Tax returns: Everything you need to know

If you’re stressed about filing your tax return by the January 31 deadline, don’t worry – HMRC have cut you some slack. The government department is waiving late filing and late payment penalties for Self-Assessment taxpayers for one month, giving you extra time, if needed, to complete your 2020 to 2021 tax return and pay any tax due. Great news, since interest will be charged on late tax payments and the rate just went up from January 4 2022 to 2.75%. Completing a tax return can be a ‘wait till later’, stressful and time-consuming process. But getting your tax return done now means you know what to pay, or what you may get back, and it can reduce stress, helping you get on with your business and life. However, the devil is in the detail so let’s look at the following: Who needs to complete a tax return? Some of the key information needed to be able to complete the return Some of the thing’s businesses can claim for Key dates and paying the tax Your tax return will include income and capital gain transactions between April 6, 2020, and the April 5, 2021. Income will typically involve business profits, salaries, benefits in kind, rental income, and dividends. Check if You Need to Bother The main situations where a tax return is obligatory is if during 2020-2021: You were self-employed with sales and fees over £1,000 You have rental income of more than £2,500 You are a higher-paid employee, this is where your income is more than £50,000 and you have untaxed income You receive child benefit and you or your partner has individual income over £50,000 You wish to claim loss relief You must pay Capital Gains Tax, for example from selling shares, second homes Income tax is worked out by adding up all your income and then taking off any costs, tax reliefs and allowances. If you have already paid some tax, for example under PAYE, then what you must pay will come down – you may even get a tax refund. There are two parts to your tax return, the main part (or the core) and extra pages. The core is where you provide personal details such as your Unique Tax Reference (UTR), name and date of birth. You also provide details of your savings income, pension payments and gift aid claims. The extra pages are where you provide details about other income not in the core return. Typically, these will be about: Employment income Self-employment Business partnerships UK property income Foreign income or gains Capital gains Non-UK residents or dual residents Key information Before you start, gather all the information you need, it will make your life easier. You’ll need your UTR. This is a 10-digit code which will have been provided when you registered with HMRC. If you haven’t registered, then you need to do so. For employment income, most of the information will be from P60s, P11Ds, P45s. If you have had to work from home during 2020-2021 because of COVID-19, even if only for one day, you may be able to claim a working from home allowance of £312. For self-employed income, business accounts will be your main source of information. For property income, take it from your rental accounts. If you don’t have supporting documentation or evidence for the information in your tax return, then in some circumstances reasonable estimates can be made. What can the self-employed claim? For the self-employed, tax is based on business profits. This is the difference between what you charge your customers and your tax allowable business expenses. If you received any COVID-19 related financial support, such as the Self-Employed Grant, include it in your tax return. The grants are taxable. The general rule is that any costs claimed must be for business purposes, i.e., ‘wholly and exclusively’ for the business. Shared expenses are where costs are a mix of personal & business – mobile phones and computers for example. By concession, HMRC allow the self-employed to claim a business proportion, this concession does not apply to companies. The costs of running your business may include capital purchases such as PCs, vans, and equipment. These are items that support your business and help you do what you do. When calculating tax profits, capital costs are claimed using the capital allowances rules. The good news is that you can claim up to 100% of the cost. Entertainment of clients and suppliers, however important to your business, is not a tax cost. Simplified Expenses If your business has sales below the VAT registration limit then HMRC allows you a choice of claiming certain expenses, based on their actual costs, or using scale rates, known as the simplified regime. This simplified regime only applies to sole traders and partnerships – limited companies cannot use this. The two main areas that the simplified regime applies to is: Transportation Working at home The rates allowed for use of your car or van is 45p per each business mile traveled, up to the first 10,000 miles, and then 25p per mile thereafter. Warning: You cannot chop and change each year between mileage rates or actual running costs. Once you choose a method, stick to it until you change your vehicle. If you use a motorbike or motorcycle, you can claim 24p per business mile travelled. And if you use a bike, you can claim 20p per business mile traveled. Working from Home The scale rates are based on the number of hours you work at home. For example, if you work on average 25-50 hours per month then you can claim £10 per calendar month. If you work more than 101 hours at home, the rate goes up to £26 per month. Key Dates The deadline for submitting your tax returns is now extended to February 28, 2022. If you want to avoid late payment interest, then pay any tax you owe for 2020-2021 plus your first payment on account by the 31st of January 2022. The payment on account can be a shock. It is an upfront payment towards your next tax bill. It is normally due if the tax you owe is over £1,000. The payment will be equivalent to 50% of the tax owing. It is possible to make a claim to reduce payments on account. The second payment on account will be due on the 31st of July 2022. Inability to Pay You may be financially strapped and not be able to pay your tax on time. Ideally you should have been putting money away each month, but sometimes life intervenes. If you can’t pay, then don’t delay sending in your tax return. Submit your return, see what you can afford and then contact HMRC debt management to discuss time to pay. They are not as scary as you think. If you prefer not to talk to anyone at HMRC you can set up a payment plan online. The key conditions are: You owe £30,000 or less You do not have any other payment plans or debts with HMRC Your tax returns are up to date It is less than 60 days after the payment deadline So don’t procrastinate, just get started!