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KEY POINTS
- The new shortened main tax return form.
- Changes in the numbering system.
- Is there scope for confusion in some questions?
- The abbreviated tax calculation page.
- Changes to the supplementary pages.
The other day, a thought struck me (it does from time to time) 'I wonder if there is a new Working Together newsletter on HMRC's website'. Readers will no doubt recall that this publication (in paper form up to issue 25 in May 2006 and only available via the Internet thereafter) brought to the attention of practitioners issues of current operational interest. A laudable aim if it does mean we are truly 'working together'.
The last web issue of Working Together (issue 26) was published in September 2006 and so another was considerably overdue. Surely, I thought to myself, we have not stopped 'working together'?
It was therefore with some excitement (?) that I discovered on HMRC website issue 27 published in June. I was even more interested when I came to the article regarding the redesigned main self assessment tax return for the year ended 5 April 2008.
Tax return
At first sight the layout of the main tax return appears refreshingly uncluttered. It consists of six pages instead of the ten we had grown used to. It is also apparent that the boxes for figures or an 'x' in the box are designed to be read by machine using optical character recognition.
I notice that the unique numbering of each box has been done away with on the main tax return form and supplementary pages. At present, if you said to someone that the figure in box 18.3 needed to be amended then you would know that this meant the total tax and Class 4 NICs, etc. box on the main tax return. Similarly, if one said the figure in box 5.23 needed to be amended that could only refer to the land and property page.
The change to numbers is particularly noticeable in the main tax return where the numbering sequence of boxes commences at each separate section of the form. For example, there is box No 1 at the section 'Starting your tax return' and again at 'What makes up your tax return' and again at 'Student loan repayments' and again at 'Income' and again 'Tax relief' and again at 'Service companies' and again at 'Finishing your tax return'. Oh dear, oh dear. One really does wonder if this is such a good idea! Would somebody please explain what is wrong with sequential numbering, or have I missed the point somewhere?
Turning to page 2 of the tax return, the section there is headed 'What makes up your tax return'.
However, it seems that someone forgot to tell the developers of the latest form that we stopped having the 'no' option to questions with effect from the tax return for the year ended 5 April 2003. A positive answer to those questions that apply is more meaningful. It is better than having to indicate a negative answer to a question that does not apply at all.
Income and outgoings
Page 3 of the return contains the questions regarding interest, dividends, pensions, state benefits, other UK income and expenses. It is remarkably concise and no longer do you have to worry about either the amount of tax deducted from interest or dividend tax credits, only the net figure is required in each case. However, some concerns arise from this page.
I wonder whether it is wise to put in a section titled 'UK interest etc. and dividends', question 5 which refers to 'foreign dividends (up to £300) — the amount in sterling before foreign tax was taken off. Do not include this amount in the foreign pages'. And then question 6, 'tax taken off foreign dividends (the sterling equivalent)'. I can see scope for some confusion here, and not just by elderly taxpayers!
I also see that on this page there is a question regarding pre-owned assets which asks for the 'benefit from pre-owned assets'.
Page 4 of the return covers tax reliefs such as pension premiums and gift aid payments. It also includes a section to claim blind person's allowance and an intriguing section of its own headed 'service companies'. There is only one question in this section which is 'total amount of any income included anywhere on this tax return, derived from the provision of your services through a service company'. What does this mean to the proverbial 'man on the Clapham omnibus'? He is directed to 'read page xx of the guide'. Unfortunately, the guidance does not seem to be available yet; I wonder what this will say?
Finishing and calculating
The penultimate page (page 5) covers 'finishing your tax return' with the usual questions regarding tax already refunded and how any overpayment should be repaid.
The final page (page 6) asks for details of the tax advisor (if there is one) and the usual declaration. However, it is also noticeable that by this stage one has not seen any questions regarding underpaid tax in tax codings, tax due for the year and payments on account. This is because these questions are removed entirely from the core tax return and form part of a supplementary page of their own, headed 'tax calculation summary'.
I began to wonder whether having the details on a supplementary page was a good idea, particularly as it includes the words 'tax calculation' which it is nothing of the kind. It actually shows totals regarding the liability for the year and other information which one would have had to calculate previously. I then reminded myself that the whole point of the new tax return is to encourage the unrepresented taxpayer to submit his paper return before the new deadline of 31 October, in which case HMRC will do the calculation of the tax due for him/her.
Additional information
The 'additional information' supplementary pages interestingly include one line to cover 'share schemes'. It seems that the information formerly contained on three pages of the previous 'share schemes' supplementary pages are consigned to the dustbin.
These pages also include questions on interest from gilts and securities, accrued income charges (but not relief for allowances), life insurance gains, stock dividends and post cessation receipts (and relief for expenses). The pages also include questions on lump sums in connection with employment. There are questions regarding 'Other tax reliefs' (VCT, EIS, loan interest, maintenance, etc.)
The form also includes questions regarding income tax losses for an earlier year which can be offset against other income for 2007-08 or losses from 2008-09 claimed against income for 2007-08.
Employment and self-employment
The employment supplementary pages are not dissimilar to those of earlier years although (as mentioned above) they no longer include the receipt of 'lump sums'.
For self employment, separate supplementary pages have been produced according to whether 'short' or 'full' accounts details are required. There is nothing particularly wrong with that idea and in fact the questions on the 'full' supplementary page largely follow the format we have been used to, e.g. first the details of the business, then income and expenditure with separate boxes for disallowable expenses, details of capital allowances, profit or loss and finally balance sheet items.
There is a difference, though, on the 'self-employment (short)' supplementary pages.
The first point to note is that it appears that one can only use the form if business turnover was less than £64,000, the present VAT registration limit. Why?
It might make sense both from a statistical point of view or risk assessment. If the form only required one to complete it if turnover was below the VAT registration threshold, then HMRC could perhaps identify those persons who were (in the year covered by the return) just below the VAT horizon and perhaps should be considering registration soon.
The prize if your turnover is less than £30,000 (yes, an increase from £15,000) is that you only need to enter details of a restricted range of 'allowable' business expenses (note there are no boxes for disallowable items).
There are supplementary pages for 'partnership (short) and partnership (full)' and these contain similar questions to the existing supplementary pages with a couple of changes to note. The first is that both types of form have a box to claim 'foreign tax claimed as a deduction — only if tax credit relief has not been claimed on foreign pages'.
The other point to note is that the 'partnership (full)' pages now include brief descriptions of the sort of other partnership income that might need to be shown on the return under the headings 'untaxed savings income, income from property (and losses on furnished holiday lettings), other untaxed UK income, income from offshore funds and other untaxed foreign income'.
Other income and residence
The land and property pages have now been re-titled 'UK property'. Broadly, the questions remain as before but there is a new one. Question 1 asks 'number of properties rented out'. I am not quite sure what the purpose of this question is.
The foreign supplementary pages are now increased to six (from five) and the usual questions. However, one is now required to enter a 'country code' against the source of income instead of the name of the country. It is also interesting to note that there is now a specific question which only requires an 'x' in the box to claim the remittance basis of taxation under ITTOIA 2005, s 831 (see in this connection 'Always read to the end!' by Rob Kernohan; see Related Links above).
The supplementary page for 'Trusts, etc.' now has enough questions to cover both sides of the form. New questions include a section on 'income chargeable on settlors' and 'income from foreign estates' together with any 'foreign tax for which tax credit relief has not been claimed'.
The 'non residence and domicile' supplementary pages contain questions that in content are almost identical to the questions for the year ended 5 April 2007. No doubt this is due to the complete rewriting of the content of the form for that year. No surprises there then.
Capital gains
As I am sure most practitioners will agree, dealing with the computation of capital gains is the most time intensive and one of the most (if not the most) frustrating exercises in personal tax compliance work. Particularly so if you have spent hours researching and identifying shareholdings only to find that the gains less losses on the disposal of say 22 separate shareholdings gave rise to gains of £5,447 and losses of £5,986, a net loss of £539 (an actual case)! Sometimes the result is a figure of net gains just under the annual exemption which is just as frustrating.
Capital gains tax pages for several years have contained, at a minimum, three pages of figures and a further two or three of explanations. I was therefore surprised to find that the redesigned capital gains tax pages were now entitled 'capital gains summary' and are made up of both sides of just one sheet of paper! In essence all that the form asks for is what would have been shown on page CG8, just the total of gains and losses, the number of disposals and separate totals for listed shares, unlisted shares, property and other assets. Note that the terms 'quoted' and 'unquoted' are no longer used.
A good point is that the idea of losses being separately recorded as either '1995-96 and earlier years' or '1996-97 and later years' has been dropped. It never really made sense.
The reason for the brevity of the form becomes evident when you read the heading 'Summary of your enclosed computations — you must enclose your computations, as well as filling in the boxes'.
After I had picked myself up off the floor, I started to wonder what was really driving the revision to the layout and content of this section of the tax return.
We are repeatedly told that HMRC take a risk based approach to targeting enquiries and investigations etc. We are also told that the unrepresented taxpayer (yes I use that word which HMRC seems to seek to try and avoid using) has trouble in completing his tax return and so it should be made easier with less questions. So why suddenly, as a matter of course rather than following the opening of an enquiry, are we faced with this demand?
A positive aspect of the current redesign is a reduction in the size of the main return and less words around the questions.
The redesigned return also only asks for the net figure of interest and dividends. These are all examples of what I would regard as thinking going along the right lines. But the capital gains pages! What really are they thinking about here? Have they any idea of what is likely to be the result of insisting that one 'must' enclose computations in the first instance? For a start let us just go back to the beginning. When self assessment was created, what was the purpose of the form? Yes I know it was to make a return under the Taxes Act of one's income and gains, but what practically happens to that form when it reaches the tax office?
What happens to the form?
Up till now someone in the tax office has looked at each box on the return and then inputted that information into HMRC's computer system. Filing electronically by FBI has simplified this procedure and increased accuracy by cutting out the element of human error on inputting the details. So in answer to the question 'what is the form for', it is simply a computer input document, no more, no less.
Moving on to the brave new world of reading the contents of the form by machine (optical character recognition) the system can then be further refined (certainly in the case of the forms submitted by unrepresented taxpayers) and accuracy improved.
But what in the name of all that we stand for as tax practitioners is the point of asking everyone (whether unrepresented or as agents) to submit full blown capital gains tax computations of every single gain and loss? Who is going to examine the paperwork? Have HMRC the staffing resources? Have the individuals the experience and training to understand (as a matter of routine rather than as part of an enquiry or investigation case) what some of the complex capital gains tax computations mean? I doubt it very much.
I am sorry but this just will not do. It will not work!
This one aspect has the capacity to bring the whole house of cards crashing down. Imagine the scene just coming up to the 31 January 2009 deadline with the volume of additional capital gains tax information said to be required, if it comes to HMRC in paper form this could amount to a considerable increase in the amount of paper being delivered to tax offices when it is supposed to be reduced. If it is sent in electronic form as an attachment to FBI or something similar, is the system robust enough to cope with the additional attachments?
Leaving aside the possible delivery problems, what really is the point of all this? If HMRC have a problem with capital gains tax calculations, then they know what the answer is: raise an enquiry under TMA 1970, s 9A. That way is in my view a more proportionate response than what is proposed.
The future
In this article I have considered the main forms which have been redesigned, there are others (pages for Ministers of Religion, MPs and repayments to charities) which I will leave readers to investigate. I would just mention that all of the forms are in draft form as they are in the course of development. I have found whilst writing this article that several changes have been made to the drafts and readers should bear this in mind when viewing the current versions.
In conclusion, the redesign of the tax return could provide some benefits for the unrepresented taxpayer. It will provide benefits to HMRC in trying to square the reduction in staffing, the increase in automation and its anticipated workload. What is less clear is how, in the light of Carter and the ending of paper substitute returns, there can be benefits for practitioners as agents. I fear that there is very little of benefit and in fact some aspects (such as the capital gains tax questions referred to above) that cause great concern.
I am pleased to read that HMRC's Dave Hartnett says that (in the context of employer returns) 'our vision is to create a smooth transition by listening to taxpayers and their advisers and to design our services around what we hear, rather than around what we might like to hear'. I trust that the various bodies representing practitioners will take up with HMRC the less than satisfactory aspects of the redesign of the tax return so that we are all indeed 'working together'.
Roger Lawes is tax manager at Finley & Partners, Chartered Accountants. The views expressed in the article are his own.
