Saving tax through self assessment

This article describes how to save tax and avoid penalties when using self assessment.

HM Revenue & Customs

HM Revenue & Customs and the Contributions Agency are responsible for the administration of income tax, national insurance, capital gains tax, corporation tax, petroleum revenue tax, inheritance tax and stamp duty.

Revenue's powers to obtain information

Once a blank tax return (or electronic filing notice) has been issued, the taxpayer is obliged to complete the form and submit it to HM Revenue & Customs.

In some circumstance, HM Revenue & Customs may, by notice, require the taxpayer to produce the documents backing up the items entered on the tax return. There will normally be a time limit of 30 days to produce the documents.

If the documents are not presented to HM Revenue & Customs within the specified time, it may obtain the power to enter the premises of the taxpayer and seize the relevant records. If the taxpayer has an accountant, they may also enter the accountant's premises and cease papers related to the taxpayer's affairs.

Payment of tax

If you fall within the self-assessment regime and you are issued with a self-assessment tax return form, you may be required to make tax payments on account of your previous years tax liability (excluding any capital gains tax payable). The two payments of 50% of the previous year's liability will be due for payment on both 31 January and 31 July each year.

As the payments on account are estimated, based on the previous years liability, there may be a catch up charge which will be payable on 31 January following the year of assessment. (i.e. for the year ended 5 April 2007, payments on account would be made on 31 January and 31 July 2007, based on the previous year, with any balancing payment being due on 31 January 2008).

Any capital gains tax (being tax due on the disposal of a capital asset) is payable on 31 January following the year of assessment (i.e. 31 January 2008 in the above example).

If you are employed, underpayments below £2000 can be collected via an adjustment to your notice of coding.

Payment of tax

Around the time the payments are due to be made, HM Revenue & Customs should issue a statement of account detailing the amount of tax outstanding. The payment methods will be shown on the back of the statement and a payslip will be attached to the bottom of the statement.

Repayment of tax

If a repayment of tax is due to the taxpayer, this will attract a repayment supplement from the date of the original payment to the date of repayment.

Payment of National Insurance

For employees, National Insurance Contributions are deducted each month, along with the tax, under the PAYE system.

For the self-employed, the National Insurance Contributions are payable on account each year, on both 31 January and 31 July.

Keeping records

You have been required by law to keep adequate records of your income and expenses since April 1996. These records must be retained for at least 22 months after the tax year they relate to, and if they are records in respect of self-employed income from a self-employment or partnership, they must be kept for at least 5 years after the filing date of 31 January.

Examples are:

• If you are an employee you should keep you payslips, P60, P11D and details of any expenses reclaimed from your employer.
• If you have savings income you should keep any statements and tax deduction certificates.
• If you have made any capital transactions you should keep copies of contract notes and documentation regarding these.
• If you are self-employed or in partnership you should keep records of all your business activities, including receipts, invoices and bank statements so that you can substantiate the amounts received or spent.

In all cases where the inspector of taxes has enquired into your tax affairs, you must keep your records until the enquiry is complete.

Penalties

Penalties and interest will be charged by HM Revenue & Customs in respect of payments of tax which are made late.

The penalty ranges from a 5% surcharge if tax remains outstanding for up to 6 months to 10% for over 6 months. (eg. A 5% penalty arises on any balance of tax due on 31 January and still outstanding on 28 February).

Interest will be charged on any outstanding balance of tax, from the date the payment was due to the date payment is made.

Late submission of a tax return

Penalties will be charged where the self-assessment tax return is not submitted by the due date (being 31st January following the year of assessment).

If the return is late by up to 6 months the penalty will be £100. If it remains outstanding for over 12 months the penalty will be £200 plus 100% of the tax unpaid for the year concerned.

Failing to notify HM Revenue & Customs of chargeability

The maximum penalty that can be charged is 100% of the tax assessed that remains unpaid at the 31st January following the year of assessment (i.e. for 2006/2007, 31 January 2008).

Failing to keep adequate records

The rules allow for a penalty of up to £3,000 to be charged for each failure to maintain or retain adequate records to back up a return (or claim). However, a penalty is not charged automatically.

HM Revenue & Customs will look at each case individually before deciding what penalty, if any, to charge. The full penalty will be charged only in the most serious cases, for example, where records have been deliberately destroyed in order to obstruct the course of an enquiry. If you are charged any penalties, you have the right to appeal against them to the Appeal Commissioners - an independent tribunal.

HM Revenue & Customs' objective is only to tax you on the correct amount legally due. This may be difficult if you don't have sufficient evidence. You could end up paying more tax than necessary, simply because you were unable to provide adequate supporting records.

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