Background: Steps to Completing your Tax Return and determining your tax liability
- Determine total income in the year
- Determine total expenditure in the year
- Calculate trading profit (Income LESS Expenditure)
- Calculate Tax liability.
A tax-efficient return is one where you’ve maximised your deductible expenditure.
On submission, your return is automatically accepted, and your tax liability confirmed, based on the figures you’ve submitted.
Important: HMRC Enquiry deadlines
Return submitted before or by the deadline of 31 January:
HMRC have up to 12 months from the date you filed your tax returns*, to make enquiries into the return you submitted. If you submitted your return on 31 August 2023, HMRC have up 30 August 2024 to open an enquiry into your return.
Return submitted after the deadline of 31 January:
HMRC have up to 12 months and a bit more time, up to the next quarter day*. Quarter days are January 31, April 30, July 31 and October 31. So you submit your return on 28 February 2023, HMRC has up till April 30, 2024 to open an enquiry into your submission.
*The periods indicated above. in which HMRC have to open an enquiry, is deemed the “open period”. Any time before the periods stated above, is deemed a “closed period”
In plain English, this means that even though you submitted your tax return and have paid your tax, HMRC has up to a year (and some, if return was submitted late) to enquire about your submission
In addition to the above though, provided certain criteria are met, HMRC can open an enquiry into a closed period. This type of enquiry is known as a “Discovery Assessment”
Timeline for issuing a discovery assessment by HMRC is usually four years, but it can be extended to;
- Up to six years, if mistake is deemed to be deliberate or due to carelessness
- Up to 20 years, if error is deemed to be due to dishonesty
Given HMRC’s powers to open an enquiry years after your return has been submitted, for some (those who receive a notice of enquiry or discovery assessment) submission and payment of tax liability, doesn’t mean tax season for a paricular year is done!
Possible results of an enquiry
An enquiry could result in being deemed to have underpaid or overpaid tax.
- Over-payment: you are likely to be due a tax-refund
- Under-payment: you will have to pay this and any interest due on it, to HMRC
In addition to any underpayment and interest payable, a penalty may also be payable. The penalty payable will be dependent on whether HMRC deem the error to be due to carelessness or dishonesty. In some more serious instances, errors could result in criminal prosecution.
Minimising negative results from a tax-enquiry
Given the above information, it is important that your tax-returns are completed with diligence and accuracy!
Here are a few things that could help minimise the risk of negative results (i.e. under-payment finding, fines, penalties, etc.)
- Include income earned from all sources
- Include legitimately deductible expenses** only
Understating or overstating either of the above, will result in inaccurate tax liability being calculated, which in the longer term could result inadverse financial consequences.
** Legitimately deductible expense is expense HMRC describe as “wholly and exclusively” for the purpose of the business.
“Wholly and Exclusively” for the purpose of the business
The “wholly and exclusively” test is a fundamental principle of UK tax. It is the principle which determines whether an expenditure is tax-deductible or not.
An expenditure is deemed to be wholly and exclusively for the business if the reason it was incurred is solely in operation of the business or in a bid to attract business. Where an expense has dual purpose i.e. business and non-business purpose (e.g. smart work clothes puchased for attendance of business meetings), then it is not deductible. Where the business element of a dual-purpose expense can be clearly distinguished (e.g. in the running cost of a car used for both business and personal purposes), then the portion that is business related will be deductible. For more details on “wholly and inclusive” for the purpose of the business, refer to HMRC’s guidance in BIM37600
The determination of whether an expense is wholly and exclusively for business could be a complicated, so if submitting your tax returns yourself, be sure to perform through investigation into whether an expense is deductible, to minimise the risk of a negative outcome from a tax enquiry.
It is always worth considering whether the cost of your time spent doing the returns yourself and the potential risk of adverse financial consequences from an enquiry is less than the cost of engaging the services of a professional to complete and submit your returns. Whichever you choose to do, proper record keeping, and documentation is of paramount importance!
To discuss how we can help with your tax returns, contact us via our website
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