Self assessment in practice
The example below shows how Self Assessment actually works:
Assume the 2009/2010 tax liability is for £4,000 and no payments on account have previously been made. This amount (£4,000) is payable by 31 January 2011.
At the same time, a first payment on account for 2010/2011 will be due and this is calculated as being half of the full liability for the previous year, i.e. £2,000. Therefore, a total of £6,000 is payable by 31 January 2011. A second payment on account for 2010/2011 is due on 31 July 2011 and this is also calculated to be half of the previous year’s liability, i.e. a further £2,000.
If then the final liability for 2010/2011 were calculated at, say, £4,500, a ‘balancing payment’ of £500 will be required by 31 January 2012 (i.e. £4,500 less the two payments on account of £2,000).
In addition, a first payment on account for 2011/2012 of £2,250 will be due (i.e. half of the previous year’s liability of £4,500). So the total amount payable by 31 January 2012 will be £2,750 (£500 plus £2,250). A second payment on account for 2011/2012 of £2,250 will be due by 31 July 2012, and so the cycle continues.
In certain circumstances — for example, if your income is falling — it is possible to apply for the payments on account to be reduced, on the basis that you expect next year’s liability to be less, but there is a risk of an interest charge if you get your figures wrong and the reduced instalments do not then cover the liability.
However, by the time you would need to make the first payment on account (31 January), you would likely have a reasonable idea of your expected income level during that year and would normally know the actual level by the time the second payment is due (31 July).
In the current climate, you may be experiencing greater cashflow problems. If so, you should approach the Revenue as early as possible, to arrange ‘Time to Pay’. You will have to provide more information, such as a cashflow forecast and maybe a summary of your income and expenses, but it will mean that you won’t be chased or penalised for arrears of tax — provided you keep to the payment schedule you agree with the Inspector. Ignoring a tax problem makes it worse, not better.
Self Assessment and the current year basis
The Self Assessment system consists, essentially, of two stages:
— Firstly the completion of a tax return detailing all taxable income for the tax year and claiming appropriate allowances and reliefs, and;
— Calculating the tax payments required based on the details declared on the tax return. If a completed tax return is submitted by 30 September following the end of the tax year, HMRC will calculate the tax for you.
It is now possible to complete and submit your Self Assessment tax return online.
Filing online means your that tax will be calculated automatically, even after 30 September. The income tax year runs from 6 April to 5 April the following year. So the tax year 2012/2013 is from 6 April 2012 to 5 April 2013.
The Self Assessment tax return consists of six pages of standard information with supplementary pages issued for other income and gains. For example, there are other pages for employment and self-employment. A potential trap here is that it is the taxpayer’s responsibility to ensure he or she obtains and completes the correct supplementary pages, as appropriate.
Ring the HMRC Orderline (0845 9000 404) for any additional supplementary pages you require.
Employees are generally taxed on earnings from employment received during the ‘current’ tax year. Details of such income are shown on forms P60, if you are employed at the end of the tax year, and forms P45, if you leave employment during the year. You may be paid expenses or provided with taxable benefits by your employer and these may be shown on the form, P11D.
Self-employed musicians are also taxed on earnings in the ‘current’ year, generally by the income shown in accounts that end in the ‘current tax year’, e.g. the year ending 30 June 2012 is assessable for the year ended 5 April 2013.
However, there are special rules to deal with the first year of self-employment (commencement) and the year of cessation of trading income.
Regardless of the date you choose to make your first accounts up to, you will always be assessable in the year you begin trading on income, from the date of commencement up to the next 5 April.
For example, if you commenced trading on 1 July 2011 and you make your first accounts up for a full year to 30 June 2012, you will then be assessable in 2011/2012 on profits from 1 July 2011 to 5 April 2012:
E.g. Business commenced 1 July 2011 and profits are:
Year ended 30 June 2012 £10,000
Year ended 30 June 2013 £12,000
Year ended 30 June 2014 £14,000
The taxable amounts will be:
Tax year 2011/2012 £10,000 x 279/365 = £7,644*
Tax year 2012/2013 £10,000
Tax year 2013/2014 £12,000
Tax year 2014/2015 £14,000
* Time apportioned to cover the period 1 July 2011 to 5 April 2012.
It is apparent from this example that part of the profits for the first year’s trading are taxed twice in 2011/2012 and 2012/2013. This anomaly may be corrected by claiming Overlap Relief, which is available at cessation or a change of accounting date.
In this example, the relief equates to the amount taxable in 2011/2012,i.e. £7,644.
You are not obliged to make your first accounts up for a full year and so may choose a 5 April year end for simplicity. However, there may be cash flow benefits in choosing a later year end.
At the point at which your selfemployment ceases, all untaxed profits since the last fully taxed accounting period will be brought into assessment during the current tax year with any unused Overlap Relief being deducted from the assessable figure.
There are strict time limits for the filing of tax returns, with fixed penalties automatically enforced for failure to adhere to the respective due dates. Self Assessment will financially punish taxpayers whose tax affairs fall into arrears.
Tax returns usually have to be filed with HMRC by 31 January following the end of the year of assessment, for example 31 January 2014 for the tax year ending 5 April 2013.
Late payment of tax incurs the following:
— Interest automatically charged on all overdue tax (currently 3% per annum calculated daily).
— Automatic 5% surcharge on late payment of tax over 30 days after the normal filing date (usually 2 March following the tax year).
— A second automatic 5% surcharge on tax paid over six months after the normal filing date.
Other penalties are:
— Failure to deliver the tax return by the due date (usually 31 January) produces an automatic late filing penalty of £100. A further penalty of £100 arises if the return is still outstanding in six months’ time.
— Daily fines of up to £60 for continued delays.
— Penalty for failing to notify HMRC of the commencement of self-employment within three months of the end of the month in which you start.