How to succeed in assessing yourself

New methods of tax assessment need not be a nightmare if you follow the right guidelines and keep your paperwork. Bhavna Mistry outlines the main points

New measures to allow the self-employed and small businesses to calculate and pay their own tax are set to come into effect in April this year. The new method, called self-assessment, will affect the self-employed, sole traders, directors, or those in partnerships – in fact a large proportion of the design industry.

While the Federation of Small Businesses believes the shift of responsibility on to taxpayers will result in a greater need for accountants and create confusion between estimated and actual profits, many accountants believe that the process can be relatively painless – if explained.

Who’s responsible for what?

From April the burden for calculating tax liability will shift from the Inland Revenue to the individual. It will be up to the taxpayer to sort out all the paperwork and to keep the necessary records to calculate and prove income and allowable expenses.

So under the self-assessment regulations, the taxpayers work out their own tax liability, fill in their returns and send off cheques to the IR.

When do you need to start?

Although the new forms won’t be sent out until April 1997, they will cover earnings from this April. So all records need to be updated and receipts and other paperwork must be kept from then onwards. The new regulations mean that you pay tax for the current year’s earnings in two instalments, payable in January and July.

What do you need to keep?

Taxpayers need to keep all those records that enable them to make a complete and accurate tax return. The records will need to be more comprehensive than before and will include: bank records – namely cash books which show each transaction, cheque stubs, paying in books and bank and building society statements – P45s, P60s, copies of receipts to justify P11D claims, business mileage, share registers, interest vouchers and capital gains details relating to rental income from property. The self-employed should keep records for at least six fiscal years.

Timing and penalties

The timing for submission for returns and payments will be different under self-assessment. The deadlines (see Timetable above) will be rigorously enforced and automatic fines will be charged for late returns or payments. The fines range from 100 if the return is late to 3000 for failure to keep or preserve proper records.

But taxpayers can choose an accounting date to their best advantage. If a date is chosen which is close to the end of the tax year (31 March), it minimises the delay between earning profits and paying tax. If profits are generally rising, choose a date near the beginning of the tax year (30 April). The tax on the incremental rise in profits each year will be rolled forward, deferring tax on the annual extra profit. If profits are falling, March is often the best month. This means you can get the benefit from the reduced profits in the current year’s tax assessment.

What will the new forms look like?

The main return will span eight pages. In addition, there are nine separate “schedules” relating to a taxpayer’s sources of income. The IR will only send out the schedules it thinks each individual will need, so it is up to taxpayers to make sure they get the correct schedules.

Timetable

April 1996

Self-assessment begins. Start keeping records from this month to enable an accurate return to be made in April 1997, when the new forms are sent out.

January 1997

First instalment of tax due. Next instalment due in July.

September 1997

Taxpayer must submit return if IR is to calculate the tax liability; this puts slightly less onus on the individual, but if this date is missed, the taxpayer will have to calculate liability.

October 1997

Notify IR of “new sources” of income so that it can send the appropriate schedules for taxpayer to complete. Request self-assessment forms if this is to be the first tax return.

January 1998

Deadline for filing 1996/97 return. First instalment to be paid for 1996/7 income tax.

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