Tax return traps to avoid
Posted: Tuesday January 10 2017
By: Guest Blogger
By Claire Howarth
Tax return traps to avoid
Even though the Government have declared that the death of the tax return is nigh, letterboxes have been rattling this last month to mark the request of those under Self Assessment to commence the preparation of the 2016/17 returns and to make a submission.
Some of you may be quick off the blocks with this so it is a good time to highlight issues and mistakes that need to be avoided when preparing your return.
For those in business :
Don’t use estimates
Using estimates, copying last years amounts and entering round sum figures on the return indicates that your record keeping is not up scratch and may prompt HMRC to ask for additional evidence to support your return.
Get Your Expenditure Right
Certain expenditure types are more high profile than others as the rules in these areas are more complex. Especially surrounding repairs and legal fees.
Some may chance their luck and try and claim for business suits, personal grooming, gym memberships and the such like, on the basis that looking and feeling their best benefits the business and improves profitability. Unfortunately, unless the clothing/footwear is a uniform with a logo, a high-vis vest or protective in nature it is unlikely to be allowable. Sorry!
Capital allowances can be claimed on certain assets purchased for use within your business. The rates which can be used lend themselves to a whole raft of legislation and case law. The most popular allowance is by far the Annual Investment Allowance (AIA) which can provide 100% relief against taxable profits for qualifying plant and machinery and integral features. This relief is not available to cars in the main (certain eco friendly models do get 100% however) and a claim where it is not due can result in underpaid tax.
For the landlord :
Where do we start here? The rules on what you can and can’t claim change on an annual basis.
Wear And Tear Allowance
The old wear and tear allowance which previously applied to furnished properties, no longer applies and cannot be claimed. This amounted to 10% of the rental income as a relief. Instead we are now operating on the renewals basis. In summary, the first time you purchase an asset is not allowable but subsequent replacements are.
From 2017/18 the amount you can claim in respect of mortgage interest relief will also be affected for the higher rate tax payer. I will cover this in more detail in a future article.
General and employment related :
Have you claimed all the necessary reliefs and especially if you are a higher rate tax payer, have you included details of pension contributions made and gift aid donations?
Certain employees are entitled to flat rate job expenses especially where they are required to wear a uniform. These can be found at https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32712.
Check Your Tax Codes
It is also essential to review any tax codes issued during the year as these may include underpayments from previous years that they will expect to see on your tax return. It is worth reviewing any such adjustment to ensure you agree that it is correct. The HMRC system does, in some circumstances, apply “assumed” underpayments which are not actual underpayments.
Another common omission from tax returns is the liability to repay student loans and also entering any repayments already made during the tax year. Any further amounts due are collected under self assessment and not repaid directly to the Student Loan Company.
In recent years the child benefit charge has also caused problems within self assessment with tax payers not fully appreciating who is affected. If you, or your partner, earn over £50,000 and you claim child benefit then you are required to repay some, if not all of the monies received.
2016/17 sees the introduction of the dividend tax, including the scrapping of the dividend tax credit and also the receipt of interest from bank accounts gross ie without tax being deducted. The data entry will therefore differ to previous years and additional care will be required to distinguish between the income types and the tax treatment thereof. It is also worth pointing out the fact that additional tax liabilities will arise if you receive more than £1,000 per annum in interest or £5,000 in dividends, whereas if you were a standard rate taxpayer previously no additional liabilities would have arisen.
HMRC are also advised by some banks and building societies of interest paid to taxpayers and they may already know from their system that you have been in receipt of additional income. If the tax return, when submitted, does not include that income type then this will flag up and they may open an enquiry to deal with amendments to your return.
Many changes are affecting the taxpayer at present and this is supposed to be in a period of tax simplification! If in doubt it is always worth considering using the services of an accountant to prepare your return and provide the necessary advice.