Simplified assessing - a revenue joke

Once upon a time the Inland Revenue had an exciting idea - 'Simplified Assessing'. Unfortunately it quickly grew so complicated that they became a laughing stock and had to rename their exciting idea 'Self-Assessment'.

The framework for the new system of self-assessment is contained in the 1994 and 1995 Finance Acts. These rules affect the calculation and payment of personal tax, including self-employed and partnership profits. The changes make individuals more responsible for assessing their tax and will affect more than half of UK taxpayers.

Everyone who gets an annual income tax return is likely to be affected by the changes, particularly those in business, individually or in partnership, those who have substantial investment income or capital gains not covered by the personal exemption.

All employers will be affected, because they will have to supply details of benefits and expenses to employees to enable them to complete their own tax returns.

The new tax regime will start in the income tax year 1996/97. At present, trading profits, interest not taxed at source, foreign income and so on is taxed by reference to income arising in the previous year, with adjustments when the source of income begins and ends. Under the new system, the tax year liability will be based on current year income. For trading profits, the current year will be the accounts year ending in the tax year, a business making up accounts to 31 December will have the year ending 31 December 1997 as its base period for 1997/98.

The tax year 1996/97 will be a transitional year, with the liability in most cases equal to one half of the profits of the last two accounting years. This may help many in construction who had a poor year in the period to December 1994.

A new returns system will be introduced, and from 1996/97 individuals who get returns will be invited to work out their own income and capital gains tax liability. If they do, they will have until 31 January following the tax year end to complete and send in their return. If they prefer the Revenue to work out the tax bill for them they will have to submit their returns by 30 September. The Revenue are trying to create tax forms the public can easily understand and fill in.

The new scheme will also have new payment dates. At present, individuals with trading profits, untaxed interest and capital gains, have three sets of payment dates. From 1996/97 on they will usually be the same for all three types of income. The timetable for 1996 payments will be:

n 31 January 1997, first payment on account - normally one half of the net tax liability for the previous year; net tax is the total tax on all income less tax deducted at source, including PAYE and SC60.

n 31 July 1997 - second payment - the remaining half.

n 31 January 1998 (when the return for 1996/97 with its tax calculation must be with the Revenue) - payment of any balance due or claim for repayment, this is the 'final' payment date.

Those failing to pay their tax on time will incur interest and penalties. There will be a surcharge on a late 'final' tax payment - the tax due on 31 January 1998. The surcharge will be 5% of the tax unpaid by 31 March 1998 and a further 5% if it is not paid by 1 August 1998.

Once the new rules are in place, the great British taxpaying public will be able to see whether the changes have been worth the effort. Last year four million assessments were shown to be inaccurate and some estimates suggest that 70% of Inland Revenue assessments are wrong. Will the Revenue be able to do any better with the general public helping them?

Once a return is received, the Revenue will not agree or disagree immediately. They will process the return and ask for interim payments and check its accuracy later. But the sword of Damocles will not hang over the taxpayer for ever. An inspector must give notice, within a year, of the returns due filing date, if he intends to make enquiries. He will make enquiries if something on the return strikes him as odd, some returns will be selected at random for checking.

People usually have two questions at this point - what will I do if I don't receive a return, and what can I do if I can't fill in a return accurately, because the figures available are only interim figures? Although returns only have to be made to an Inspector of Taxes if he issues a notice, anyone liable to tax who has not received a notice MUST notify the Revenue that they are liable by 5 October in the following year.

Estimated figures in returns will be accepted provisionally, but only if the taxpayer has been unable to finalise the information within the formal time limits - having given it his best shot. Even then he must notify the final figures as soon as he can, or suffer interest and penalties on any further tax due. Inspectors will have the power to issue assessments and collect their best estimate of tax due if returns are not submitted.

The changes, and the potential for the Revenue and the taxpayer to make costly mistakes, will be enormous. The Revenue are consulting the accountancy bodies at some length, and it might be wise if the public followed their lead.