We should all file a tax return

THOSE INDIVIDUALS who are not sent a tax return may think it a relief (no pun intended) to be outside the self assessment system, but in my view they are mistaken. Even though those people may not have the pressure of submitting a tax return by 31 January each year, they still have to ‘self assess’ their tax position to work out whether they should be completing a formal tax return or not.

A more sensible approach would be for all taxpayers to have to complete a simplified version of the self assessment tax return.

This would also have neatly avoided the latest round of red faces among HMRC’s PAYE officials who have been dealing with difficulties thrown up by the PAYE reconciliation process for 2008/9 and 2009/10 and the revelations that some 6m taxpayers had over or underpaid tax.

All those with day to day experience of the UK tax system know that PAYE is a blunt instrument, unable to cope with taxpayers whose affairs are even slightly complicated. The surprise here is that the population at large is unaware of this, seemingly putting faith in the PAYE system’s ability to ensure that their tax position is 100% accurate.

This breakdown in communication seems to be a by-product of the way that the UK tax system is operated. The legislation provides that if an individual is issued with a self-assessment return, he or she must complete it accurately and submit it to HMRC on time. According to House of Commons Written Answers for 10 February 2010, approximately 9.3m tax returns were issued for the 2008/9 tax year. However HMRC statistics show the total number of income taxpayers was 31.3m in that year which suggests that some 22m taxpayers were outside the self-assessment system.

Although the legislation is clear that anyone who is chargeable to tax and who has not received a self assessment tax return must notify HMRC within six months of the end of the tax year, this is not widely known among taxpayers.

The notification rule is applied less strictly to people whose total income comes within the following exceptions, provided they have no chargeable gains: taxable income which has been taken into account in the making of deductions under PAYE; income where tax has been deducted at source and dividends from UK companies, so long as the taxpayer is not liable to higher rate tax.

However working out whether these exceptions apply may well require some degree of understanding of the UK tax code.

For example, an employee has had medical insurance provided by the employer for some years which has been reported on form P11D and coded out.

However the amount of the benefit for 2009/10 was substantially higher than it was in the previous year and so the amount coded out was inadequate and an underpayment arose as at 5 April 2010. Did this underpayment represent taxable income which should be reconciled in the making of deductions under PAYE, or should the taxpayer have drawn HMRC’s attention to the underpayment if the reconciliation had not been completed at 5 October 2010? The correct answer seems to be the latter according to the legislation but how many taxpayers would understand that?

Looking at the second test above, how does an individual know if they are a higher rate taxpayer without doing a full calculation of their tax position. So while they may be outside self assessment, they still have to self assess, which sounds like a flawed system.

Which brings me full circle. Surely,  a better system would require all taxpayers to file returns, providing  a streamlined version  could be designed for those with simpler affairs.

Richard Mannion is national head of tax at Smith & Williamson