ARE YOUR CLIENTS renting out a property or receiving extra income outside their regular job? Have your clients started a small business? Is their business turnover about to reach £70,000? Or have they sold an asset and made a profit?
Your clients need to tell HM Revenue & Customs (HMRC) about these or any other changes that mean they have to register for a particular tax or pay tax on undeclared income.
Under regulations that took effect from 1 April, the penalty HMRC can charge has changed. Penalties are charged on top of the tax owed.
Examples of what your clients need to disclose are:
• They’re liable to tax because their new business has made a profit;
• Their business’s turnover has reached the VAT registration threshold;
• They sell an asset and make a capital gain on which tax should be paid; or
• They have any income that isn’t taxed and you haven’t declared it.
What could it cost?
The new penalty for failing to tell HMRC about taxable income is a percentage of the tax that they owe. They may pay a higher penalty if they deliberately fail to tell HMRC about their income – and an even higher penalty if they take steps to hide it.
The amount they will pay depends on how HMRC views their actions:
• Not deliberate – the penalty is between 0 and 30 per cent of the tax they owe;
• Deliberate but without concealment – 20 to 70 per cent of the tax owed; or
• Deliberate with concealment – 30 to 100 per cent of the tax owed.
The amount of the penalty will also depend on how much help they give HMRC. If they provide access to their records and help HMRC calculate what tax is due, the amount will be reduced.
HMRC can reduce the penalty to zero if they get in contact within 12 months of the change to their income. Even after 12 months the penalty can be greatly reduced if they contact HMRC about the change before it’s discovered.
Example 1 – renting a property
Anna has inherited her mother’s house and rented it out. She’s retired and doesn’t normally need to complete a tax return. But she needs to check if the rent takes her income above her personal allowance for income tax. If it does, then she should contact HMRC and request a self-assessment return to declare it.
Example 2 – selling a taxable asset
Thomas sold a second home in August this year at a profit, which is subject to capital gains tax. He doesn’t normally need to complete a tax return, so Thomas should contact HMRC to request a self-assessment return.
Example 3 – registering for VAT
Stephen runs a car body shop. His turnover for the past 12 months is about to exceed the £70,000 VAT registration limit. He needs to contact HMRC and register for VAT.
Example 4 – a hobby becomes a business
Jean works full time for a company, and pays her tax through the PAYE system. However, she also collects toys and has begun to buy and sell these on eBay, which provides her with a second income. Because this is treated as trading, Jean should register with us as self-employed and complete a self-assessment return.
Example 5 – the freelancer
Rashid is a photographer employed by a company. However, he also takes wedding photographs at the weekend from which he makes a profit. Rashid should register with us as self-employed and complete a self-assessment return to declare this income.
Brian Redford is acting director for the business customer unit at HMRC
How to avoid a penalty (hmrc.gov.uk/about/new-penalties/index.htm)
Self Assessment (hmrc.gov.uk/sa/index.htm)
Register with HMRC as self employed (hmrc.gov.uk/selfemployed/iwtregister-as-self-employed.htm)
Check if their asset sale is liable for tax (hmrc.gov.uk/cgt/index.htm)
Register for VAT (hmrc.gov.uk/vat/start/register/index.htm)
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