January Self-Assessment Special
In the last few days of January, hundreds of thousands of you were agonising over the completion of your annual tax return. Many of you had that nagging fear that a small error could land you in bother with one of the most powerful bodies in the land, HMRC.
As HMRC’s Moira Stuart fronted advertisements proclaimed, “Tax needn’t be taxing”, and indeed HMRC’s website offers people a huge amount of guidance on filling in forms. Unfortunately for many the questions you want to ask aren’t covered by these guides and you may feel uncomfortable asking them, for fear it may mark you out as being potentially dodgy or even worse, classed as a tax evader.
- Small Share Dividends
- Teacher’s Private Lesson
- Tax on E-Bay Sales
- Compliance Checks
- Exaggerated Expenses
- To Use or Not to Use an Accountant
- Cash Paying Tenants
- Tax Penalties
- Taxable Benefits
- Question: I don’t fill in a tax return, but I do receive a modest amount of share dividends, in most years less than £100. Do I have to go through the rigmarole of self-assessment just to declare £100? And If I don’t declare the £100, what will happen?
- Answer: HMRC’s stock answer would probably be, if you aren’t a higher rate taxpayer we won’t ask you to complete a tax return. However, not telling them if you are on 40% tax could make them think that may be other things you haven’t declared; though in reality, almost certainly nothing will happen for such a modest amount.
- Question: I’m employed as a college lecturer and last year I earned about £1,500 in additional income from private lessons, with most people paying me in cash. If I “accidently forget” to declare that money, what are the chances I’ll be caught?
- Answer: HMRC have many of ways of finding out taxpayers who do not declare a source of income, including reviewing ads in local newspapers and online. You might get away with it for a while, but eventually it is likely to come to HMRC’s attention.
- Question: I started buying and selling on eBay a couple of years ago and last year made around £2k, which I haven’t thusfar declared. Do I really have to tell HMRC, as they can’t possibly know about these sorts of small transactions, can they?
- Answer: Someone who simply sells their surplus household or personal items won’t have a tax liability; but if you’re regularly trading on eBay, you should declare that in the same way as any other trading income. HMRC is well aware of eBay trading activity, as well as classifieds ads and car boot sales and have produced a guide, so I suggest you go online and get a copy at: https://www.gov.uk/working-for-yourself/what-counts-as-self-employed
- Question: How many tax returns are looked into or investigated? I can’t imagine it’s very many, so is the risk of being caught low?
- Answer: HMRC does not publish precise figures on Tax Return enquiries (known as Compliance Checks), but anecdotally they number well into six figures. They usually look into tax returns on a selective basis, especially where they have any reason to suspect the details provided are inaccurate or not fully complete. However there is a small but significant random element so relying on HMRC not checking yours, is a risk not worth taking.
- Question: On my Tax Return I have always exaggerated some of my expenses, computer consumables, photocopying and travel expenses etcetera and I’ve calculated that I save several hundred pounds a year this way. I’ve always assumed that there’s no way the taxman can do anything about that, is there?
- Answer: Tax returns are subject to detailed parameter checks and these sorts of inaccuracies have a good chance of being spotted. If you’re contacted by HMRC, they could well regard what you’ve done as deliberate tax evasion, in which case the tax savings you have made would all be lost: plus you’ll be charged compound interest and a hefty penalty. (Also see my previous answer)
- Question: Am I more or less likely to be looked by HMRC if I use a firm of accountants rather than doing my return myself?
- Answer: According to HMRC they treat all taxpayers the same, however it’s commonsense that you are far less likely to have your tax return scrutinised if you use an accountant, because HMRC know that it is much more likely that the figures declared are accurate if you have a professional adviser involved.
- Question: I’ve just inherited my parents’ old house and am letting it out. The tenant pays me in cash, so I presume it is highly unlikely that I’ll ever be found out?
- Answer: HMRC could find out in many different ways, for example they receive several hundred calls a week to their tax evasion helpline. They also check on at ads in newspapers and online to ascertain who should be reporting rental income. Additionally they regularly look at landlord lists at letting agents and check with Local Authorities that the person paying the Council Tax is in fact the owner. So the chances are the longer you rent out the property, the more likely it is that you will be found out.
- Question: Not the headline figures, but what are the actual penalties people pay when they don’t fully disclose income on their tax returns and what will be the penalty if the taxman finds out?
- Answer: The penalties range from, up to 100% of the tax evaded and the possibility of being publicly named a tax evader or, in the most serious cases, criminal prosecution and a jail sentence.
In reality most people caught simply pay a penalty and the level is calculated on a published scale. This scale takes into account the behaviour of the taxpayer, such as did you fully cooperate in a timely manner and was the error one of omission or commission. If deliberate, the penalty will be at the higher end of the scale, but if it’s simply an inadvertent mistake and you’ve fully cooperated, it will be very light and in some cases waived altogether.
- Question: I work for myself as a gardener and small builder, whilst my wife is employed but gets a tax return simply because she has taxable benefits at work. Do I assume that the Revenue may well will crawl all over my tax return and ignore hers?
- Answer: Not necessarily is the quick answer from HMRC. However, in reality the nature of your business puts you in a high-risk category for potential investigation, whilst it is highly unlikely that your wife will undergo the same treatment.
A Tax Accountant’s view
The answers I’ve given above, may possibly suggest to you that I’m either on the side of HMRC or leaning their way. I can assure you that this isn’t the case, as I spend most of my time assisting clients to legally avoid tax. But I know the ground rules very well and exactly at which point that murky grey area of tax avoidance turns black.And finally to finish off a salutary tale on how one enterprising café owner demonstrated how to teach your kids about tax, especially VAT.
Whilst passing through Leicester a few months ago, I spotted a sign outside Brucciani’s, a delightful old fashioned Italian café and ice-cream parlour. It read:
“Teach your kids about tax; buy them an ice cream and eat 20% of it!”
If any of you would like more detailed information on any aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.