Technology has made it easier for HMRC to understand how taxpayers manage their affairs. But consequently HMRC is now more frequently finding errors. While there is not necessarily any suggestion of deceit, it does not hurt to look at the most common reasons for official intervention.
Failing to keep records
The consequences of failing to keep records can be significant. In a recent tribunal case, a vehicle repairer failed to keep records for a number of years. HMRC raised an assessment of lost VAT amounting to over £46,000 based on only two invoices – the only information available to it over the period. The taxpayer challenged this, but the tribunal upheld the assessment as the judge considered that HMRC had made a reasonable estimate on the limited evidence available.
Records are everything and businesses need to retain enough information to accurately calculate their tax position. Although they can keep their records in any form, owners need to think about what taxes they pay and the implications of HMRC’s Making Tax Digital when they are considering how they keep business records.
As for how far back records must go, those who are self-employed should keep records for at least five years after the January 31 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 they relate to.
Poor record keeping can lead to HMRC charging penalties of up to £3,000 for each failure to keep and preserve suitable records. Worse, a director risks disqualification.
Missing income off 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 that 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 PAYE, self-employment and any other income such as dividends.
Missing reporting deadlines
Different taxes have different reporting requirements and deadlines.
Very simply, those within self-assessment must report their taxable income annually via self-assessment. The deadline to report is January 31 following the tax year – so for the current 2020/21 tax year ending on April 5 2021, the deadline to complete a self-assessment return is January 31,
2022.
In contrast, the deadline for filing a corporation tax return is 12 months from the end of the accounting period. VAT is generally reported 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.
There are penalties for non-compliance, and they vary on the nature and sometimes the amount of tax. For example, for self-assessment that is up to three months late, the initial penalty is £100. After that there are penalties of £10 per day for the next 90 days. If the return is still outstanding after six months, the penalty will be the greater of £300 or 5% of the tax outstanding.
For corporation tax, penalties start at £100, with a further £100 once a return is over three months late. After six months HMRC will estimate the corporation tax due and add a penalty of 10% of the unpaid tax.
Fail to save for tax
While taxpayers have a duty to report, they also need to pay the tax on time. But payment schedules are complex. For self-assessment, tax is payable in instalments in July and January each year. The first payment on account is due on January 31 in the tax year, the second by July 31 after the tax year and the final balancing payment on the January 31 following the end of the tax year – the same time as payment on account for the next tax year. Further complexity is added in that payments on account are based on the previous year’s profits.
As for corporation tax, it is payable nine months and one day after the end of the accounting period.
Taxpayers would do well to pay into a separate bank account, that contains monies purely for tax bills.
Claiming tax reliefs wrongly
Another problem is claiming for costs which are not allowable. An example is a self-employed individual who can claim tax relief on the costs of training which refreshes existing knowledge, but not for learning a new skill.
The rules are more generous for companies; a company can pay for an employee or director to learn new skills relevant to their work and claim against their corporation tax without creating a benefit in kind for the individual.
Another point to consider is not claiming for costs which do not relate to the business. Adjustments should be made for private use of business assets in an unincorporated business. And for an incorporated business, where a benefit is made available, it must be taxed and reported to HMRC.
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; this will unnecessarily increase a tax bill.
In summary
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.