Sunday, August 10, 2008

"Why is it important that tax returns are filed on time?"

I was amused to see a list of 8 reasons given in a recent HMRC Consultation document.
1 - to enable HMRC to put the right amount of tax into charge;
2 - to enable HMRC to make timely repayments where appropriate;
3 - to enable HMRC to check the basis of the calculation by which the taxpayer has arrived at their liability to ensure that it is correct;
4 - to identify whether the taxpayer or people in their employment are due certain entitlements – for example failure to file employers’ end of year returns such as P35 and P14s may result in an employee being denied proper entitlements;
5 - to calculate the taxpayer’s tax code for the following year (for employees completing income tax self assessment returns). This ensures that the taxpayer pays the correct amount of tax in the following period;
6 - to calculate any payments on account (in year payments) that are due in the following year;
7 - to identify which taxpayers need a return to be sent to them in the following period. If a taxpayer fails to file a return on time in one year it may result in them receiving a return when they don’t need one in the following period, and
8 - to collate and report statistical information on intra-community trade (in the case of VAT returns).
Of course it's important for returns to be filed so that all of the above activities can be undertaken but not one of them justifies the basic contention. That is unless the filing deadlines have been set at the last possible time by which most of those actions could take place. And they have not.

Indeed, the objective should be to encourage taxpayers to file before the deadlines not 'just in time'.

Taking the reasons above in turn:

Under the pre-self assessment system tax returns were required to enable the Revenue authorities to compute and charge the right amount of tax. Now taxpayers self assess (so reason 1 above makes no sense).

There's a hint of nannying here too. Look at reason 2 above. If a taxpayer wants a refund he has to file his return. The sooner he files it the sooner he gets his refund. Simple. There is no financial benefit to taxpayers in delaying submission.

Of course HMRC need to be able to check our self assessments (reason 3 above) but arguably this could be done at any time - indeed, spreading the workload would mean more returns could be checked by fewer HMRC staff.

Reason 4 - in connection with PAYE returns is a good reason in so far as repayments are due to employees.

Reason 5 - to enable PAYE codes to be correctly set foir the following year. This made me laugh. It's a great ideal but for as long as I can recall the computer has generated PAYE codes long before the filing deadline for tax returns. As a result employees who file tax returns routinely get 2 or 3 codes each year. One before last year's return has been processed; one afterwards and one more by reference to changes announced in the March Budget.

Reason 6 - again this is nonsense. Payments on account are self assessed and claims to reduce payments on account are accepted without the need for any supporting evidence.

Reason 7 - this seems to be an attempt to offer a 'green' reason for filing tax returns on time. Except that many of us have continued to receive the wrong SA tax return pages in subsequent years. And short tax returns are routinely issued in error to company directors. And HMRC hold off issuing tax returns to taxpayers who routinely make repayment claims.

Reason 8 - Is this any more than a statistical monitooring exercise? For who's benefit?

I'll return to this document on another occasion. I'm quite happy to support moves to encourage tax returns to be filed before the deadlines. I think that would be helpful to accountants and their clients as well as to HMRC but let's be clear as to why this is important. And the simple answer is:
To encourage the right taxes to be paid on time and for HMRC to be able to check this without delay.

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