In April, the Inland Revenue issued the new income tax self assessment forms which we all fully expected, but for which we are almost certainly unprepared
There is something about the new regime of self assessment that has made ostriches of even the boldest. But we have to face up to the reality that the forms must be completed and returned, in some cases by the end of September, or at the latest by January 1998.
The requirements and penalties apply not only to employers and the self employed, but to employees as well. Chris Wilkins, senior partner at accountancy firm Wilkins Southworth, and a regular contributor to accountancy and taxation journals, takes us through the critical details.
‘Self assessment imposes additional requirements for both employees and employers to retain documentation and ensure that these are supplied on time to the relevant parties. The overriding stick that the Inland Revenue has is that penalties and fines are that much harsher than they otherwise used to be.
‘No matter whether you are an employer, an employee or self employed, with effect from 6 April 1996, everyone should have been keeping all relevant records and documents. And if you are self employed, or a PAYE employee you must complete and forward your Tax Return to the Inland Revenue by 30 September 1997, if the IR is to calculate your tax liability, or by 31 January 1998, if you are to calculate your own liability.
‘An initial fine of £100 is levied if these time constraints are not complied with and this rises with the delay in filing the return. It is important to remember that the fine applies to everyone, so seek the advice of an accountant now to ensure you retain all the necessary information for 1996/97. Don’t leave it until September.’
If you are self employed
You must keep documents and records for both business and personal tax for five years after the filing date. So you must retain this year’s records until at least 31 January 2003.
This means copies of:
- bank and building society statements, including passbooks, showing interest received
- dividend counterfoils and brokers’ contract notes
- copies of sales invoices and other records of sales
- details of goods taken for your own use and of goods ‘bartered’ with other traders
- invoices or receipts for all your purchases – in cases where a receipt can’t be obtained, you must keep a day by day record
- itemised telephone bills where the telephone line is used only partly for business purposes
- a detailed log of your business mileage where you use your car both for business and personal purposes
If you are a PAYE employee or a company director
You must keep records and documents at least until the anniversary of the filing date for the year. For the tax year 1996/97, this means 31 January 1999.
The main items required are:
- Form P60 – the certificate issued by your employer at the end of the tax year, giving details of your gross pay and the tax deducted. Your employer must provide you with this by 31 May
- Part 1A of the new version of form P45 – issued when you change jobs. The new form, which should have been used from 6th April 1996, now has four parts, which allows a former employee to keep part 1A for his or her own tax records
- Details of taxable benefits and expense payments. The new rules now require an employer to give an employee a copy of his form P11D or P9D by 6 July
- Details of any tax deductible expenses
- A record of any tips or other incidental receipts that you receive, written up on a daily basis
- A travel log showing the date, purpose and mileage of each business journey – this applies whether you use a personal or company car for business
- Bank and building society statements and passbooks
- Dividend counterfoils and brokers contract notes
- Documents relating to taxable state benefits
- Child Support Agency assessments.
Obviously it is important that employers supply copies of forms P11D, P9D and P60 to their staff, so that they can comply with their self assessment obligations.
Make the most of your accountant
Advice from your accountant can save you money, and while looking at your tax affairs it may be an opportune moment to review his or her role in your affairs right across your business and personal finances.
‘Too often small businesses call their accountant in only at the year end or in a crisis. In fact, the accountant should really be viewed as a partner in the business, providing on-going specialist advice and support. There are a number of obvious areas where any business can benefit from input by a good accountant.
‘Preparation of management accounts is a good example: third parties such as banks find them particularly useful when asked to lend money or just to keep abreast of how well the business is doing’.
Effective management accounts, profit and loss projections, and cash flow projections also reduce the amount of financial fire fighting involved in running any company, making it considerably easier to plan for future demands on resources.
Help with personal taxation for those owning companies is another example. It may be possible to take dividends out of the company, rather than director’s remuneration, to avoid employer’s national insurance.
Provision of benefits in kind is another area to look at. Employees’ national insurance is capped at a salary of £23,660 this year, but there is no cap on employers’ national insurance. However, if a member of staff receives benefits in kind rather than a salary, these are not subject to employers’ national insurance.
Your accountant can also advise you have to maximise your allowances. You may be able to transfer capital assets to your spouse, to ensure that income derived from these assets is covered by a non working spouse’s personal allowance. In addition to this, each spouse also has a capital gains tax exemption which should be maximised each fiscal year.
Finally, ask about your personal and corporate investment. You should ensure you use your maximum allowances for investments in pension plans, TESSAs (Tax Exempt Special Savings Accounts) and PEPs (Personal Equity Plans).
You never know, self assessment and the closer contact it brings between yourself and your accountant may prove to be a blessing in disguise. But don’t take the view that burying your head in the sand means it will go away because it won’t. Take advice now.
Chris Wilkins FCCA is a partner in Wilkins Southworth Chartered Certified Accountants and Registered Auditors, who advise both small and large businesses on taxation matters.