Self-Assessment to Check the Liability to Capital Gains Tax and Income Tax in Setup UK

11 Oct

This blog focuses on the administration of tax. It helps the people who might be wondering how to check if they have to pay the capital gains tax and the income tax and which rules apply. It explains how to self-assess oneself under the light of rules of law. The self-assessment of individuals and partnerships done in starting a company UK is under discussion here.

What is the Self-Assessment System?

The system of self-assessment is dependent on the taxpayer as when he files and completes a return of tax and makes the payment of the due tax. If the person is not able to follow the defined time limit, then a system of penalties enforces the system. In case if the tax is paid late, then a payment of interest has to be made. Many taxpayers make use of the PAYE code with which they receive their pay through PAYE under the deduction of tax. Such people do not have to complete the return of tax. However, company directors of UK incorporation, self-employed taxpayers and individuals having complicated affairs will have to complete the return of tax.

How is the Tax Administered?

The HMRC (Her Majesty’s Revenue and Customs) is responsible for the administration of taxes for UK incorporation companies as well as individuals or self-employed taxpayers. The treasury that is managed by the Chancellor of Exchequer, collects and imposes the tax in a formal manner. Her Majesty’s Revenue and Customs (HMRC) undertakes the function for collecting the tax in an administrative fashion. The Taxes Management Act 1970 (TMA 1970) contains the rules and regulations related to the matters of administration.

The Officers of Revenue and Customs exists under the HMRC as the staff and commissioner’s for Her Majesty’s Customs and Revenue. The officers of revenue and customs have the responsibility of the supervision of the system of self-assessment and the agreement of tax liabilities.

The two tiers make the tax appeals. The Tax tribunal listens to these appeals. The tiers include:

  • First Tier Tribunal - that deals with most of the cases excluding the complex ones.
  • Upper Tribunal - that does its dealings with the cases of complex nature that either contain a huge financial sum or an important tax law’s issue. It is also responsible to listen to the appeals against the First Tier Tribunal’s decisions.

Many taxpayers make use of the taxpayer’s agent i.e. their accountants to pay and prepare their tax returns. However, the responsibility to pay the tax and to submit the return still remains of the taxpayer himself.

Notification by the Individuals in Case of Exempt from Tax

In the case of individuals who have a new income or gains source or who do not acquire return of tax, should notify their CGT or income tax chargeability.

The individuals who have not been provided with the notice, are supposed to give a chargeability notice within six months from the year’s end to the HMRC, i.e. the notice should be given by October 5, 2014 for the years 2013 and 2014.

A person who is not liable to higher rate tax or has no chargeable gains does not have to give chargeability notice in the case if his income:

  • Is from an income source that is not liable to tax when self-assessed.
  • Is a UK dividend.
  • Is considered under PAYE.
  • Had or is still having income tax subtracted at source.

In the case if the notification is not made in time, then the person is subject to a penalty.

Returns of Tax and Keeping of the Records

The date to file the tax return is usually October 31 on paper and January 31 electronically after the end of the year of tax.

Returns of Tax

The form of the tax return consists of a basic form of six pages, with additional pages for some specific income sources. The taxpayers are sent the following number of supplementary pages that are dependent on their known sources of income, return, various notes related to the supplementary pages, and a guide of tax return. A small four page tax return is to be completed by the taxpayers who have simple returns of tax. The taxpayer whose return for the last year filed in an electronic way, does not receive an HMRC form but rather a notice is sent.

In the process of starting a company UK, partnerships are made with colleagues or other businessmen for fast company formation UK. A partnership statement must be included while filing a separate return by partnerships. The partnership statement shows the firm’s proceeds, tax credits, losses, gains from sailing out the assets, tax suffered and the apportioning of all of these amounts between the partners. A partnership in the fast company formation UK must include a tax reference and the name of each partner, and also the declaration that the return is complete and authentic under the signatory’s best knowledge. Each partner is supposed to include his share of the profits from partnership upon the return of his personal tax.

Till when can the returns of tax be submitted?

The most suitable date for a personal return of tax for a year of tax, say year 1, is October 31 in the year of tax (Year 2), for a paper or another non-electronic return. And in the case of a return made via the internet as an electronic return, January 31 in the 2nd year is the due date.

The general rule mentioned above contains two exceptions that are as under:

  • If the HMRC issues a notice to the taxpayer after July 31 in the 2nd year, then the first exception is applicable. In the case of filing on or before October 31 in the 2nd year, then the latest filling date is the termination of 3 months after the notice, in case of a return in the form of a paper, and January 31 in the 2nd year, in the case of a return in an electronic form.
  • The second exception is applicable if the HMRC issues the notice to the taxpayer to file the tax after October 31 in the 2nd year. The latest filing date, in this scenario, is the end of 3 months after the issuance of the notice.

In the case of a partnership return, the main rule and the exceptions as discussed for the personal returns are also applicable to the partnership returns and the partnership return’s filing may be performed on a paper or electronically.

Information about Standard Accounting

It is the requirement of a tax return that the results of trading are presented in a standard format. Although there is no hard and fast rule for the submission of accounts, there is no restriction, to file the accounts. If the accounts are filed along with the return, then the HMRC’s power become restrained to hold an assessment of discovery.

Income less expenses equal to profits such as the three lined accounts merely require to be included on the businesses’ return of tax having gross rents from property or a turnover of less than the VAT’s threshold for the registration of VAT, i.e. 79,000 pounds. This seems to be helpful but that might not be the case as the records underlying should still be possessed for the purposes of tax like items not allowable etc. when the production of three line accounts is performed.

Huge businesses having a turnover of an amount of at least 5 million pounds that make use of the figures rounded off to the closest 1000 pounds in the production of their accounts published can perform the computation of their profits to the closest 1000 pounds to fulfill the purposes of tax.

Keeping the Records

It is mandatory for all the taxpayers that they retain all the records that are needed to allow them to deliver and make a correct return of tax.

The records should be preserved until the later of:

  • 5 years following the date of January 31 after the year of tax where the taxpayer owns or is at the post of a partner, or a sole trader or lets property. Except the business records, the above is applicable to all of the records.
  • 1 year following the January 31st of the year of tax or

Given notice for the delivery of a return is given before the date mentioned in point 1.

  • The time following an enquiry of a compliance check by HMRC into the return cannot be initiated any longer, or
  • The date on which a similar compliance check enquiry terminates.

In the case of records which are in bulk, then it is in the authority of HMRC to determine a smaller limit of time for keeping the records and some other way is then used to provide the information that the records hold.

In case of a person who receives a return of tax delivery notice after the expiring of the normal period of record keeping, then he must keep all the records safe with him till an enquiry of compliance check gets started in regards of the return or till an enquiry of compliance check gets terminated.

In case of bulky records, it is not compulsory for the taxpayers to maintain the records, they can also suffice just with the information. However, they must present that they have prepared a correct and complete return of tax. On request, the information should also be able to be provided in a legible form. The records can be kept in a soft copy or an electronic format.

If the HMRC feel or believe that the checking of a position of tax is reasonably required, then they have the authority to inspect the ‘in-year’ records prior to the returns being submitted.

Self-Assessment and Claims

In the case of filing a paper return, the HMRC can be asked by the taxpayer for the computation of the due tax. Tax is calculated automatically in the case of electronic returns.

How is the Self-Assessment Calculated?

A self-assessment consists of the computation of the taxable income’s amount and gains after subtracting allowances and reliefs, and a computation of CGT and income tax that stands payable after considering the tax subtracted at source and credits of tax on dividends.

In case if the taxpayer files a return in paper form, except a short tax return, he can then either make or ask the HMRC to make the calculation of tax on his behalf. In the scenario of the taxpayer requesting the HMRC to make the calculation for the 1st year, then the filing of paper must be performed on or before October 31 in the 2nd year or if the tax return filing notice gets issued after August 31 within 2 months of the notice in the 2nd year.

The computation of liability of tax is done automatically when the return is made online in the case if the taxpayer files a return electronically.

Amendment or Alteration in the Self-Assessment

It is possible for the taxpayer to make amendments in his return, including the computation of tax for 1st year within twelve months after the date of filing. The date of filing, for this purpose, means January 31 of the 2nd year or where the issuance of the notice to file a return took place after October 31 in the 2nd year, the final day among the 3 months’ period initiating with the issue.

An amendment in the return may be made by the taxpayer at a time when an enquiry of compliance check is under progress in the return. The scope of an enquiry of a compliance check is not restricted by the amendment into the return but it might be considered in that enquiry. If the amendment made during the enquiry of a compliance check is the amount of tax that remains payable, then the amendment is not applicable till the enquiry is going on. Similar rules are applicable in the case of correction and alteration of the returns of partnership.

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