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22 Dec 2010
THOSE INDIVIDUALS who are not sent a tax return may think it a relief (no pun intended) to be outside the self assessment system, but in my view they are mistaken. Even though those people may not have the pressure of submitting a tax return by 31 January each year, they still have to ‘self assess’ their tax position to work out whether they should be completing a formal tax return or not.
A more sensible approach would be for all taxpayers to have to complete a simplified version of the self assessment tax return.
Further reading
This would also have neatly avoided the latest round of red faces among HMRC’s PAYE officials who have been dealing with difficulties thrown up by the PAYE reconciliation process for 2008/9 and 2009/10 and the revelations that some 6m taxpayers had over or underpaid tax.
All those with day to day experience of the UK tax system know that PAYE is a blunt instrument, unable to cope with taxpayers whose affairs are even slightly complicated. The surprise here is that the population at large is unaware of this, seemingly putting faith in the PAYE system’s ability to ensure that their tax position is 100% accurate.
This breakdown in communication seems to be a by-product of the way that the UK tax system is operated. The legislation provides that if an individual is issued with a self-assessment return, he or she must complete it accurately and submit it to HMRC on time. According to House of Commons Written Answers for 10 February 2010, approximately 9.3m tax returns were issued for the 2008/9 tax year. However HMRC statistics show the total number of income taxpayers was 31.3m in that year which suggests that some 22m taxpayers were outside the self-assessment system.
Although the legislation is clear that anyone who is chargeable to tax and who has not received a self assessment tax return must notify HMRC within six months of the end of the tax year, this is not widely known among taxpayers.
The notification rule is applied less strictly to people whose total income comes within the following exceptions, provided they have no chargeable gains: taxable income which has been taken into account in the making of deductions under PAYE; income where tax has been deducted at source and dividends from UK companies, so long as the taxpayer is not liable to higher rate tax.
However working out whether these exceptions apply may well require some degree of understanding of the UK tax code.
For example, an employee has had medical insurance provided by the employer for some years which has been reported on form P11D and coded out.
However the amount of the benefit for 2009/10 was substantially higher than it was in the previous year and so the amount coded out was inadequate and an underpayment arose as at 5 April 2010. Did this underpayment represent taxable income which should be reconciled in the making of deductions under PAYE, or should the taxpayer have drawn HMRC’s attention to the underpayment if the reconciliation had not been completed at 5 October 2010? The correct answer seems to be the latter according to the legislation but how many taxpayers would understand that?
Looking at the second test above, how does an individual know if they are a higher rate taxpayer without doing a full calculation of their tax position. So while they may be outside self assessment, they still have to self assess, which sounds like a flawed system.
Which brings me full circle. Surely, a better system would require all taxpayers to file returns, providing a streamlined version could be designed for those with simpler affairs.
Richard Mannion is national head of tax at Smith & Williamson
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Visitor comments Add your comment
I agree
I agree with Richard that there is a good argument that everyone should complete a tax return each year. People manage this in other countries. I come across far too many higher rate taxpayers who are convinced that their tax is right because they are in PAYE and tax is deducted at source from investment income. Once others receive the 'magic' letter saying they no longer have to be in PAYE, they ignore their tax affairs henceforth because it's easier than struggling with the HMRC helplines and unintelligible letters which they've previously had.
The sooner HMRC stands up and tells people that PAYE is intended only to get their tax approximately right, the better. I hope that all the issues recently with PAYE codes and under- and over-payments will make people more aware of just how wrong PAYE can get your tax.
Posted by: Angela Williams, 23 Dec 2010 | 18:52
Spot on
Richard, you are absolutely right. Too many people are vulnerable to assessment for additional tax and penalties because of the self assessment return process - it is clear that HMRC are aiming to process less returns, so it is quite illogical to level penalties to people who are not sent a return and have had no training or understanding of an increasingly complex self assessment system that requires pro-actie notification.
The US system has its merits - all US citizens learn from an early age of the need to file a tax return and how to do it. It becomes second nature. Their rules and customer-related instructions are extremely good - ours leave much to be desired.
I have a particular problem with the interaction between self assessment and benefits in kind, where HMRC have a habit of adjusting tax codes for expenses that are clearly business related, not taxable. This increases the tax deduction incorrectly.
Conversely, higher rate taxpayers who have dividend or interest income do not appreciate the need to declare their often modest investment income and pay higher rate tax. It is difficult to justify the new penalty system in such circumstances.
Posted by: Peter, 23 Dec 2010 | 22:40
I agree
I agree with the article and the previous comments.
A couple of additional benefits would be that more people might realise how much tax they were paying; and that the tax system might be made simpler so that ordinary people (& MPs) could fill in their own returns!
Posted by: Duncan, 05 Jan 2011 | 16:24
We should all file a tax return
I have been saying this ever since the introduction of self-assessment. With so many people now having internet connections filing a simple version of the tax return on line would easy for all and cost effective. It is likely that many people do not declare untaxed income if they are not sent a return and others may not realise that they owe higher rate tax. In additon it would automatically generate repayments for those who have been over-taxed instead of hoping that one day HMRC will identify the excess and repay it. At the very least HMRC should be obliged to send every taxpayer who does not file a return an annual calculation of liability.
Posted by: Alan Robertson, 11 Jan 2011 | 13:09
I totally agree
Previous comments have revealed the widespread ignorance of the average taxpayer and their blind faith in the PAYE coding system. It also reveals there must be unpaid tax amongst those who don't submit returns. From personal experience, I have to fill in a tax return because of property income but am exasperated by the efforts of HMRC to adjust the tax codes of my wife and I who are both retired but have a miscellany of small pensions, annuities etc. Could it be that if everyone had to complete an annual return, more tax would be collected for relatively less HMRC resources.
Posted by: Simon Nickols, 12 Jan 2011 | 12:06
Black economy
The black economy is far worse than previously thought and totally unfair. If we all filled in tax returns the additional tax collected would help pay off the deficit.
Posted by: Richard, 18 Jan 2011 | 12:33
It won't work
My mother, a pensioner, and the other 30-odd residents of her retirement home, could neither e-file a tax return nor afford to pay an accountant to help them. I can't imagine many other basic rate taxpaying pensioners would be any more able or willing. It should be perfectly possible for them all to pay the correct amount of tax on their pensions and savings if the PAYE system operates correctly. Furthermore, HMRC has overstretched resources now: how much worse would it be if they had to handle 20-odd million more returns, notices to pay, queries, etc. Any "universal" SA system would need lots of exceptions.
Posted by: David Heaton, 28 Jan 2011 | 14:28