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Vincent Costello looks at the importance of using a professional to assist with the preparation of your self assessment tax return and how this can save money in the long run.
The devil is in the detail
Most people (including professional advisers) can have a go at preparing a tax return…you just hand over your tax return information to someone so they can put together your tax return – it’s that easy, right? Wrong.
You could give me a ton of bricks and ask me to build a house, but I’m not a builder so whilst I may think I can build a wall as I’ve seen someone else do it (the how hard can it be syndrome), chances are the cement will be mixed wrong and the wall won’t be straight so it will fall! I think the same principles apply to personal tax compliance. On the face of it there is nothing more than filling in some boxes on a form, in reality if you get these wrong it can have bad consequences.
A good example of how a competent tax compliance professional can add value by doing the fundamentals right relates to EIS investment. I have been involved in lots of compliance work over the years where some my wealthiest clients have invested significant amounts of money into EIS portfolios. They often give you a general investment amount and ask you to claim the appropriate tax relief and get some tax back for them.
Ignoring the fact that you can’t make an EIS claim until you have the appropriate certificate, I have seen occasions where an adviser will simply include an amount in a blanket claim to maximise the income tax relief with no care or consideration as to what the right steps are and what the consequences could be if they get it wrong. In one return I came across, my client thought they had missed out on income tax relief and capital gains tax deferral relief simply because whoever did their tax return in the previous tax year hadn’t looked at the paperwork in any great detail. They saw a £500,000 EIS investment on one date but didn’t think to see how that money was invested and more importantly when it was invested.
After a thorough review of the prior year’s tax return I was able to obtain income tax relief on the entire investment and to defer a pretty big proportion of that’s years capital gains tax liability. The client received a big cheque back and the firm got a decent fee for the work I had done.
Future proofing yourself as best you can
A lot of people we talk to believe that giving HMRC information in a return is a bad thing and are scared to provide anything other than a vanilla submission of income, profits and gains as anything more will potentially raise red flags with HMRC and open tax returns up for enquiry. That is not always the best way to approach things when dealing with tax compliance, or in fact with HMRC generally. The right balance is to provide HRMC with the right information at the right time by making a good quality disclosure (often ‘white space’ disclosure) in their tax returns.
By including a well prepared disclosure in your tax return you are in fact minimising HMRC’s opportunity to look at your tax return at a later date as you are restricting what HMRC can discover once the tax return enquiry window has closed, this is usually 12 months after the date of submission.
This is because HMRC can only make a discovery assessment about something which they could not have not have known about from the return.
Should HMRC find errors, they can issue penalties and charge late payment interest on any tax liabilities that arise from the corrections. These have been covered in detail across previous newsletters so I will not go into detail with them here. Suffice to say, the cost of professional fees to ensure the tax return was correct in the first place both gives peace of mind to the taxpayer that is has been done correctly, but also reduces the potential for penalties and interest being charged should HMRC enquire into the tax return.
Get your return done early
I can probably give you a list of clients I will be doing tax returns for in January, such is life, we are all guilty of putting off today what can be done tomorrow.
That said, I still advocate getting your tax return done as soon after 5 April as is possible. The benefits of doing so can be as simple as knowing what your January tax liability is early and providing, providing you with a cashflow advantage, for example, your projected payments on account could be too high or you may be due a refund.
It can also mean that discussions on potential tax savings for the current tax year can be discussed and implemented in good time before 5 April. Often where information is received close to the filing deadline of 31 January, the review aspect of a person’s tax affairs can end up being a rushed affair, especially where an unexpectedly high tax liability prompts the taxpayer into seeking ways to mitigate it using reliefs which can be carried back but need to be in place before 5 April.
Tax compliance plays an important role for wealthy individuals, it is your annual opportunity to minimise your tax exposure by maximising reliefs. A carefully constructed and considered tax return is a useful way of having a proactive strategy to defend yourself against HMRC investigation; they sometimes say that attack can be the best form of defense.
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Changing legislation combined with increasing tax scrutiny has made the preparation of annual self-assessment tax return a stressful and time consuming process.
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