The Taxman's trouble of the week: The paper shortage

I was in two minds whether to post this here or on my accountancy and tax fun blog.

Believe it or not, but HMRC has run out of paper! This means that some self employed people who are due to pay tax on 31 July will not get their reminder statement until August.

Much the same thing happened in January 2008 - as HMRC admit in their FAQs about the current farce.

HMRC are saying that anyone who is affected will not be subject to interest on the late payment as long as the tax due is paid within 30 days of when the statement arrives. Some of the people affected by the paper shortage will already be planning to pay their tax as it's an annual liability. The amount due will typically also be clear from the statements issued earlier in the year by reference to the tax due on 31 January 2011.

If you do pay the tax late I suspect that the computer will automatically charge the interest that would otherwise be due. You will then need to call or write to the taxman to get the interest charge wiped from your record.

I was going to finish by hoping that HMRC will have enough notepaper to record the details of telephone conversations when taxpayers challenge the interest charges. But the records are probably all stored online now.

"Too busy for the taxman"? - don't blame your accountant

I admit I was unaware that 'British couple' Sharon and Ozzy Osbourne had admitted to owing the IRS around £1,065,000 as a result of being “too busy” to look at their finances. Now it seems they owe a further £213,000 for unpaid federal income taxes from 2007.

According to the Daily Express Sharon's schedule has left her little time to meet with her accountant.

“I cancelled two meetings with him over the past 18 months because I was way too busy. Even though he is paid to do a job, the buck stops with me. I was too involved with myself – because I think I love myself a little too much.”

I am pleased to note that Sharon is not blaming her accountant. I trust that he or she has the necessary experience to advise Mrs O on US tax matters and was aware of the likely reaction of the IRS to late filings and payments of tax. I wonder if Mrs O's UK tax position is uptodate. Our tax system is very different and it can take some time before the demands start to pile up for unpaid taxes.

It is likely that the accountant has tried to meet with Mrs O more than twice in the last 18 months. At least I hope so. It's hard to imagine dealing with her tax affairs properly with just one face to face meeting each year.

Some people want to blame their accountant when problems develop with the taxman (in the US or the UK). This is rarely fair. Most accountants will have been in regular communication and warned the client of the consequences of letting their tax affairs get in arrears. Most accountants will also stop chasing clients if their fees are left outstanding. At which point the client has no one to blame but themselves.

It doesn't pay to be "too busy for the taxman".

By the way. As from 2012 the penalties for late filed UK tax returns are increasing. If you traditionally wait until the last minute and file your tax return online in January each year, I'd get a move on. You really don't want to risk missing the next filing deadline.

50% tax rate announced in Budget 2009 but 2 years on and the self employed haven't paid it yet

For all the fuss about the impact of a new top rate of 50% income tax, no self employed person earning above the £150,000 threshold has yet paid tax at 50%. They need not have taken action to reduce their tax bills. It's just the way the tax system works.

Let me explain:

The new 50% rate was introduced by Alastair Darling in his 2009 Budget speech. As happens all the time now, the tax change did not take immediate effect. The first year’s taxable income to be affected was that for 2010/11 – the tax year that started on 6 April 2010 and ended on 5 April 2011.

The self employed and those living off rental or investment income pay their income tax in 3 instalments each year. When their tax liability increases it is only the final instalment that rises to reflect this. And for 2010/11 this tax will not be payable until 31 January 2012.

What about employees who pay tax through the PAYE system? Some of them also have yet to pay 50% tax. The Budget announcement in 2009 gave HMRC just a few months to establish systems to adapt PAYE codes. They were unable to do this for PAYE codes that employers used in 2010/11 where the individual had two or more employments. Instead HMRC added a note to their website for employees with income above £150,000:

"HMRC will work out how much tax you are actually due to pay when you send in your 2010-11 Self Assessment tax return. This may mean you'll owe some extra tax."

What does this mean?

I think it means that any research into the impact of the 50% rate would be premature. Some wealthy taxpayers may have taken steps to reduce their liability to tax at 50%. Beyond that the majority may well be thinking that it hasn't had much impact on them (yet). And that's because, despite being announced in April 2009, only high earning employees with just one job have so far paid any tax at 50%.

There is also every chance of a further uproar when unrepresented high earning employees file their tax returns and find that they owe thousands of pounds in tax. Someone earning £250,000 across two jobs for example might owe £10,000 despite paying tax through the PAYE system on both employments.

Tax tease: Late filing penalty STAYS at £100

The media have been reporting that the £100 penalty for late filed tax returns is about to rise from £100 "to a possible £1,300". Nice and newsworthy. Whilst arguably true it's not as big a deal as the reports suggest. Quelle suprise!

Most of the media stories are lifted directly from HMRC's press release about the new penalty regime for 2010/11 tax returns: File your tax return on time and avoid the new penalties.

This highlights two key changes. The first is that the £100 penalty will be charged even if you have no tax to pay or you have already paid all the tax you owe. And there will be further penalties for returns filed more than 3 months late. These penalties could rise to £1,300. previously the £100 was all that could be charged. Late paid tax continues to be subject to interest and to late payment surcharges.

I don't suppose it really matters that the changes addressed by the press release were actually announced by Alastair Darling in his April 2009 Budget. This followed a (so-called) Consultation document issued just a few months earlier as part of the 2008 Pre-Budget Report. That was in the days before the Coalition Government's new approach to tax policy making - the policy decision to abolish the £100 penalty had clearly already been taken by Mr Darling. The Consultation was a formality.

I accept that the £100 penalty is not much of a deterrent as plenty of people who were late filing their tax returns simply paid their tax on time and could then avoid a late filing penalty. This will no longer be possible.

I have two concerns though - which will affect those people who file their tax returns just a few days late:

The first relates back to the reason for the penalty being limited to the amount of outstanding tax at 31 January. When the self assessment system was introduced it was thought it would be unreasonable to charge disproportionate penalties. There were fears that a pensioner who owed, say, £10 of tax, would have a legitimate complaint if charged £100 just because her tax return was filed a few days late. What's changed here?

My second concern is that the taxman's computers are fallible. Erroneous penalty charges are inevitable. Under the present system many such errors go unnoticed as penalties are routinely refunded once the late tax return is processed and the computer recognises that sufficient tax was paid before the deadline. In future the £100 penalty will be payable regardless so there will be plenty of arguments about precisely when tax returns were filed.

Will the prospect of higher penalties for late filed returns motivate you to ensure that your next return is filed well before the 31 January deadline?

Beware misleading press reports about late filing fines

If you file your tax return late, you'll be fined £100 unless you have paid all your tax by 31 January. Nothing has changed in this regard for many years.

Still Unbiased.co.uk have published a press release that the Press Association has circulated as a 'story' that will be all over the press on Wednesday. It starts:

Late tax forms could see huge fines

"Workers could be fined more than £440 million this year for handing in their self-assessment tax forms late or miscalculating how much they owe, it has been estimated."

'Workers' implies lower paid employees doesn't it? But only a minority of employees have to send in tax returns. The estimate was calculated by reference to the total number of tax returns filed each year.

And anyone 'handing in their self assessment tax forms' in January will be deemed to be late. The deadline was 31 October. You have to file online in January to be safe.

Frankly late filing penalties are easy to avoid. If you have to file a tax return this year get on and sort things out in good time. Hardly anyone has a justifiable 'reasonable excuse' for leaving things to the last minute.

Incidentally, the rules change next year, when the fine will be £100 for late returns regardless of whether you have paid all your tax by 31 January.

Why does it take HMRC 2 months to register the self employed?

A contributor to the blog brought this to my attention. On HMRC's website they say that the expected turnaround times for paper based self assessment and self employed registrations is currently 8 weeks. And that it will stay at 8 weeks until November.

The implication is that they would prefer the time lag was shorter than this. And that the position will improve but not until November. But 8 weeks from the posting of an application until confirmation is received of the self employment/assessment registration? As my anonymous contributor notes:

"Are they trying to ENCOURAGE the black economy?"

HMRC explain that the delay is due to the redeployment of resources to higher priority work. It is this that will result in the lengthy turnaround times for paper forms handled by the Central Agent Authorisation Team until 31 October 2010.

This seems to be yet further evidence that HMRC's staffing numbers were cut too sharply by Gordon Brown and that MORE staff are required to deal with basic functions such as the prompt registration of compliant taxpayers who want to register their liability to pay tax on time.