The self-assessment has been with us since its introduction in the tax year 1995/1996. Before the age of “tax doesn’t have to be taxing,” the responsibility of calculating what someone’s tax liability was belonged to HMRC. It will come as little surprise to anyone who has dealt with them that this frequently meant they were late in performing the calculations and, when they did, they were prone to making the odd error.
After self-assessment was introduced, this all changed. Now, the onus was on the tax payers themselves to figure out for themselves what was owed. This was a huge change and it is not surprising that, when the self-assessment pack arrived in the post, the taxpayer realised the weight of this responsibility on them and it made many of them very uncomfortable.
Over the many years it has been in operation, it now functions well for both taxpayers and HMRC alike. Currently, about half the people who have to fill them in do so because they are self employed and not paid via PAYE. Others who have to fill it in do so because they may have freelance earnings, they may derive income from property rental, among other reasons.
Directors of companies automatically receive a tax return as it is presumed that their tax affairs are complex and that they will have multiple sources of income.
What happened after it was introduced
In 2001, a report was produced for parliament detailing progress with self-assessment, some five years after it was introduced. The three main areas of focus for the report were
• success in identifying taxpayers,
• getting the tax returns in on time, and
• carrying out enquiries.
The report went in to some detail about the hidden economy, describing those who had not identified HMRC of their income and gains as ‘ghosts’ and ‘moonlighters’. It then went on to report that, as a result of the investigative work carried out by HMRC, these ‘ghosts’ had been obliged to pay some £22 million of additional tax for the tax year 1999/2000.
On a positive note, it was reported that 90% of assessments were filed on time. The 10% that were late were calculated to have cost the economy some £300 million because the missing payments and the cost of chasing tax payers up for remittance – this was after the automatic £100 late files were taken into account.
The self-assessment legislation gave HMRC with the power to conduct in depth audits on tax payers assessments in order to ensure figures were being accurately reported. The self-assessments to examine were chosen at random and the results of the audits as a whole, whilst not considered definitive, did indicate that large amounts of tax were not being collected due to errors and omissions on the forms themselves.
How is it working today?
The jury is still out regarding how successful the self-assessment regime is today. There is some conjecture that errors that used to be made by HMRC under the previous provisions are now instead being made by tax payers themselves
A meta-analysis was performed on audits that were made during the period 1999 to 2009. Key findings of this report included the observation that 36% of all returns had some form of income under reporting. This figure rose to a significant 60% among those who were self-employed. Most of these underpayments were less than £1,000, however around 4% owed more than £10,000 – it was concluded that over half the tax revenue that was missing was down to this small minority of individuals.
The future of self-assessment
Around 11 million people are subject to self-assessment and the requirement to complete returns every year. In an effort to reduce this number, HMRC have introduced a scheme called Simple Assessment.
This method of tax calculation abandons the principle behind self assessment in that HMRC, instead, use existing data from past returns and calculate what they believe the tax liability to be. After this calculation has been made then the individual has 60 days to appeal. If no appeal is received then it is deemed to be correct and HMRC will expect payment to be made within the pre-existing deadlines.
While this scheme has been in development for a considerable amount of time, it has proven difficult to roll out to more than a small group of taxpayers. A critical government report initially delayed the roll our completely. However, it is now operational but it is unclear when and whether it will develop further and if its scope will expand.
Making Tax Digital (MTD) is a broad effort by HMRC to revolutionise income and expenditure reporting in the UK, and Self-assessment is an area it is area that is being targeted for an upgrade. Unlike the Simple Assessment program, this technology is actively being rolled out across a large swathe of the UK tax landscape, and if you are not affected by it now, it is likely you soon will be,
Initially MTD is available to individuals who have income from rental property and enables them to opt out of Self-assessment. By recording all your business transactions on MTD compliant software and submitting them directly to HMRC, it is possible for all your income tax calculations to be made by HMRC – removing the need for any paper-based forms.
In the future, HMRC wishes all individual payers to have a Personal Tax Account. This will enable them to manage all their tax affairs online with the ultimate aim of removing the need for Self-assessment for everyone
Need more information
Self-assessment will still be with us for a while, and regardless of how you report your income, it is still very beneficial to talk to a tax advisor so that you pay the least amount of tax possible. An Accounting Gem advisor can give you the advice you need and talk you through all the options available. Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.
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