Enter Your E-mail

Mark McLaughlin CTA (Fellow) ATT TEP highlights recent important changes affecting tax compliance.

{mosimage}Introduction

Changes to legislation and practice affecting tax compliance seem to be happening at a rapid pace. These days, a practitioner’s life is made more complicated by the fact that announced changes are often prospective, and may not apply until different points in the future. Below is a summary of some recent significant procedural changes, and when they take effect.

Tax return filing dates

The changes to personal tax return filing dates announced in Finance Act 2007 apply to tax returns for 2007/08 and later years in respect of individuals and trustees, and return periods beginning from 6 April 2007 for partnerships with one or more companies (FA 2007, s 92).

31 July has become a significant date under the new filing regime. The general rule is that paper returns must be filed on or before 31 October following the end of the relevant tax year, or alternatively electronic returns must be filed by 31 January. However, an exception to this rule is that if HMRC issue a paper tax return (or filing notice) after 31 July, the filing date is extended to three months beginning with the date on the return (or notice).

Practitioners filing paper returns for 2007/08 and later years will become familiar with the 31 October deadline. Those practitioners who file online using HMRC’s software should be aware that it may not be suitable for dealing with every client’s circumstances. In its publication ‘Changes to Self Assessment (SA) – a guide for tax agents’ (http://www.hmrc.gov.uk/sachanges/#7) under ‘Exceptions to the 31 October paper filing deadline’, HMRC outline a concession for “…a small number of SA customers whose returns cannot currently be filed online because HMRC has not yet been able to develop online facilities for their particular circumstances, using either HMRC or commercial software products” (emphasis added). It would thus appear that if HMRC’s software cannot cope, the practitioner (or taxpayer) is expected to find and purchase suitable software from a commercial provider, unless the return falls within the small minority for whom there is no choice other than to submit paper returns, in which case a 31 January deadline applies without late filing penalties being imposed.

Tax return enquiries

The tax return enquiry ‘window’ (ie the period within which HMRC may commence an enquiry into a self-assessment return) also changed in respect of personal tax returns for 2007/08 and later years, and most company returns for accounting periods ending after 31 March 2008. The enquiry window is no longer linked to the filing date for the return, but will now normally run for twelve months from the date on which the return was delivered to HMRC.

Practitioners would therefore be well-advised to maintain a log showing the dates on which tax returns for 2008 and later years were delivered to HMRC, if they do not already do so.

Penalties for errors

A new penalty regime for incorrect tax returns, etc was initially introduced in Finance Act 2007 (FA 2007, s 97 and Sch 24). The rules are intended to take effect for returns due to be filed on or after 1 April 2009, which relate to a period beginning on or after 1 April 2008. Thus, for example, the regime will apply to personal tax returns for 2008/09 and later years. Practitioners will need to check the accounting periods of their corporate clients, to determine the first period affected by the rules.

As previously indicated in ‘Points of Practice’ ( see http://articles.taxationweb.co.uk/index.php?id=726 ) penalties for negligently (or fraudulently) incorrect tax returns under current legislation are tax-geared, based on potential lost revenue, and expressed as a percentage of the additional tax due. The maximum penalty (i.e. 100% of the culpable tax lost) is subject to reductions, based on certain abatement factors (i.e. disclosure, co-operation and seriousness). Under the new regime, fixed maximum and minimum penalties apply, which broadly depend upon certain factors (i.e. the person’s behaviour, the type of disclosure to HMRC (‘prompted’ or ‘unprompted’) and the ‘quality’ of disclosure).

Practitioners will probably need to be familiar with the ‘old’ and ‘new’ penalty regimes for some time to come. For example, suppose a self-employed taxpayer submits his 2007/08 self-assessment return on 30 January 2009. HMRC open an enquiry into the return in January 2010, by which time the taxpayer’s 2008/09 return has already been filed. HMRC’s enquiry into his 2007/08 return uncovers understated cash sales, and an enquiry is also opened into the 2008/09 return, which results in the individual making a prompted disclosure of a similar error. When discussing the level of penalties with HMRC, the taxpayer’s agent will need to take account of the different methods by which penalties can be mitigated for 2007/08 and 2008/09 respectively.

HMRC guidance on penalty abatement factors under the current regime can be found in the Enquiry Manual (at paragraph 6050 and following). The Compliance Handbook (at paragraph 82400 and following) deals with penalty reductions for disclosure under the new regime.

Assessment time limits

Provision was made in Finance Act 2008 to amend the time limits for assessments, claims etc, in an attempt to provide greater uniformity and alignment where possible across the various taxes (e.g. income tax, corporation tax, VAT). For example:

• The general time limit for taxpayers to make relief claims for income tax (including PAYE and under the Construction Industry Scheme) and CGT purposes in TMA 1970, s 43 is changed to four years after the year of assessment, from the previous five years and ten months (or six years for corporation tax). The same time limit applies to error or mistake claims under ss 33 or 33A.
• The ordinary time limit for assessments by HMRC is also reduced to four years, from five years and ten months (or six years for corporation tax). This time limit also applies to discovery (or mistake) assessments.
• However, an extended time limit of six years after the year of assessment (previously five years and ten months, or six years for corporation tax) applies if a loss of tax is brought about carelessly, or twenty years (previously twenty years and ten months, or 21 years for corporation tax) if the loss of tax has been brought about deliberately, and also to recover a loss of tax resulting from failing to notify HMRC of liability to tax under TMA 1970, s 7, or failing to disclose tax avoidance schemes.
• The time limit for HMRC determinations in the absence of self-assessment returns (and for taxpayers to make returns to supersede determinations) is reduced to three years from the filing date, from five years.
• For VAT purposes, the normal period for VAT assessments is increased to four years (from three years). An extended time limit of four years also applies to VAT claims. However, the time limit for assessments to recover a deliberate loss of VAT is twenty years, which was also previously the time limit for VAT assessments in cases of fraud.

The Finance Act 2008 changes to time limits will enter into force on a future date to be specified by Statutory Instrument. Whilst the alignment of time limits is a simplification measure, the cumulative effect of recent changes will probably leave many practitioners with a sense that the tax compliance landscape has altered quite significantly in a relatively short space of time.

The above article is based on an article published in ‘Busy Practitioner’ (July/August), which is published by Tottel Publishing.