Tax returns – worth your time and attention?

I work in the area of tax disputes – or more accurately – resolving tax disputes. Ten years ago I and my business partner Rhys Thomas founded WTT Consulting which has a core of clients who were (and still are) contractors and who had used one of the 150 or so “schemes” that have existed from 2002, all of which promise to make contracting “easier”. Most of these schemes had some element of tax planning in them, often however this was hidden from contractors. All of them offered a UK tax adviser who would, usually for “free”, complete a tax return for the contractor. Whilst on the surface this was a very valuable benefit, in practice I fear that the motive was driven by the scheme promoters wishing to prolong the life of their schemes.

The end result was that thousands of tax returns went to HMRC which were at best inaccurate and incomplete and at worst deliberately misleading. And here our story begins. 

The Importance of Accuracy

A tax return is a legal document which comes with serious consequences whether it is correct (to the best of your knowledge) or not. Responsibility for making an accurate tax return lies with the individual. It is NOT POSSIBLE to claim that another party has assumed the legal obligation to make an accurate and true return. Even if that party is a professionally qualified tax adviser who has entered a formal engagement with you. Accountability for the tax return begins and ends with the individual.

Who is Liable to Submit a Tax Return?

Every individual resident in the UK or with a UK source of income, is obliged to make a tax return. (Similar rules apply if there is no income but capital gains have been realised). There is no automatic exemption from making a tax return even if ALL of your income is routed via the PAYE system. 

The UK has around 30 million taxpayers. It would be a monumental task for HMRC to receive and check a tax return from all of these taxpayers. Instead a series of exemptions can apply to remove the obligation to make a return. The easiest is via the HMRC website which offers a simple questionnaire as to whether to make a return. If the answer (delivered immediately) is that no return is necessary, happy days. However, screen shot and/or print that answer and check that you have answered all the questions honestly. Some have letters from HMRC indicating that a tax return is not required. Be very careful. These letters will specifically relate to earlier tax years and come with the caveat that “no material changes to your situation” have arisen. If there have been changes, your exemption letter is worthless.

The above process should leave two groups of taxpayers who need or may need to make a tax return. There are those who definitely do because they have self employment income, dividends, interest not taxed at source, offshore income, gains, etc. Then there are those who are unsure. Does the receipt of money from the will of dear old Aunt Mary need to be declared? When does my side hustle become more than a hobby and need reporting? Am I trading in crypto? 

Crucially, if you have used some form of organised arrangement to receive money, can you rely upon the advice of the organiser or somebody connected to them? 

Staying Compliant

In an ideal world where all tax advisers recognise their legal and moral obligations to the individual for whom the return is being made and are aware of the rules of their professional bodies, you can rely on them to get the return “right” within the parameters of the information they have.

Sadly history shows that in the contracting space (and elsewhere), some advisers prefer to take instruction from scheme designers and facilitators, regardless of whether that is correct for the scheme user and often without applying any critical analysis to what payments are being made and why. The result is an incorrect or inaccurate tax return, the consequences of which fall on the individual.

How can these consequences be avoided? Simply by making sure that the tax return is accurate, complete and if it has some items that may be contentious, you have checked with the adviser (or got a second opinion) and understand why certain entries are made or omitted.

If after checking as above, you remain unclear as to the correct position, include in the white space of the return a description of the situation, the advice you have had and why you have concluded that disclosure should (or should not) be made.

If such a disclosure results in a debate or exchange with HMRC but no further tax due than is legally the case, you will be safe from any accusations of error – deliberate or otherwise – which can attract penalties.

Seeking Professional Advice on Your Tax Returns

If you are advised that the payments are not taxable and the above exchange fails to see HMRC agree, that is where WTT steps in. Later in this series of posts, I’ll explore what happens next.

The first step however is making sure that the tax return is as complete and accurate as it can be – even if this means disclosing some uncertainties. Check what you are told by advisers if you have the slightest doubt as to who their client is. A hour’s time with a adviser giving a second opinion is always worth it.

PS. By all means check with HMRC but be aware that they have a vested interest in maximising the tax take. Often whomever you speak with will not have much (if any) tax knowledge but will be largely reading from a script. If you do get such “advice”, get it in writing.