Friday 15 January 2010

Tax Return Tips

If, like me, you’ve yet to submit your 2008/09 self-assessment tax return, then get a move on to avoid a possible £100 fine and interest on unpaid tax.

And, if you’d rather watch paint dry, just remember that completing your tax return provides an opportunity to claw back money from the taxman by claiming for legitimate reliefs, allowances and expenses.


So, for my benefit as much as yours, I’ve put together some self-assessment reminders and tips.


Deadline

The deadline for filing a 2008/09 paper tax return (covering 6 April 2008 to 5 April 2009) was 31 October 2009. Your only option now is to file online via the HMRC website by midnight on Sunday 31 January 2010.


Who needs to complete one?

If you’re an employee who has no other sources of income and pays tax through PAYE then probably not. If you fall into one or more of the categories below (or HMRC has sent you a tax return) then very likely yes:


  • Self employed.
  • Company director.
  • Minister of religion.
  • Receipt of rental income from land or property.
  • Annual gross income from savings/investments of £10,000 or more.
  • Claim against tax for expenses or professional subscriptions of £2,500 or more.

  • Receipt of untaxed income which cannot be handled via PAYE.
  • Receipt of foreign taxable income.
  • Receipt of income from a trust.
  • Annual income of £100,000 or more.
  • Owe tax at the end of the tax year that cannot be collected via PAYE the following year.
  • Selling shares or other investments at a profit.

You can find out more here.


What you need to do to file online

To file your tax return online you’ll need a Government Gateway account that’s activated for self-assessment. If you’ve done so before you simply need to dig out your Gateway user id and password then login at https://online.hmrc.gov.uk/self-assessment/. If you’ve forgotten your user id or password you can retrieve either online. If you’ve forgotten both call the HMRC online services helpdesk on 0161 930 8445.


If you don’t have a Government Gateway account and/or haven’t activated it for self-assessment then you should register via the same link above by 21 January to allow time for your self- assessment activation code to be sent by post. When registering you’ll need your Unique Taxpayer Reference (UTR) and either your national insurance number or postcode.


Completing the return

Although you’ll complete your tax return online, you might want to look at the paper version beforehand to familiarise yourself with the various sections. The accompanying help sheets can also be useful – view a full list of forms and help sheets here.


I also find it much easier to prepare all the figures beforehand, e.g. on a spreadsheet or using accounting software, so that by the time you complete the form online you’re simply entering figures in boxes.


If you’ll be entering blanks where you previously entered figures, perhaps due to a change in circumstance, it’s worth explaining why in the ‘additional notes’ boxes so as not to arouse HMRC’s suspicions.


Plus, don’t forget you’re allowed to round down income and round up expenses entered on the return to the nearest Pound (e.g. £80.90 of income becomes £80 and £21.10 of expenses becomes £22). Do this wisely and you could save a few extra Pounds.


Once completed, print a copy of your tax return for your records.


If you’re employed (i.e. PAYE)

Check that your employer has already deducted any tax owed on benefits (e.g. company car and medical insurance) from your salary; otherwise you’ll likely need to declare and pay the tax via a tax return.


You might be able to claim back some tax if you’ve incurred expenses ‘wholly, exclusively and necessarily’ in the performance of your employment which haven’t been reimbursed by your employer. In practice this means that you can't claim for a new suit or travelling to the office, but you probably can claim for items such as professional subscriptions, travel/subsistence away from the office and the proportion of your mobile phone bill used for work (but only if your employer doesn’t reimburse you).


Also, if you’ve stopped working or changed employer during the tax year double check you’ve not paid too much or little tax via PAYE using your P45 and/or P60 forms. The last time I did this I claimed back over £1,000!


If you’re self-employed

In general you can deduct all costs incurred for the ‘sole purpose of earning business profits’ from your turnover (excluding entertainment). This includes items such as goods purchased for resale, rental of business premises, vehicle costs and electricity/telephone.


Where the costs relate to both private and business use, e.g. working from home and using a car for business and domestic purposes, then you’ll need to split the costs between business and private use – you can only deduct the business costs. HMRC has a guide here.


Capital Expenses (both self-employed & employees)

If you buy 'capital' items for work which have a life of several years, e.g. a computer or machinery, you can claim a proportion of the cost each year over a period of time using 'capital allowances'. But, provided the total expenditure is £50,000 or less the cost can be fully claimed in the year of purchase under the ‘Annual Investment Allowance’ (with a few exceptions, primarily cars).


Although less common for employees, you might have a clam if you have to buy equipment to carry out your job and your employer doesn’t reimburse you. More details here here.


Don’t forget to re-claim

Failing to claim the allowances, reliefs and expenses you’re due is the same as giving the taxman cash straight from your pocket. So claim as much as you’re allowed. In addition to those mentioned above, common reliefs and allowances include:


Pension contributions – higher rate taxpayers can reclaim additional higher rate tax relief on their pension contributions (e.g. if you contributed £800, basic rate tax relief of £200 will have automatically been given and you can claim a further £200). Employees should check this hasn’t already happened via PAYE.


Charitable donations – under the Gift Aid scheme higher rate taxpayers can reclaim tax equal to 25% of the contributions made (e.g. if you contributed £100 you can claim £25 – the charity will have already reclaimed the basic rate tax relief).


Venture Capital Trusts/Enterprise Investment Schemes – you can get an income tax rebate of 30% (VCTs) or 20% (EIS) on your investment provided you meet the qualifying rules.


Note re: the above rebates – you can’t reclaim more tax than you’ve actually paid/owe!

Capital Gains Tax – remember you have an allowance of £9,600 to offset against gains you made during 2008/09.

Property rental – if you rent property remember to claim for allowable expenses, including mortgage interest and 10% of rent as a ‘wear and tear’ allowance. There’s lots of helpful information here.


Paying tax

Once you’ve worked how much tax, if any, you owe, you must pay HMRC by 31 January 2010. You can make payment by direct debit, internet/telephone bank transfer, cheque, bank Giro or debit/credit card (through Billpay with a 1.25% fee for credit cards).


What happens if you’re too late?

Fail to submit your tax return by 31 January and you’ll be slapped with an automatic £100 fine, with a further £100 fine on 31 July if your tax return is still outstanding. HMRC can also levy a daily fine of up to £60 if you persistently fail to submit your return.


However, the penalty is normally limited to the tax you owe on 31 January. So, provided you don’t owe tax, HMRC shouldn’t charge you for filing a late tax return. This means you could avoid a fine by paying a liberal estimate of the tax you owe by 31 January and subsequently reclaiming any surplus once you’ve submitted your return. HMRC currently pays 0.5% interest on any credit.


If you don’t submit a return then HMRC might send a request for payment, called a ‘determination’, which estimates the tax you owe. The only way to change the amount owed to the correct figure is to send in a tax return.


While the taxman won’t accept your dog eating your paperwork as a valid excuse for filing late, they should be more understanding if you have a genuine excuse such as losing documents through fire/theft or a serious illness. More details here.


Interest on tax owed

If you haven’t paid the tax you owed on 31 January by 28 February then HMRC will levy a 5% surcharge, followed by a further 5% on 31 July on any tax still owed. This is on top of interest at 3% on any balance owed from 31 January.


Keeping records

You should keep all paperwork relating to your tax return, including proof of income and expenses, in case HMRC decides to take a closer look. Individuals and directors must keep these records for at least 1 year 10 months after the end of the tax year they relate to and the self-employed for at least 5 years 10 months. Failing to do so risks a £3,000 fine.


Are there simpler alternatives?

If you fall into the category of people required to complete a tax return (see rules above), then no. However, if you simply want to reclaim tax you’ve overpaid you may not need to do so via a tax return, see here for more details. For example, you reclaim excess tax paid on your savings using HMRC form R40.


Right, better get to work on my own return. If you have any tips or think of anything I’ve missed above please do leave a comment below. And, if you’ve still to complete your tax return, good luck!


You can read more about income tax in general on our income tax page.

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