Nine million people face tougher tax penalties
HMRC investigators have sharpened up their act when checking the UK's self-assessment forms – so double-check yours, says Neasa MacErlean
Saturday 08 January 2011
About four million people have been working on producing their tax returns over the holiday period, or have yet to file them before the 31 January deadline. But all taxpayers need to be particularly careful that their returns are accurate this year. Her Majesty's Revenue & Customs (HMRC) is taking advantage of a new, tougher penalties system and is also using its technology far better than in the past to spot people understating their tax liabilities.
Each of the nine million tax returns submitted every year are thought to be subjected to about 400 logic and comparison tests. These analyses have become far easier for HMRC to do, now that seven million forms come in online. They can be checked against others and against previous returns from the same person at the click of a mouse. HMRC is also getting better at comparing information from different sources, such as matching up the interest that a bank says it has paid to an individual with the declaration of interest made by that same individual on their return. HMRC's software will also flag up unusual situations to its investigators, such as that of a 67-year-old who is not receiving a pension.
John Cassidy, a tax investigations partner at the accountant PKF, says: "If something is wrong on your return, you've got a much higher chance of being spotted now. HMRC have always had tons of information, but they have been pretty bad at using it. But now they have got better."
And Anita Monteith, tax manager at the Tax Faculty of the Institute of Chartered Accountants in England and Wales, warns: "They are sophisticated and getting more so." One particular kind of analysis that HMRC concentrates on is comparing the self-employed to their peers. The kind of question they will consider, says Mr Cassidy, goes like this: "If you are a chip shop at one end of the street, why aren't you making as much as the chip shop at the other end?"
If your profits have gone down for a particular reason (because you were unwell, perhaps, or because you lost a major contract), then it is worth keeping a note of these reasons in case HMRC asks you later."
Since the Finance Act 2008 became law, HMRC has had greater flexibility in writing to taxpayers to ask them individual questions about their affairs.
"You've got to be pretty careful if you are asked one of these questions," says Mr Cassidy. "HMRC has limited resources. They are not going to waste them asking questions if they don't think it is going to yield more tax."
HMRC is now using new penalties, though fines are banded and set as a percentage of any tax underpaid, depending on the lack of care, deliberate negligence or dishonesty on the part of the taxpayer. From later this year, people can be fined for returning their tax details late, even if no tax is owing. With less money flowing into the Exchequer during the downturn, Mr Cassidy thinks HMRC will be more vigilant in getting all the tax income it can legitimately claim. "In the past couple of years, their money has gone down and, therefore, they need to find the hidden tax," he explains.
Mistakes are very easily made on tax returns. The accountant BDO has seen many individuals switch out of ordinary bank and building society savings accounts, because they were receiving interest of less than 1 or 2 per cent per year and into money market funds. But these funds are taxed on a much more complex basis than bank interest, says BDO's senior tax partner Stephen Herring. "People need to be really careful that they put them down on the return correctly. They can get a penalty if they underpay," he adds.
Conversely, these low interest rates mean that some of the country's one million buy-to-let landlords could be in for a shock. In many cases, their monthly mortgage payments will have gone down, leaving them with a greater taxable profit and, therefore, a bigger tax bill. Tina Riches, of the Chartered Institute of Taxation, says: "This is certainly something that people should watch out for. They can get quite a nasty surprise." Another area of perennial confusion is pension contributions. Workers should check with their employers if they are not totally sure they understand which figures need to go into which boxes on the tax form. BDO is also concerned that some high earners may fall foul of the "anti-forestalling" provisions which prevent them obtaining tax relief on more than £20,000 or, in some cases, £30,000 of contributions. The rules are explained in the notes to the tax return and those affected need to read them if they are completing their own applications. While there have been problems in the past about online filing of tax returns, the experts say the system is working smoothly now.
"It all seems to be going reasonably well," says Ms Riches.
Anyone who still has to set up online access with HMRC must hurry, according to Ms Monteith, because it takes at least a week to get the password and set up the electronic facility. Mr Herring also urges people to take action now. "If you file your tax return on the last day, or a couple of days before, [HMRC] are taking a more jaundiced view of it if you have made an error." This means that you would be more likely to get fined as you could be deemed as acting without due care if you use too many estimates, do not get your figures right and do not read the HMRC guidance.
Taxpayers should not forget about tax issues once they have filed their tax return, however. HMRC usually sends out tax codings in January, although this may be delayed to February this year. Many tax codes that were sent out in early 2010 were incorrect, as HMRC data inputting measures about people's individual circumstances have not worked properly.
So people could get codes that are too low or too high for their situation if, for instance, a source of pension income is being missed off or if an employment contract is still thought to be continuing after it finished.
"There will still be a lot of wrong codings," says Paddy Millard, chief executive of the charity Tax Help for Older People. "It will be years before that is out of the system. People need to be very much on the ball when looking at codings that seem odd."
Breaking the code: Are your deductions correct?
Only one in 50 people who were due to be sent statements last autumn telling them they had underpaid tax have appealed against the rulings. Most of the 1.38 million people who have not challenged the statements will start repaying in April, when monthly deductions will be made from their pay or pensions through their tax code.
They will receive new tax codes by post later this month or in early February. The codes are not easy to understand but, if tax has been underpaid, this should be stated clearly. Since the average underpayment is £1,500, the typical person will find deductions from his income averaging £125 per month for the tax year starting in April.
For most people, the arrival of a new tax code will be the first notification, after the original letters, about the sums due. Paddy Millard, of Tax Help for Older People (THOP), is surprised more have not complained. "This is going to shake up a lot of people," he says of the coding notices. "People should be getting their act together. It is a second chance." Useful information on how to challenge an HMRC notice is on the websites for both THOP and its sister body, the Low Incomes Tax Reform Group (LITRG). About 1.4 million individuals were told last year that they had underpaid tax and had a liability to make good the shortfall.
Towards the end of last month, only 18,734 people had appealed, according to HMRC. Of those, nearly a third (5,809) have seen their challenge accepted.
THOP is seeing a 50 per cent immediate success rate on its letters challenging HMRC. It keeps on fighting in most cases, so that 50 per cent success rate is likely to rise significantly as it gets into further correspondence with HMRC. Mr Millard believes many people who received HMRC notices deserve to have their liability cancelled. He and his staff find the HMRC response bizarre. "It's utterly inconsistent," he says. "It's impossible to see a pattern from one letter to the next."
Since most cases are handled by HMRC's office in Birmingham, the inconsistent response is not because different regions take different views. Mr Millard's experience suggests that two people with exactly the same circumstances could be judged entirely differently by the tax office, with one being let off and one having to pay.
* HM Revenue & Customs: www.hmrc.gov.uk/individuals
* Low Incomes Tax Reform Group: www.litrg.org.uk
* Tax Help for Older People (which gives free advice to pension households with annual income of less than £17,000): www.taxvol.org.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Q&A: What’s the best way to invest for our baby?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
- 2 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 How the language you speak changes your view of the world
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park