Questions & Answers

I Can’t Pay my Tax Liability?

Q: I filed my tax return before Christmas but due to cashflow problems I do not think I will be able to pay the tax I owe by the deadline of 31st January. Will I still receive a late filing penalty of £100?

A: You will not receive the £100 penalty as you have filed your tax return before the 31 January deadline, but as you haven’t paid your tax liability for the 2005/06 tax year, HM Revenue & Customs will begin to charge you interest on a daily basis starting from 00.00am on 1st February on the tax unpaid. Currently interest is being charged by HM Revenue & Customs on late payment of tax at a rate of 7.5%.

You must also try to ensure that you pay the tax you owe by 28 February 2007, as any amounts relating to the 2005/06 tax liability that are still unpaid at this date will receive an initial 5% surcharge. Also, an additional surcharge of 5% will be levied on any tax outstanding if you still have not cleared your 2005/06 tax liability more than 6 months following the filing date, which is the 31 July 2007.

If you are due to make payments on account towards next years 2006/07 Tax liability, you will not receive a surcharge if you don’t make payment of these, but you will receive interest from the due date of payment, which is 31 st January 2007 and 31 st July 2007 respectively .

Will I receive a late filing penalty?

Q: I have received a reminder from the HMRC to file my 2005/06 tax return. If I am unable to file it by the 31 st January deadline will I receive a penalty? If so, how much will this be and are there any ways that it can be reduced?

A: Every year the number of taxpayers who file their income tax returns in January increases. In view of this increasing trend HM Revenue & Customs have issued guidance to these last minute taxpayers on how they determine which returns are late filed and receive a £100 late filing penalty. The guidance for the tax returns due for the 2005/06 tax year is as follows:

Wednesday 31 January: Tax Returns received up to midnight are on time. This includes Tax Returns received in Office letter boxes that are opened first thing on Thursday morning.

Thursday 1 February: Tax Returns received up to midnight are late but incur no late-filing penalty. This includes Tax Returns received in Office letter boxes that are opened first thing on Friday morning.

Friday 2 February: Tax Returns received from the morning post and onwards are late and incur a late-filing penalty of £100.

Unfortunately, negligence is not an acceptable excuse to reduce a late filing penalty. HMRC only accept a limited number of excuses such as bereavement or serious illness for not submitting your return on time.

However, even if you cannot file your return by the deadline, if you establish how much tax you are required to pay, and make this payment so it reaches HMRC on or before 31 January, you can reduce any £100 late filing penalty to nil. For further information on this concession, please speak to your accountant.

How Can I amend last years tax return?

Q: I recently finished off my 2005/06 tax return and noticed some dividends I received were shown incorrectly on last years tax return. As I am a Higher Rate tax payer I should have paid an additional amount of tax on these amounts. How should I let the HMRC know of my error?

A: Just as HM Revenue & Customs has the right to repair an obvious error or mistake on a return you also have the right to amend it, within 12 months of the original filing date. The amendment may be in the form of a letter or an amended return showing the additional income in the correct box or supplementary page. If the error relates to a tax return which was filed more than 12 months previous then you have to make an “Error and Mistake” claim by including details in a letter. You cannot just send in an amended tax return.

You should also let them know as soon as you realise of your mistake and try to pay the tax due as soon as possible, as interest and surcharges will be due on the amount you have underpaid.

Interest will be applied on a daily basis at the rate in force at the time the tax was originally due, so if you missed the income off the 2004/05 tax return then you will have interest applied from 1 February 2006 until the day HMRC receive your payment. The interest rate is currently set at 7.5%.

Can I take My Tax Return to any Tax Office?

Q: I am still in the process of trying to complete my tax return and do not want to miss the deadline. However, I live I London and my return has to be filed in Middlesborough, which is apparently where my employer’s details are kept. I have yet to pay my tax liability and wondered if I would I still have to pay the late filing penalty if Royal Mail delivered the return late?

A: I am afraid you would as it is your responsibility to ensure the return is filed on time. The only time HMRC reduce a penalty due to a postal delay is when the return was posted in good time, and an unforeseen event occurred which disrupted the normal post service, which has led to loss or delay of the return. Examples include a fire or flood at the Post Office where the return was handled or prolonged industrial action by the Post Office staff.

However, they will allow you to take it into your nearest Inland Revenue office as they are bound to accept it, whether it will eventually be processed there or not.

Unfortunately, new guidelines issued this year mean HMRC will not now issue receipts for hand delivered tax returns. On this basis, if you want proof of delivery you may be better advised to post the return either by recorded or special delivery to ensure receipt, as HMRC have confirmed that it is now departmental policy to sign for items received in this way.

Records Destroyed by Fire

Q: I have yet to file my tax return as part of my records were destroyed in fire at my home. Should I send an estimate of income/expenditure to the Inland Revenue or should I wait to see if the documents can be recovered?

A: The HMRC advise that you should not delay sending in your tax return just because you do not have all the information you need. If you feel that there may be the possibility that you can recover the information then you should submit your return with provisional figures, and advise the HMRC when you expect to be able to file actual figures. You must ensure that figures you provided are reasonable and take account of any information that is available for the same period.

If you feel that the records are unlikely to be recovered you should submit estimates for the period which is missing. Once again these need to be reliable estimates, and you should be aware that HMRC obviously reserve the right to investigate and ensure the figures are reasonable and consistent with similar trades and previous years figures.

If you run a business, HM Revenue and Customs do advise you to ensure suitable back up procedures are in place to prevent problems occurring with your records. Duplicate bank statements can always be obtained as a last resort to substantiate figures you have reported.

Selling Second Hand Items

Q: For a many years I have sold a number of old second hand items I own through car boot sales and classified adverts in my local newspaper, and recently internet auction sites. I recently read an article which suggest I may have to pay tax on the money I receive in this way. Is this correct?

A: If you are just selling some unwanted items that have been lying around in the attic and your home, the answer is probably no, as in order to pay tax on the goods you sell, you either have to be trading or make a capital gain.

You are likely to be treated as trading where the HMRC consider you to be purchasing or making goods for resale with the intention of making a profit, or sell goods for others and receive a commission.

If you only sell occasional, unwanted personal items through internet auctions, car boot sales and classified advertisements then it is unlikely they will view you as self-employed. This is due to the fact that in most cases the second hand value and amount you receive rarely exceeds the original price you paid for item, and as tax is only chargeable on the profits you make, no tax will be chargeable.

Capital Gains Tax is only charged on gains you make and if you sell an item for less than you purchased it for you will not make a gain. It is the gain that is taxed, not the amount you receive. Therefore, you will only have to pay tax if the items you sell have increased in value during the time you have owned them, and as they are likely to be personal effects or goods (known as ‘chattels’) you are selling, which are individually worth less than £6,000 when you dispose of them, it is very unlikely you will have made a gain.

If you are concerned that your situation may be considered to be trading you should discuss this with your accountant, as there is a late registration penalty if you do not register within 3 months of starting.

Gift Of Goods To Charity Shops

Q: Over the Christmas period I cleared out lots of old clothes and items which I have stored over the years. If I give these items to my local charity shop can I include a deduction in my tax return for Gift Aid, as I am a Higher Rate taxpayer and will receive 18% tax relief on this gift?

Unfortunately donations of goods and other items to a chosen charity can not be Gift Aided as Gift Aid only applies to gifts of money.

However, your charity can act as an agent for you by selling goods on your behalf in the hope that you then donate the proceeds from the sales to the Charity. If the donation of the eventual sale proceeds is made in this way then you will be able to include a deduction for gift aid in your tax return, and receive 18% tax relief either in the Tax Year you make the donation, or the year before.

Initially, we recommend you speak to your local Charity shop to see if they will actually sell the goods on your behalf, as they must remain your property until they are sold.

Also you reserve the right to keep all or part of the proceeds of the sale, so the charity must keep a record of the items they sell on your behalf and if they ask you to complete a Gift Aid declaration before the sale (in anticipation of the proceeds being gifted to them) the wording of that declaration must not commit to you making a donation as you must retain a choice of whether or not to gift the proceeds.

VAT Return Errors – How Do I correct them?

Q: I have noticed that there are a number of errors on the Vat return I completed for my businesses previous VAT period. Due to these errors, I will have additional VAT to pay. How do I rectify the situation and will there be any penalties or interest to pay on this?

A: If the net errors total less than £2,000 you have the choice of using two methods to disclose the errors without being charged interest or penalties. You can voluntarily disclose these errors either by contact your local VAT Business Advice Centre in writing or by adjusting your VAT account and including the value of that adjustment in the next VAT return for the current period.

If the net errors total more than £2,000, you must inform your local VAT Business Advice Centre in writing of the errors. If you use this method, you must not make adjustment for the same errors on a later VAT return. Customs may also charge interest on any under declarations you disclose in this way.