Self Assessment is a system of tax administration used in the UK. It is based on taxpayers calculating their own tax bill as part of their tax return submission, rather than relying on assessments issued by the tax authorities. It included a system of random and targeted checking by HMRC with penalties for errors or omissions.

We give below the answers to the most commonly asked questions -

You may not need to complete a tax return at the moment but you must be aware of the circumstances in which you would be required to complete a return. You cannot rely on HM Revenue & Customs to send you a tax return as it is your responsibility to file when necessary.

You must also have the necessary records to back up your figures.

You will always need to complete a tax return if you are self-employed.

Your employment income will be taxed under PAYE so you would not normally be required to complete a tax return. However, you may need to complete a return if you receive an additional source of untaxed income such as UK rental income or any income arising outside the UK.

If you are a 40% taxpayer and have investment income - bank interest or share dividends - you may need to complete a return as this income will not have been taxed at source and you will be required to pay any balance tax through self assessment.

New Income.........?

You must notify HMRC of any new untaxed income by 5th October following the tax year in which it is first received. The penalty for failure to do so could be as much as the tax owing - i.e. you could double your tax bill.

New business.......?

If you start a business you have only a period of a few months in which must tell HMRC so we recommend that you notify HMRC immediately upon starting in business.

Tax return filing......

You must file your tax return by January 31st following the tax year. The penalty for failure to do so starts at £100 and can easily run up to £1,600 plus interest and further penalties on the late tax payment.

A starting penalty of £100 will always be due if your tax return is late. After the initial penalty, if you still don't send your tax return back you will also be charged the following penalties

1. •Over 3 months late - a daily penalty of £10 - up to £900 if this is higher
   

2. •Over 6 months late - an additional £300 or five per cent of the tax due if this is higher
   

3. •Over 12 months late - a further £300 or a further 5% of the tax due if this is higher.
   

Tax payments......

Pay your tax liability by January 31st following the tax year. Tax paid late accrues interest on a daily basis and there are also penalties for late payment of tax.

If you have to settle the balance of your tax liability for 2019/20 under self assessment, you may also have to make payments on account for the 2020/21 liability.

Payments on account are based on the self assessment payment for the previous year and are payable in two instalments on January 31st and July 31st. For example -

    2019/20 self assessment payment - due January 31, 2021           £5,840

    2020/21 first payment on account - due January 31, 2021           £2,920

    2020/21 second payment on account - due July 31, 2021            £2,920

You will not be required to make a payment on account if the previous year's self assessment payment was below £1,000 or if more than 80% of the overall tax liability was paid through PAYE or otherwise deducted at source.

You will not normally have to send accounts or other documents to HMRC as part of your self assessment return. However you must keep all of the relevant records for at least 22 months from the end of the tax year.

If you are self employed then you must keep your records for 5 years and 10 months from the end of the tax year to which they relate.

It is a legal obligation to keep proper tax records. HMRC have some very good booklets which will tell you exactly what records you need to keep, depending on your circumstances. See https://www.gov.uk/keeping-your-pay-tax-records

If you are self employed, you have to keep more detailed records. HMRC expect you to keep -

1. •bank and building society statements or passbooks where the accounts are used for business transactions;
   

2. •a record of stock and work in progress at the end of each accounts period;
   

3. •a record of private money introduced into the business (and its origin);
   

4. •details of money or goods taken from the business for personal use;
   

5. •where a motor vehicle or property is used for both business and private purposes, a record to enable a split of expenditure to be made;
   

6. •a record of receipts under the subcontractors' scheme.
   

If you are not self employed (i.e. an employee) HMRC expect you to keep the following records, where relevant -

1. •details supplied by an employer about pay, tax deducted, benefits and expenses payments (e.g. forms P60, P45 (Part 1A), P11D, P9D);
   

2. •a record of tips or other receipts or benefits connected with an employment not provided by the employer;
   

3. •a record of state pension and other taxable social security benefits;
   

4. •statements from banks and building societies about interest credited;
   

5. •dividend vouchers
   

6. •particulars of purchases, sales and gifts of assets giving rise to chargeable gains.

This article was written by a consultant at Solar Tax to update accountants on HMRC enquiry tactics :

Whilst HMRC can launch an investigation into a business at any time within the statutory time limits enquiry notices are usually timed to be issued at specific times of the year in order to control work flow within the department. Most practitioners will be aware that a favoured time of the year is the end of January – accountants are hoping that their problem clients may have avoided an enquiry only to have those hopes dashed by an enquiry notice dated right at the very end of the month.

The initial letter from HMRC can be quite intimidating as HMRC tend to throw the kitchen sink at it. The letter will often embrace every single aspect of the business and will often be a standard template padded out in parts by reference to the particular client. This can be evidenced by a request for an analysis of debtors in a case where debtors amounted to £6! When this was gently pointed out to HMRC, the reply rather huffily said that HMRC was entitled to ask for the information and it should therefore be provided! Common sense eventually prevailed and no analysis was provided!

Fridays are another favoured time for issuing enquiry notices – what better way to start a weekend than to open the post on Saturday morning and discover that HMRC is about to investigate your business?

The modern way is for HMRC to impose a non-statutory time limit on the taxpayer for the production of the information requested in the opening letter. It will often not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case and agree an extended deadline. This can be useful in both getting some sort of relationship started with the officer dealing with the enquiry and also gaining maximum penalty mitigation relating to cooperation if the worst happens and there is culpability.

HMRC has a variety of techniques which are employed in deciding whether or not a business should be investigated. This “risk assessment” process can be very informative as it will compare the results of the business to other similar businesses; it will produce statistics such as gross profit margin, mark-up rate and comparisons to earlier years. The problem is that if a case is “risk assessed” the officer cannot decline the invitation to investigate. Officers have quite openly admitted that they had no choice but to open an enquiry, even though they knew that there was nothing in it for them, because the risk assessment process had identified the case as warranting an enquiry.

Accountants do not have access to the risk assessment software used by HMRC, so what are the trigger points to look out for?

The simple answer is patterns!

HMRC loves to see consistency across a business, both within the business itself and also across similar businesses. It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit goes down HMRC will raise an eyebrow if proprietors’ drawings/directors remuneration goes up!

If turnover increases substantially it begs the thought that maybe not all of the turnover in the previous year was declared. If it drops significantly then maybe some has been taken by the owner and not declared?

Suspicion is aroused if the claim in respect of power and light increases well beyond what would be expected comparing it with the previous year (and bearing in mind known increases in tariff). The HMRC officer will wonder whether working hours have increased (hence the increase in power/light) and therefore the officer will wonder why turnover has gone down!

Proprietors’ drawings will be similarly scrutinised – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to wonder whether any cash takings have found their way into the proprietors pocket rather than the company’s books. If the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business!

Gross profit margins are a favourite barometer for judging whether or not a businessman is declaring all of his income to HMRC. The GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than 3% will arouse suspicion. HMRC has access to a wealth of information to indicate what the GPR of a particular type of business should be and will be well aware of most of the tricks which the less scrupulous businessman may try in order to disguise the true GPR of his business.

Clients will often be amazed at the depth of knowledge which HMRC may have concerning their business. HMRC has access to information concerning for example the amount of wastage which an experienced butcher would expect from preparing a pig for sale, the wastage which a chef would suffer when grilling a 10 ounce steak. In my previous life as a tax inspector I was present in the kitchen of a Greek restaurant weighing each ingredient as a tray of moussaka was prepared. This enabled me to calculate the profit margin on each serving and led to a rather large adjustment in the accounts!

HMRC will scrutinise invoices carefully. I had a client some years ago who had a Chinese takeaway. HMRC found that when purchasing potatoes the proprietor bought 5 sacks for which he paid by cheque with a further two sacks for which he paid in cash. The two sacks for cash were converted to chips and the sales were not recorded, thus the GPR was unaffected by the unrecorded sale. How did HMRC discover this? – it was written on every invoice “five sacks by cheque plus two by cash”!! This practice had been going on for years and a significant settlement was agreed with HMRC!

HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector. Security companies have been under the microscope for a while now, mainly because it is known that many of them engage guards as self-employed workers but the reality is that they are employees.

Medical practices, dentists and vets are targeted because they engage locums as self-employed workers whereas in reality it is nigh on impossible for a locum to be self-employed.

Professional footballers and their clubs have been under scrutiny for a few years now mainly because in some cases a player will receive a payment for the exploitation of his “image rights” and HMRC does not approve of this because it reduces or in some cases completely avoids liability to UK tax. HMRC appears to be feeling its way somewhat in this area contending in some cases that there is no such concept in UK law but in other cases seeming to acknowledge that image rights do indeed exist as a concept!

HMRC will be concerned as to whether or not an individual has the means to finance his standard of living. Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc. There will often be perfectly sound explanations as to how such assets may have been acquired. I had one client who was investigated because HMRC drove past his house and saw half a dozen boats in the client’s drive. The explanation was that he was allowing fellow yacht club members to store their boats there during the winter, but it still took HMRC the best part of 18 months to accept that the enquiry should be closed without any adjustment.

Another client was the subject of a tip-off to HMRC by a neighbour who became somewhat jealous at seeing a new Porsche parked in the drive every other year. The explanation was again quite simple – once the first Porsche was acquired, it only cost around £20k to exchange it after 2 years for a new model, but again it took a full scale enquiry into the client’s company before HMRC would close the case down.

I knew an accountant who returned a net profit of £5k per annum and he was investigated by HMRC who saw a Rolls Royce with the accountant’s personalised number plate attached to the car! HMRC had a point!!

An on-going case concerns a client who HMRC insists has a number of caravans which he rents out. The information is allegedly from a “reliable source” but the client is adamant that he has only one, and the caravan park has confirmed this. There are no unexplained deposits in the client’s bank account and he lives a modest lifestyle with no indication that there is significant undisclosed income. There is also no indication as to how he could have acquired a number of caravans in the first place. We are now at a stage where HMRC either has to give an idea of where this information has come from or close the case down.

Some HMRC officers will scour the weekly adverts in the free local paper to see who is advertising their services and will then check to ensure that they are all registered with HMRC. They may check adverts in newsagents’ windows, in supermarkets and DIY stores with the same purpose in mind. Jealous neighbours, relatives and ex-wives will volunteer information to HMRC some of which may be malicious but some may be true and HMRC will usually investigate to see whether or not there is a case to answer.

I knew of a tax inspector many years ago whose 6 year old daughter returned home from a friend’s birthday party asking why she couldn’t go on holiday to Barbados like her friend. My acquaintance knew that the friend’s father was a taxi driver and the following Monday he checked the records of the girl’s father and opened an investigation because the declared profits did not support a holiday in Barbados and sure enough the business takings were grossly understated for a number of years!

So you can see from the above how HMRC can acquire information and use it to investigate a client. With experience it is possible to risk assess your own clients and at least address possible inconsistencies in advance of submitting self-assessment returns to HMRC. In this way explanations can be provided which may help to avoid an enquiry or the client can be made aware in advance that his figures pose a risk.

Every year the self-assessment deadline brings a sense of quiet panic for many people. Of course, if you are one of those super-organised people who have their tax return completed months in advance then this doesn't apply to you. For the rest of us, the stress created as the deadline of January 31 ticks nearer is very real indeed.

Is there anything you can do to reduce the burden of last minute tax return filing? Here are some suggestions :

Create a Routine

Throughout the year it will be easier if you can make your bookkeeping and tax filing part of your business routine. Put it in your schedule at least once a month and get up to date. Dealing with tax papers in smaller chunks makes it a lot less daunting.

Organise Your Data

As paperwork arrives - either physical or electronic documents - find a home for them so they are ready to be actioned when you next are working through your tax or accounts. This should include paper or e-statements from your bank. Even if you are only collecting paperwork to pass to your accountant for processing, having a good system will mean you can easily spot if something is missing.

Consider sharing a DropBox folder or similar with your accountants so they have immediate access.

Review Regularly

If you run your own business, particularly if you are VAT registered, don’t leave bookkeeping to the last minute. Having quarterly VAT returns can be a good incentive to ensure that your business records are current.

The added benefit is that you will have a good feel for the current state of your business, you will know what you owe and who owes you money.

Use the Right System for You

It doesn't matter if you use cloud based integrated invoicing and accounting software, desktop bookkeeping software, spreadsheet based records or even manual ledgers. As long as your system works for you, that's the important thing. And don't be led by your accountant into using software which leaves you confused.

If you use a system which works best for you, you will get the most out of it. If you are a spreadsheet whizz kid, using spreadsheets may not give you 'push of a button' management accounts - but maybe you don't need them if your spreadsheet data tells you everything you need to know about your business.

Talk to Your Accountant

Your accountant or tax adviser is there to help. They won't mind if you send data across to them at regular intervals so send it when it's fresh. You could ask your accountant to review the year to date if that would help your business plans.

If you are struggling with your current system, ask your accountant to help you find a better one. They will know of plenty. But beware accountants who are tied too closely to one software product as it could be in their interests to sell it to you, but not necessarily yours.

Plan Your Tax Bill

Getting your tax return completed early means you have plenty of notice of any tax bills falling due in January and you can budget accordingly. If you are due a tax repayment, you will get it back earlier.