In the middle of tax return season, your main role is to ensure clients’ self-assessment returns are accurate and submitted on time. Bear in mind that as an adviser, you also want to minimise risk of HMRC enquiry. Here are five tips to manage the risk and hopefully make life a bit easier towards 31 January.
1. Provisional figures
A client inherited a rental property in 2019/20 but is unable to provide detailed information for income and expenses for their self-assessment.
In this situation, the best thing to do would be to ask the client to estimate income and expenses, highlighting to the client which are allowed and which are not (revenue vs capital) and use these figures on the tax return ensuring that the “provisional figures” box is ticked.
If filing a provisional figures tax return, make sure that the figures are as accurate as possible and also make a note in the white-space explaining the reason for the estimates. It is better to get a return in on time with provisional figures than to send the return in without the rental income at all.
Ensure that the final return is filed as soon as possible.
Late submission of a tax return, or a provisional tax return filed with significantly different figures to the final document are all flags that might result in HMRC enquiry. A well worded white-space disclosure can mitigate this risk.
2. Gift Aid
If when preparing a client’s tax return, you notice that they have marginally exceeded a tax threshold – say they earn £160,000 – you may wish to suggest that they make a gift aid donation to a registered charity. Gift aid works by increasing the tax band by the amount of the gift x 100/80. So if a client makes an £8,000 donation to charity, the additional rate tax band will go up to £160,000, saving the client from going into the 45% income tax bracket.
Further, if the donation is made by 31 January 2021, the donation can be “backdated” to the 2019/20 tax year. Of course, the deadline is looming and any gift aid donations will have to be made sooner rather then later. Nonetheless, if by making an £8,000 donation, the client saves £2,500 and makes a charitable donation, it’s a win-win situation.
Without gift aid, the tax bill would be £37,500 x 20% + £112,500 x 40% + £10,000 x 45% = £57,000
If the client makes a donation of £8,000, the tax bill would be £47,500 x 20% + £112,500 x 40% = £54,500
i.e. a saving of £2,500
Ensure that when the donation is made, the client ticks the Gift Aid box and that the donation is claimed on the tax return as well.
3. Paying HMRC
Many clients have been negatively impacted by the Coronavirus, so bear in mind HMRC are offering extensive time to pay arrangements. Also, remember to reduce the instalment payments if necessary!
Continuing on the Coronavirus scheme, a number of clients may have made losses even in 2019/20 – ensure these are all declared on the tax return even if they will not be used immediately. Where a client has made an investment, which has lost value, check if a negligible value claim can be made and if so whether this can be offset against income – possible more relevant for 2020/21 but worth keeping in mind nonetheless.
Where possible, if a loss can result in an immediate refund, the relief should be claimed (instead of selecting to offset the loss against future profits).
If the client has made losses in 2020/21, consider whether it is worth filing the 2020/21 tax return early (say April 2021) to claim the loss as early as possible.
5. Furlough Fraud
Bear in mind, that HMRC will likely be cross checking tax returns to Coronavirus support schemes. If for example a client’s 2019/20 tax return shows their business is failing, but the client then claimed support, HMRC may well be knocking on the door, asking if the client should have claimed the support when the business was unlikely to survive. See my previous article on Furlough Fraud for a review of the legislation.
Make the client aware of this and make sure that any documentation reflecting reasons for decisions to claim aid are retained. If you conclude that aid was claimed in error, consider whether a disclosure is necessary.
Mala Kapacee is a Chartered Tax Adviser and Director of London Tax Network Ltd, a Tax Investigations Specialist consultancy. Her experience includes resolving tax enquiries, CoP8 and 9 Investigations as well as disclosures for a range of taxes and situations; self-employment, property, owner managed businesses and non-UK domiciled individuals. Mala lectures regularly for professional bodies including the CIOT and the CIMA. She founded the London Tax Society in 2017 and actively encourages networking and technical development for Young Professionals. She was a finalist for Best Rising Star in Tolley’s Taxation Awards 2020. Email firstname.lastname@example.org or call 07783 236 845.