Self Assessment - 11 Tips to get ahead of the taxman

The January tax returns deadline is looming, but even though HMRC is clamping down on avoidance and requiring accountants secretly to inform on clients in certain circumstances, some straightforward good housekeeping can still produce good rewards.

Andy Hardy from TaxCalc.com demystifies the tax returns process and offers top tips on how you can ensure you don’t get caught out by the taxman.

1: Register your business with the HMRC

If you have recently started your business you have three months to inform the revenue by completing form CWF1. Failure to do so can result in a £100 fine.

2: Register with HMRC website to submit your tax return online

• It can help avoid processing errors, and receive faster repayments
• To submit your form online you will need a User ID and password. These take a week to come through so make sure you do this early

It is never too early to start organising. Whilst rummaging at the back of cupboards for your Christmas decorations, hunt for important paperwork. When tidying the house ready for Christmas festivities, make sure you do not throw away important paperwork

4: Check the tax you pay

If you run a business, you will need to complete a tax return, however, your spouse or other family members on PAYE may not. They rely completely on HMRC getting it right – but does it?

A recent National Audit Office report highlights HMRC processing errors and that more than 1 million people paid the wrong amount of tax in 2006-07. Whilst some people paid too little, more than 500,000 people paid too much, on average £290 too much. Did you pay too much or too little?

Whether or not you have to complete a tax return, it is easy to check whether you or your family have paid too much tax, by using tax software such as TaxCalc.

5: Don’t incur unnecessary fines

• Last year 10% of returns were filed after the 31 January deadline, leaving the offenders open to fines of £100. HMRC is currently reviewing the fine and it may rise significantly in future years.

• Don’t panic or delay. Take advantage of the holidays to collect up all the paperwork that you will need and MUST keep for the taxman, and then set aside some time to complete the tax return.

• The income tax due for 2006/07 is due on 31 January 2008. A payment on account of the 2007/08 liability will be payable on the same day. This is 50% of the previous tax year. In a business’s first year this means that your tax bill could be 150% of the tax you owe. Make sure the cash is there to pay the bill.
• Interest will start to run immediately on unpaid tax. In addition, there is a 5% surcharge on all tax still owed 28 days after the deadline (i.e. the end of February). This equates to an annual interest rate of 65%. This surcharge is repeated in July

• Don’t believe everything you are told as there are lots of myths about what expenses can be claimed for tax purposes
• Tax relief is due only for expenses which are incurred wholly and exclusively for the purposes of the business, although in practice HMRC does allow proportionate claims to be made for assets like cars, which are used partly for business and partly for private purposes

You have a legal duty to record income and expenses relating to your business.

• HMRC has a useful booklet SABK4 which explains what you need to keep and what you need to do.

Your tax bill always comes as a nasty surprise, so plan for it now.

• The sooner you prepare your tax return, the sooner you know how much is due and plan for its payments.

• As a general rule, you should put aside 20-25 percent of your profits to ensure you can cover your tax bill.

• A tax return that is not signed cannot be accepted
• If you submit your tax return online, the combination of your ID and password is sufficient, and you do not need a signature

• The deadline is midnight 31 January 2007 if filing online
• Whilst strictly it is the same for paper filing, in practice you will avoid the penalty if you hand deliver it on 1 February 2007
• HMRC will not give a receipt if it is filed by hand, so send it by recorded delivery to ensure that you can prove filing