The Inland Revenue is changing the way many people pay tax. It is called self assessment and it seems set to cause tremendous confusion. Although most people will not be affected by it, those who are face hefty penalties if they get the procedures wrong.
In fact self assessment is nothing new. Believe it or not, the Inland Revenue operated it in the early days of income tax in 1799. But in 1806 it was abandoned in favour of Revenue staff doing the calculations. A hundred and ninety years later the Government has decided to introduce it again. One reason is that it will save £50 million on administration costs, eventually getting rid of more than 3000 staff. Critics say that will just pass the job onto taxpayers who will either have to do the work themselves or pay someone else to do it for them. The Revenue insist that in the long term it will be simpler and less trouble and may actually reduce the need for employing an accountant.
Who will be affected?
Most people will not be affected much by the new system. You can ignore most aspects of self assessment if
If you did not get a tax return this year then you probably will not be affected by self assessment.
But even people who are not affected must be aware of two new legal obligations on everyone this year and every year in future.
The people who will be directly affected by the other new rules are people who get a tax return. They include
In addition some people who pay their tax in four quarterly instalments will also be affected. In future they will be sent a return and will have to pay the tax in two instalments.
When does it start?
The new system will not really get into its stride until next tax year. But people who are affected by the new system will get a statement from the Inland Revenue in November or December requesting that they pay a certain amount by January 31, 1997. This is called a payment on account.
It is important to realise that this request for a payment is part of the new system. It is not a demand for payment as such. It is an estimate of what your tax will be for 1996/97, based on last year's figures. The statement just tells you what the Revenue think you should pay. If you do not agree you simply tick a box on the form, let them know why you disagree, and send whatever payment you think is right or reasonable. If you end up paying the wrong amount then it will be corrected the following January. If you pay too little, you will have to pay interest on the difference between what they asked for and what you paid. If the amount the Revenue ask for is too much and you pay it, then they will pay you interest on the excess.
Next year
The full effects of self assessment will start to be felt next year, 1997/98. There will be new tax forms sent out on April 6 1997 which will be very different from the present tax return. If you want the Inland Revenue to calculate your tax you will have to send back the form by September 30 1997. Otherwise you can do the calculation yourself and submit it by January 31 1998. Failure to meet that deadline will result in an automatic fine of £100. If the return is still not back six months later then there is another £100 fine. Ultimately, the Revenue has power to fine you £60 a day to make you fill in your return.
Note that this year's tax return, 1996/97 which was sent out in April, is the last of the old style returns. It has to be in by 31 October but there are no automatic penalties for sending it late - though you could be charged a penalty and interest will be charged on tax paid late.
Working out your tax
If you do not send back your tax return by September 30 1997 or you decide to work out your own tax anyway, a long form from the Revenue will guide you through the complicated arithmetic. At the end you should come up with a figure for the tax due. The Revenue will check these forms for obvious arithmetical errors, which they will correct. But once that has been done, the tax assessed on that form will normally be the tax you have to pay.
The tax will be due in two instalments one on 31 January 1998 and the second on 31 July 1998. If you pay it late then interest will be charged. In addition, if some or all of this tax is not paid by 28 February 1999 there will be a surcharge of 5pc added to the amount owed. Six months later this penalty will be repeated. These penalties are on top of the interest which is now routinely added to late payments of tax.
Under this new system the first instalment of tax is due more than two months before the end of the tax year. So it normally cannot be based on an accurate figure for the income that year. Instead, it will be based on the previous year's tax. The second instalment will be the same as the first. So a balancing payment one way or the others will almost always be required in the following January - at the same time as the first instalment of the next year's tax is due.
Change of year
The Government is introducing another major change at the same time as self assessment. It is called current year assessment and it affects income from self-employment, from some forms of investment, and from overseas pensions.
At the moment these sources of income are taxed a year in arrears. For example the tax due in 1995/96 was calculated on the income received in the previous tax year 1994/95. This method made sense because the income is often not known until after the end of the tax year so waiting until the next year enabled the Revenue to tax it accurately. However, it did lead to complexities in the years when a source of income began or ended. And the Revenue has decided it would be easier to tax the income in the year it arises.
Transitional period
However, there will be a problem in the year the changeover is made - 1996/97. Last year, 1995/96, you are taxed on the income received in the previous year - 1994/95. In 1997/98 you will be taxed on the income received in that year - 1997/98. And that leaves a problem in 1996/97 because there will two years of income which have not been taxed - 1995/96 and 1996/97. The Government has decided that you will be taxed on the average of the two. So in 1996/97 your income will be counted as the income for 1995/96 added to the income for 1996/97 and divided by two.
Of course, the income for 1996/97 will not be known until after the end of the tax year. So, using the rule mentioned earlier, the Revenue will assume that your income for 1996/97 is the same as that for 1995/96. So you will actually be assessed to pay tax on your 1995/96. If your 1996/97 income is different from your 1995/96 income then you will end up paying too little or too much tax. That will be adjusted when you pay the first instalment of your 1997/98 tax by January 31 1998.
Is it really self assessment?
Although the new system is called 'self assessment' as long as you get the tax form in by September 30 you will not actually have to do the calculation. But it does mean that you - and not the Inland Revenue - are responsible for deciding what tax you should pay. At the moment you provide the Inland Revenue with the figures for your income and tax inspectors work out what you should pay. Then you either pay up or argue about it but eventually it is the Revenue that decide what is due and enforce payment. In future the responsibility for deciding what tax is due will rest with you - the taxpayer. The Revenue will only step in if they suspect your tax is wrong, if you are one of a random sample picked for further checking, or if you ask them to.
The Inland Revenue claim that the new system will be easier. It is hard at this stage to see how. If you want more information, your local tax office has leaflets, tapes and even videos which try to explain the new system.
September 1996
e-mail Paul Lewis on paul@deadline.demon.co.uk