorrect penalty notice.

The HMRC computer also has its calendar in a knot. The £100 late filing notices for 2015/16 SA returns should have been dated 22 February, but were actually dated 15 February, and did not arrive with taxpayers until early March. If you have only just received a penalty notice for your client, you can submit a late appeal. A mistake by HMRC in the detail of the penalty notice – such as with the issue date, should be accepted as a reasonable excuse of making a late appeal.