Prepare for a paper chase
Self-employed and people who let out property will have to keep records for five years after filing
Sunday 14 April 1996
Taxpayers will really notice the change when a different tax return form goes out next April. This will relate to the 1996-7 tax year, which started on 6 April. But for now, taxpayers just need to keep payslips and other records of income and (tax-allowable) payments and expenses.
Self-assessment is a new system for making tax returns and paying tax. For the vast majority of people on pay-as-you-earn, there won't be much difference. The system will mean providing the Inland Revenue with more accurate information on earnings, and give taxpayers the opportunity - but, importantly, not the obligation - to work out their own tax bills. In the background, though, is the threat of fines and penalties for not meeting the demands of the system.
All taxpayers should now keep any document which may be needed to support what they put on a tax return. This means records of income and expenses, details of interest and dividends paid, pensions, social security benefits and so on.
Nine million people already fill in a tax return, including the self- employed, higher-rate taxpayers, pensioners with numerous sources of income, and people with substantial investment income or company cars and other benefits-in-kind.
The four million or so self-employed are the most affected by the changes and the one in five self-employed people who do not use an accountant will need to take particular care. Important elements of the system include a "current year" basis of tax assessment, rather than basing tax on more historic earnings, as well as new fixed dates for tax to be paid and a new system of fixed penalties and surcharges. For example, people who miss the deadline of 31 January for sending back tax returns will face a penalty of pounds 100, with a further pounds 100 penalty if the return is still outstanding six months later.
The most noticeable difference will be the new tax return itself. It will require taxpayers to give all the figures needed and other information to work out their tax bill, rather than using cop-outs such "see P60 form", which mean the Revenue effectively has to find the figures.
Estimated bills will be abolished and taxpayers will have the option of working out their own tax bill and sending a cheque with their returns by 31 January. Alternatively, they will be able to ask the Revenue to do the sums, but this means getting the return in by 30 September.
Record-keeping: For many taxpayers, records and documents relating to information given on a tax return will have to be kept until at least 22 months after the end of the tax year to which they relate. But the self- employed, and those who let out property, will have to keep records for five years after the 31 January filing date for each year's tax returns. That means the bits of paper accumulating now must be kept for the best part of seven years, until January 2003 (five years after 31 January 1998, the date by which the first self-assessment tax return should be filed).
Records to keep include receipts and invoices, bank statements, paying- in slips and cheque stubs. Keep a written record of income and expenditure for which there is no documentary proof, such as a list of business journeys and mileage done in a car also used privately. A penalty of up to pounds 3,000 can be imposed for each failure to keep proper records. If in doubt, hold on to a bit of paper rather than binning it, and keep things in a system which is readily accessible to Inland Revenue officials in case they choose you for one of their new random enquiries.
Transitional rules: Transitional rules are arguably one of the more difficult aspects of the new system. The self-employed have traditionally been taxed on a preceding-year basis, so tax due on 1 January 1996, with a second instalment due on 1 July 1996, relates to income in the 1994-5 tax year.
Under self-assessment, the tax that people pay will relate to the current tax year (or, more accurately to the accounting year which ends in a tax year). Tax will be due on 31 January 1998, with a second instalment on 31 July 1998, for earnings in the 1997-8 tax year.
Transitional rules are designed to bring about the switch from preceding- to current-year basis. Tax for the (current) 1996-7 tax year will be based on half of people's earnings this tax year and half their earnings in the 1995-6 tax year. In other words, the tax bill will be based on the average of two years' earnings. People who have become self-employed on or after 6 April 1994 have been taxed on the current-year basis from the start and transitional rules do not apply.
Payments on account: The move to a current-year assessment iscomplicated by the introduction of payment of tax "on account" - paying tax in instalments before the final bill is worked out. Payments will be due on 31 January and 31 July each year. If the actual tax due turns out to be more or less than the payments on account, an adjustment is made the following January. The first payment on account will be due on 31 January 1997.
Partnerships: Individual partners will be assessed separately for tax. Someone will still have to fill in a tax return on behalf of the partnership, but partners will no longer be legally liable for any tax bill which another partner has failed to pay.
Employers: There are extra duties under self-assessment, especially if employers pay expenses or benefits-in-kind. They will have to give a copy of form P11D to employees, setting out expenses and benefits they have received, by 6 July following the end of the tax year.
More information: The Inland Revenue has produced lots of free material on self-assessment, including A general guide (code no SA/BK1), A guide to the self-employed (SA/BK2), A guide to keeping records for the self- employed (SA/BK3) and A general guide to keeping records (SA/BK4). Leaflet IR28, Starting in business, is also useful. In addition, there is What it will mean for employers (SAT3) and an audio cassette. Contact your tax office or ring 0345 161514. Seminars can be arranged for employers. Contact your tax office.
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