Crushing increase in tax burden

Self-assessment is going to exact a painful price from the taxpayer, Andrew Watt warns

THE COUNTDOWN to the introduction of self-assessment, the most momentous change to the system of direct taxation in this country since the introduction of PAYE, is well under way. By comparison, the election of a Conservative Party leader will be but a temporary diversion.

Despite the emollient words of senior Inland Revenue officials and politicians to the effect that self-assessment will be "a clearer, fairer and more straightforward system for the calculation and payment of income tax", readers should be under no illusions. Self-assessment will place enormous additional burdens on ordinary citizens.

How else could the Inland Revenue afford to make thousands of its staff redundant, if not for the fact that, under self-assessment, work previously done in tax offices will now have to be shouldered by taxpayers, or more likely, their accountants?

Nine million or so taxpayers will be affected, mainly self-employed and employees with reasonably complicated financial affairs.

The mechanics of the new system are already fairly familiar.

Self-assessment means:

o The first new tax returns will be issued in April 1997

o Most self-employed taxpayers will, from 1997-1998, be taxed on their profits arising in the tax year itself rather than in the preceding year, as at present. In order to ease this change, 1996-1997 will be a transitional year for which special rules will apply.

o Businesses started after 6 April 1994 are already subject to the current- year basis of tax assessment.

o Taxpayers will have until 30 September 1997 to submit their returns if they want the Revenue to calculate their tax bills, but until January 1998 if they wish to do the calculation themselves.

However, there are a number of serious pitfalls in the new regime which you are unlikely to hear being trumpeted by the cuddly cartoon character currently cavorting across our television screens

o First, the tax return itself is vast. The basic return comprises six foolscap pages and, depending on how complicated your affairs are, it may be necessary to complete up to 15 voluminous schedules. Each of these is accompanied by its own explanatory notes.

Tax returns under the present regime cause difficulty enough. Commentators are predicting uproar and chaos when the new tax returns begin to thud on to doormats in April 1997.

o Taxpayers who choose to calculate their own tax bills will have until 31 January 1998 to submit the returns to the Inspector, along with any balance of tax due for 1996-1997.Those who in the past have been lackadaisical in submitting tax returns on time, or who have been prepared to pay interest on tax paid late, are in for a rude awakening under the new system.

Failure by even one day to render a return by the 31 January deadline will trigger an automatic penalty of pounds 100. An additional pounds 100 will be payable if the return is still outstanding six months later.And as if that were not enough, the Inspector may seek a penalty of up to pounds 60 for every day's delay in sending in the return.

o In addition to the usual interest on tax paid late, the Collector of Taxes will in future have a new and powerful weapon in his armoury, designed to deter tardy payers. If tax is still outstanding after 31 January, final payment date, VAT-style surcharges will be incurred.

These are a 5 per cent surcharge on any tax for the previous tax year which is unpaid by 28 February, and a further 5 per cent surcharge on any of those amounts still unpaid by 31 July.

And if the return is not submitted and the tax is not paid by 31 January, the Inspector will merely estimate the amount of tax and surcharge which he thinks is due and proceed to collect that, along with the fixed penalty.

There will be few assessments raised under the new system, with the consequent elimination of time spent in tax offices dealing with appeals. But inevitably that saving will be offset by the anticipated floods of appeals against surcharges and fixed penalties by aggrieved taxpayers who feel they have a reasonable excuse for failing to submit their tax returns or pay tax bills by the due date.

It will no longer be sufficient for an employee to refer the Inspector to the employer for details of salaries and benefits paid during the year. Employers will be required to supply their employees, shortly after the end of the tax year, with written details of all remuneration paid and benefits provided, which will form the basis of the employees' self-assessment tax returns.

A senior Revenue Office is quoted as saying: "The essence of self-assessment is process now, check later. "

Therein lies a minefield for the unwary. In most cases, the Inspector will accept the returns and payments of tax as they stand. But he has up to 12 months from the date the return is filed to challenge the figures.

From 6 April next year, taxpayers will be obliged to retain, for at least five years after filing the return, records to back it up.Failure to comply will result in a Draconian penalty of up to pounds 3,000.

What sort of records will the Inspector consider adequate? Normally he will expect a record of all sales and other business receipts; back-up records such as invoices, bank statements and paying-in slips, to show where the income came from; invoices for all purchases and expenses and details of purchases and sales of assets used in the business; written records of all amounts taken out of the business bank account or in cash for the personal use of the proprietor and his family; and details of all amounts paid into the business from personal funds.

Under the present system, the Inspector has to have reasonable grounds for opening up an investigation into the completeness of tax returns or business accounts. The advent of self-assessment will give the Inspector formidable, wide-ranging powers to challenge returns entirely at random.

And where the Inspector suspects that there has been fraudulent or negligent conduct by a taxpayer or a person acting on his behalf, the normal 12- month deadline for challenging returns goes by the board. In these circumstances, he will have up to 20 years after the normal filing date to initiate his enquiries.

The Financial Secretary to the Treasury, launching the recent publicity campaign, said that self-assessment "will save time and work in the longer term".

The long-suffering taxpayer will rightly take this assurance with a healthy pinch of salt. We are about to embark on a new era where confrontation with the authorities and substantial inconvenience and cost for the taxpayer are inevitable.

o The author is tax partner at Casson Beckman, chartered accountants, London.