Mark McLaughlin
CTA (Fellow) ATT TEP, General Editor of TaxationWeb, selects a 'question of the month' from TaxationWeb's Forum

Have you got a tax question? Post it on the Tax Tips Forum and it may be answered either by Mark McLaughlin or one of the other Forum contributors.

October 2006

Introduction

Occasionally, questions from concerned individuals on the TaxationWeb Tax Forum raise the issue of how to bring their tax affairs up-to-date. The background to these questions is often that an individual commenced self-employment but did not notify HM Revenue & Customs (HMRC). The reasons may vary from ignorance of the law in some cases, to those who intended to 'get around to it' but never actually did. Those individuals eventually realise that the situation may have developed into a potentially serious problem. But they continue to ignore the situation, because they fear the possible repercussions. Eventually, they accept that the problem is not going to disappear, and decide to take positive action.

It is said that 'prevention is better than cure'. The situation described above can be easily avoided by taking professional advice at an early stage, e.g. preferably before commencing self-employment. There is also free guidance available on starting up as self-employed on HMRC's website.

The following query from 'steve7' indicates that the direct tax issues may not be as bad as first feared, although it is hoped that he and his business partners have made adequate provision for their tax liabilities out of the profits they have earned to date. There is a potential penalty situation for National Insurance purposes as described below, but again this may not be as bad as first suspected. However, depending on the nature of the business, there may be VAT problems. As mentioned above, expert advice should be sought.

Q:

Myself and two of my business partners have been running a business online since January this year. We have made £250,000. We have not declared any of our income to the Inland Revenue. We would like to come clean with the Inland Revenue. Will we receive any penalties?

A:

Editor's Comments

It is all too easy for those who do not seek early advice or guidance to allow their affairs to slip into arrears. However, for those who seek to recognise the problem and address it, in many cases the position may not be as bad as they fear. For example:

• The newly self-employed must notify their liability to pay Class 2 National Insurance contributions to HMRC within three months from the last day of the month in which the self-employment commenced, with a possible £100 penalty for non-compliance. However, the penalty may be avoided if business profits are very low (i.e. below the 'small earnings' exception limit for Class 2 purposes, which is £4,465 for 2006-07) or if there is a reasonable excuse for not registering, and HMRC also have powers to mitigate or waive the penalty.
• In addition, HMRC must be notified no later than 5 October following the end of the tax year in which the business started trading. Note that this date could be as much as 18 months since trading commenced (e.g. if trading commenced on 6 April 2005, the notification deadline for these purposes is 18 months later, by 5 October 2006). There are penalties for late notification (which is distinct from the penalty mentioned earlier) up to a maximum of the amount of tax payable, but in practice such penalties are often subject to significant 'discounts' depending on the circumstances.
• For VAT purposes, there is a requirement to be VAT registered if business turnover exceeds certain limits. HMRC must be notified if at the end of any month the value of taxable supplies in the previous twelve months (or since trading commenced, if shorter) exceeds £61,000 (unless the value of taxable supplies in the next twelve months will not exceed £59,000). Customs must be notified within 30 days following the end of the relevant month; or if the value of taxable supplies in the next 30 days will exceed £61,000, in which case Customs must be notified before the end of that 30 day period. It is therefore important to monitor taxable turnover levels on a rolling, monthly basis to ensure registration within the above 30-day time limits, in order to avoid backdated registration and a possible penalty. Clearly, the VAT registration threshold has been well exceeded in this case, and as recommended above advice from a VAT specialist should be obtained without delay.

In cases of longer delays or deliberate non-disclosure, the position is potentially more serious, and professional advice from a specialist in investigation work should therefore be obtained.

Responses from contributors included:

al_eebee

If it is only since January then things are not TOO bad.

You will probably each suffer a £100 penalty for failing to notify HMRC re income tax, but so long as you tell them before 5 October there should be no further penalty re IT/NIC as HMRC have time to issue returns to you.

You are in SA so the first tax will be payable by 31 Jan 2007 based on profits for the period to 5 April 2006.

You will need to decide when you will prepare accounts to each year - 31 March / 5 April is the easiest as it save having to apportion profits in the early years and carry overlap relief until the business ceases, but there may well be valid reasons to chose another date.

You will also need to consider VAT registration and whether you should already have registered and been charging, which for an on-line business could be a minefield and I shall leave for others to pick up, but could leave you in an awkward hole.

The important thing for the sums involved is get full advice and notify HMRC as soon as possible.

Bob Jones

If you are not already in receipt of self assessment returns then you must notify HMRC by 5 October - if you do so there will be no penalty. Even if you do not notify chargeability by 5 October there will be no penalty provided you pay the tax due in full by 31 January next. This applies to the other partners as well.
If you are already in receipt of self assessment returns you simply include the income on that return. If this is a partnership then a partnership return will need to be completed. Provided you comply with all this there will be no penalty - if you don't then the maximum penalty will be 100% of the tax due - not £100 - 100% of the tax.

Add your comments

To visit the above query on the Tax Forum, including any updates, click here.

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.

<< back to Tax Doctor index | go to Tax Tips Forum >>