MODULE 1: paying the right amount of tax (intro) PRESENTER Len

MODULE 1: paying the right amount of tax

(intro) PRESENTER

Len came into the Advice Agency because his housing benefit was affected badly by his increased hours of work.

So we asked him about his sources of income. He explained that he had a couple of jobs and thought he must be paying too much tax.

As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try. Once you answer correctly you can carry on with the story. Good luck!'

( Action 1) Len

‘I’ve got two jobs. One, I work as a martial arts instructor. I started this job when I stopped being employed by the local Council. I do that nights. About 25 hours a week. Then I work lunchtimes at the pub as well. It makes ends meet. Well, it ought to. But I’m paying too much tax. Can’t be any other explanation.

(Question break 1) EXPERT

The amount of tax Len pays depends on the tax codes used by his employers. The tax code for his martial arts instructing should have been: a. Issued by HMRC? b. From a P46 form completed by the employer? c. From a P45? a.

No. In a simple change of jobs, there is no need for HMRC to intervene. b.

No. The new employer should only use form P46 when an employee does not have a form

P45. c.

Yes. Len’s previous employer should have issued a P45. Len should keep the top copy of this and hand the rest of it to his employer.

EXPERT

Form P45 – the tax leaving certificate from a previous employer - should be handed to a new employer. The new employer simply uses the tax code and brought-forward pay and tax details from the P45 form.

(Film note – picture of P45)

The new worker will only have a P45 if they have left a job before coming to the new employment.

They will not have a P45 if the new job was an additional job, or if they were previously a student, self employed, or on a lengthy career break, for example.

TEXT



Form P45 is the tax leaving certificate from a previous employer



The new employer uses the tax code and pay and tax details from the P45

(Action 2) Len

It doesn’t make sense. I’m paying a lot more tax on the pub work than the martial arts. Why’s that ?

Look. Here’s the payslip from the pub, and this – is from the Sports Centre.

{Picture this}

Question break 2 EXPERT

What should the normal tax code be in 2012-13 for someone’s second job? a.

810L ? [“eight one zero L”] b.

BR ? c.

0T ? [“zero T”] a.

No. 810L is the code which should be on the main job, giving £8,105 tax free income. b.

Yes. BR is the correct code. c.

No. Where a P46 has been completed for a second job, the standard code would be BR.

EXPERT

The correct code for a second job, where a P46 has been completed, is BR. This gives a 20% tax deduction. 0T is used by an employer when a P46 has not been completed. However, to ensure that the correct code is used, a P46 should always be completed when starting a second job.

TEXT



BR (Basic Rate) is the correct code for a second job where P46 has been completed



BR gives a 20% tax deduction



0T is used in the absence of a P46

(Action 3) Len

So they explained it to me. I don’t like it, but it makes sense enough. 810L, that means I get £8,105 tax-free income on my main job. That takes care of the martial arts. But I earn more than that. So then there’s no tax-free pay left for the job at the pub. That’s my second job. That’s why I’m paying all that tax on it. I see that now. There’s not a lot I can do really.

(Conclusions) Presenter

Many people only need an explanation of what their PAYE codes mean. Where someone has two jobs, and their earnings in their main job are more than the £8,105 tax-free personal allowance, then a simple check that they are a) under 65 and b) a basic rate taxpayer, means that an 810L code on the main job, and a BR code on any additional job, should produce the right answer.

But sometimes life isn’t that straightforward. Take Nadia, for instance.

[Download points P45 and P46 & payslips]

Nadia

(Intro) Presenter

We’ve looked at what happens to tax codes when people move between employments, and what to expect where someone has two jobs. But what happens if someone doesn’t neatly fit these categories?

What risks do people like Nadia face in coming off benefits back into work?

(Action 4) Nadia :

It had taken me a long time to recover from the accident. I’d been on E.S.A. – Employment and

Support Allowance – for nearly 12 months. There was a job at the florist down the road. It wasn’t much - £800 a month. When I started, back in August, they asked me for a P45; I said I hadn’t got one. So they filled in a form called a P46 for me on-line. But you’ll never guess what happened when my first month’s money came through.


What should have happened to Nadia? a.

Nadia will be paid her £800 a month without deductions because she began work part-way through the year, and has unused tax-free pay? b.

Nadia will pay both tax and national insurance? c.

Nadia will pay national insurance, but no tax?

a.

No. Nadia should have told her new employer that she has received E.S.A. earlier in the year; this will normally have happened when the P46 was completed. b.

Yes. Nadia will pay national insurance because she is earning more than the monthly national insurance limit of £633 or £146 per week. She will pay income tax because an 810L month 1 code will be used. c.

No. She will pay income tax and national insurance because an 810L month 1 code will be used. This gives £675 tax-free income per month and Nadia is earning more than this.

EXPERT

When she started her new job, Nadia should have told her employer that she received E.S.A. earlier in the tax year; this would normally have happened when the P46 was completed. Her employer will then know to use a 810L month 1 code. This is a temporary code that allows Nadia an amount of monthly tax-free pay and is used while HMRC find out if Nadia has had any taxable earnings or benefits since the start of the year. As Nadia’s monthly pay is over the monthly tax-free amount of

£675, she has to pay some tax. Later an adjusted code will be issued to ensure that Nadia pays the correct tax on her total income.

TEXT



Completing a P46 will alert employers to the earlier ESA



Using temporary code 810L month 1 allows £675 a month of tax-free pay

 NI is due on weekly income over £146

 Tax is due on income over £8,105 per year

(Action 5) Nadia:

I was really lucky. I’ve always been mad about anything to do with horses. There was a job at the livery stables in the next village. My dream job, really. They wanted nearly full time, so I cut down my hours at the florist. I’d just had a tax refund, too, something to do with a new coding. Brilliant.


Nadia has got a tax refund. Is this good news ? a.

Nadia’s refund is probably a mistake. She will have to pay it back. b.

Nadia’s refund is the result of her new tax code, and likely to be correct.

Answers

a.

No. Nadia had been paid at the florist using a month one code. . b.

Yes.. Nadia is due a refund .

EXPERT

Nadia has unused tax-free personal allowance from earlier in the tax year, when she was on a nontaxable benefit – income-based E.S.A. The new “cumulative 810L” tax code issued by HMRC means that her employer, the florist, can recalculate the tax due and pay her a refund.

TEXT



The usual PAYE code for main jobs in 2012/13 is 810L



Current year refunds can be made by the employer through PAYE

(Action 6) Nadia:

I’m over the moon at the stables. I was a bit disappointed at first – somehow I’m earning less than I expected.


Is Nadia paying the correct tax at the stables? a.

Nadia should expect to pay more tax on her second job. b.

Nadia has reduced her hours at the florist, so that may no longer be her main job. a.

No. She should ask HMRC to swap the codes round, and treat the stables as her main job. b.

Yes.. Nadia’s main job is now at the stables.

EXPERT

Significant changes in employment mean tax codes could need to change. Otherwise under or over payment of tax is likely.

Nadia should ask HMRC to swap the tax codes. She no longer works sufficient hours at the florist to use all her tax-free pay on that job. Both her employers will be sent revised codes.

TEXT



Contact HMRC to discuss tax codes when employment changes



Employers are not able to change codes unless instructed by HMRC

(Action 7) Nadia

It was worth telling HMRC about my changes in hours at the two jobs – otherwise they would have continued to deduct too much tax and I would have had to apply for a refund. It could have been well into the next tax year before anyone noticed!

(Conclusions) Presenter :

As people’s circumstances change, they need to double-check that their tax codes are still appropriate.

Refunds are not always good news: if you are not actually due them, refunds will have to be repaid.

Queries like this should be referred to HMRC on the Employee Helpline, 0845 300 0627

TEXT

Employee Helpline 0845 300 0627.

'Thank you for joining us for this module. Do not forget to download the very useful supplementary material. We look forward to seeing you again. Good bye'

MODULE 2: paying the right amount of tax (b)

( intro): PRESENTER:

Let’s look at PAYE tax codes. We’ve seen in Part 1 when and how the standard codes, 810L, BR and

0T should be used. Now we’re going to turn our attention to some cases – quite common cases – where adjustments need to be made to those codes.

Kayleigh is a care worker. She’s been in her current job for over 12 months. A colleague at work told Kayleigh that she should be due an expense allowance because she does so many business miles.

'As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try. Once you answer correctly you can carry on with the story. Good luck!'

(Action 1) KAYLEIGH

Working as a care assistant, I was driving almost 10,000 miles a year. Visiting people at home.

That’s what makes the job for me. Helping people stay at home and independent. The agency pay me

30p a mile, but a friend at work said I could claim 45p a mile against tax.

It sounded really good. I was earning about £14,000, and getting nearly £3,000 more in tax-free travel expenses. With this 45p-a-mile allowance, it sounded as if I could claim an extra 15p per mile against my tax.

(Question break 1) EXPERT:

Can the extra 15p per mile be included in Kayleigh’s PAYE tax code? a.

All that needs to be done is an adjustment to her tax code. b.

It can be included in her tax code, but she will need to complete a self assessment tax return as well. c.

Kayleigh will not get any tax relief unless she completes a self assessment tax return.

Answers a.

No. Employee mileage allowances can be included in a PAYE tax code, but Kayleigh must make a formal claim. b.

Yes. Employee mileage allowances can be included in a PAYE tax code, but Kayleigh must make a formal claim.

c.

No. Although Kayleigh will need to complete a tax return because the claim for business mileage allowance is more than £2,500, tax relief can be given provisionally through her tax code.

EXPERT

Up to set limits, an employee using his own vehicle to do his job can receive tax-free travel expenses from his employer. If the employer pays less than the set limits, the employee can claim a tax deductible mileage allowance equal to the difference. A formal claim for mileage allowance has to be made. Where the total claim for allowable work expenses is no more than £2,500, the claim should be made on the form P87 (Tax relief for expenses of employment). Above that amount a self-assessment tax return has to be completed.

TEXT



Total claim for all allowable work expenses is no more than £2,500: use form P87



Above that limit: complete self assessment tax return

{On screen ; copy of Form P87}

(Action 2) KAYLEIGH:

I phoned HMRC. They changed my tax code. I was paying about £25 less tax each month. I received a tax return in April, so I sent it in as soon as I could. I knew I’d get a fine if it was late. But the calculation showed that I owed them over £500! How can that possibly be right?

(Question break 2 ) EXPERT:

Employees in self assessment face many of the same risks as self-employed people. These are things like a late filing penalty – even if there’s no tax due; or interest and surcharges for late payment.

Kayleigh is facing a potentially difficult situation. Kayleigh should: a.

Do nothing? Any tax due can be collected through next year’s tax code. b.

Contact HMRC to ask how this underpayment of tax has arisen?

(Answers) a.

No. There has clearly been a mistake, either on Kayleigh’s part, or by HMRC when processing her tax return. b.

Yes. Kayleigh needs to ask how this unexpected underpayment of tax has arisen

EXPERT

Kayleigh was not expecting a bill as a consequence of filing her tax return. She has probably made a mistake when filling in the return. A common error is to include net PAYE income rather than gross or to forget to show the tax that has been deducted under PAYE. Mileage claims can be tricky and it is all too easy to omit a figure or to put a figure in the wrong box. You also have to be aware that

HMRC’s online systems do not always test for “logic” so from a simple mistake in the return it is possible to generate tax demands or refunds that are illogical.

TEXT



Common errors on returns generate tax demands or refunds



Check income is listed gross and PAYE deductions are shown



Double check all claims for work expenses – especially mileage allowances

(Action 3) KAYLEIGH:

I rang HMRC and it turned out I’d missed out one figure on the tax return. If I’d ignored the whole thing then, I might not have been able to change it later.


Q: Is Kayleigh right – she might not have been able to correct her tax return? a.

Kayleigh could have corrected the mistake on the tax return at any stage. b.

It would have become progressively more difficult for Kayleigh to change the figures.

(Answers) a.

No. There is a time limit to make an amendment to a return. b.

Yes. Kayleigh has 12 months from the 31 January filing date to amend the return – a simple process.

EXPERT

Taxpayers have up to 12 months from the 31 January filing date to amend their return if they find they have made a mistake. After this, a more formal and complex claim for overpayment relief is needed. This must be made within four years of the end of the tax year for which the return was due. After four years, taxpayers cannot get the figures changed, even if they are clearly wrong.

TEXT



Up to 12 months from the 31 January filing date to amend a tax return



Formal claims within 4 years of end of tax year for which the return was due



After 4 years figures cannot be changed – even if they are wrong

(Conclusions) PRESENTER:

Even employees can get caught up in the self assessment system. Because there are high penalties for mistakes and late returns, it’s vital that people understand what the self assessment system means.

Even low-paid workers may need specialist help.

(intro) PRESENTER:

We have seen that sometimes basic tax codes for people in work can need adjusting. One reason is to take account of work expenses, as in Kayleigh’s case.

Another common reason for adjusting tax codes is Benefits in Kind. These range from the company car, to medical insurance and other benefits provided to employees as part of their salary package.

Take Julius. He used to work in sales for a company, visiting customers, getting orders. But when there was a dispute with his employers and Julius left, things got very complicated indeed.

(Action 4) JULIUS

I fell out with the company about low pay – I’d stuck it that long because I got the car to use. They turned nasty and took the car away in October last year. I was desperate to leave, but I didn’t land another job till April. With even less money and no car. Just look at how my pay has gone down! I must be due some sort of refund.

{On screen - 2 payslips Note both have codes including a company car}

(Question break 1 ) EXPERT

Look at the payslips and particularly the tax codes. The number part of the code is much lower than the standard 810L code. a.

The difference probably relates to the company car. b.

At least one of the codes looks wrong. Julius should check them at once. c.

The codes are probably okay.

Answers a.

It probably does, however Julius has not had a company car since October 2011, so his tax code for the new job looks wrong and should be checked. b.

Yes. Julius lost his company car in October 2011, so there is no obvious reason why the starting point for his new job in April should not be 810L. c.

No. It is always a good idea to check more complex codes. Here, we might expect Julius to be on a standard 810L code with his new employer.

EXPERT

To check the codes he will need a P2 coding notice. HMRC should have sent him one in early 2012.

If he hasn’t got one, he should phone HMRC and ask for a copy. We might expect Julius to be on a standard 810L code with his new employer. It is important for taxpayers to report any benefit-in-kind changes to ensure that their code is correct.

TEXT



P2 coding notices are sent by HMRC early in the tax year



Ask HMRC for a copy if needed



HMRC need to know about benefit-in-kind changes to give employers the correct codes

(Action 5) JULIUS:

When I got my P2 coding notice from HMRC, I couldn’t believe it. An adjustment for a company car on my new job as well as on the old one! I phoned and HMRC said they would change the code. But for the earlier year, I have to get a form called P11D from my old firm. What planet are they on? The old company won’t even speak to me!


Julius has overpaid tax this year and last year as well. To get refunds, he will have to: a.

Contact both his current and previous employers, to get them to give him a refund. b.

Apply to HMRC for a refund for both years. c.

Ask HMRC for a refund for last year, but his current employer will give him a refund for this year as soon as the tax code is corrected.

Answers a.

No. An employer can only deal with a refund in the current year. b.

No. Although Julius will need to ask HMRC about a refund for last year, current year refunds are made by the employer via the payroll. c.

Yes. Julius’ employer will make a refund for the current year, once HMRC has issued a new corrected tax code. However, Julius will need to ask HMRC about the refund for last year.

EXPERT

The usual rule is that current year refunds are made by the employer via the payroll following a change in tax code issued by HMRC. However, HMRC can give a refund during the year if someone: is off work and not claiming benefits, has been unemployed for more than four weeks, has retired with

no company pension, or they have returned to studying. In these cases a P50 form will have to be completed to get the refund. HMRC may also pay a refund during the year if a person has been made redundant.

TEXT



Current year refunds are made by the employer via the payroll



HMRC can give a refund during the year in some circumstances where no PAYE facility is being operated



Use P50 form downloaded from HMRC website for in-year refunds where taxpayer is not now in PAYE or claiming benefits

(Action 6) JULIUS:

So I got the refunds for this and last year! To resolve it, I had no option but to ask for help from my old employer.

(Conclusion) PRESENTER

Most employees rely on HMRC and their employer to get things right. But this puts them at a disadvantage if there is a dispute.

So it’s good to know that there are things they can do to safeguard themselves. Things like ensuring all the paperwork is in order. Checking that they get forms like a P45, a P60 or a P11D on time.

Contacting the employer straightaway if they don’t arrive on the right timescale. It means being really careful with things like benefits in kind – and possibly even confirming in writing with the employer any changes that do take place.

'Thank you for joining us for this module. Do not forget to download the very useful supplementary material. We look forward to seeing you again. Good bye'

MODULE 3: employment scams, traps and abuses

(Intro) PRESENTER:

Life can be really quite tough for migrant workers. There’s a whole range of issues they can have to sort out. Things like getting a national insurance number. Dealing with income from abroad. Engaging with HMRC – either as an employee or a self-employed individual.

The situation can be made worse by unscrupulous employers. Lack of experience of the UK tax system, and the problem of getting clear information in their own tongue, can compound the problems. Particular sectors of the economy have their own problems. Many migrant workers for example, are involved in the construction industry or domestic work. Both have their own special difficulties.

Let’s listen to Habiba’s story.

As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try. Once you answer correctly you can carry on with the story. Good luck!'

(Action 1) HABIBA:

In this country I work for a family in central London. Housekeeping. I am most anxious that everything is in order. So I applied for a National Insurance number as soon as I arrived in the UK.

The family agreed wages of £300 per week. Each week they pay me £200 a week by cheque, and

£100 in cash. They say everything is above board. All taxed, everything. The £100, this is just because he is in business and they keep cash in the house. See, I have kept every payslip.

( Slip to show £200, tax and NI, code 810L)


Is Habiba’s payslip legal? What do you think should be shown on a payslip? Tick the boxes for the items you think have to be included. a. Gross pay b. Net pay c. Hours worked d. Tax deducted e. Rate of tax f. National insurance deducted g. Rate of national insurance

h. National insurance number i. Other deductions j. Employer’s PAYE reference k. Tax code l. An explanation if net pay is paid by more than one method

Either: a, b, d, f, i, l

Or: a, b, d, f, i

Answer a.

Yes b.

No

EXPERT

The only details that must be shown on a payslip are gross and net pay, tax, National Insurance and other deductions. Also if net pay is paid by more than one method, for instance, bank transfer and cheques, the amount paid by each method should be shown.

TEXT



Gross and net pay, tax, National Insurance and other deductions must be included on payslips



How net pay is paid must be shown if more than one payment method is used


When I question my employers about the £100 cash payment, overnight it stopped. I do not know why they should do this. I went to an advice agency for help as I’m not getting my full pay. They contacted HMRC. HMRC have recorded me as paying tax and National Insurance only on the £200.

They do not have the other £100 on their records. Again, I asked my employers, and they say the

£100 is ‘expenses’ – but that’s not true, they agreed £300 in the letter when I took the job.


Is tax and national insurance due on the £100? If it is, who foots the bill, Habiba or her employers? a.

Nothing is due because it is expenses b.

Tax is due c.

Tax is due and the employee, Habiba, has to pay

Answers a.

No. In Habiba’s case, it seems clear the employers are manipulating the rules.

b.

Yes, tax is due on the full wages. c.

No. Tax is due but the employer has primary responsibility.

EXPERT

The employer is responsible for operating PAYE on all payments. HMRC should ask employers to pay any tax due where they have deliberately not operated PAYE correctly. Habiba’s employers could try to evade responsibility, for example by claiming that the money was housekeeping, or that the employee knew that they were being paid without deduction of tax. HMRC can consider that the employee connived at being paid without deduction of tax. However, proof can be difficult – particularly in domestic situations. Habiba is in a difficult position. She is likely to lose her job if she asks HMRC to investigate her employers for the tax. But she has received untaxed pay.

TEXT



The employer should operate PAYE on all payments



In practice, the employee without payslips showing tax deductions will often end up paying



There are risks for the employee if payslips understate income


I don’t know what I should do. For maybe over a year I have been working with £100 a week that has not been taxed. It frightens me. And, now I receive only £200 a week from my employers.


Migrant workers are among the most vulnerable members of the tax-paying community. They are often told, or wrongly assume, that tax is being deducted from their wages, but don’t have any proof.

Even if tax is deducted, is it the right amount? They must have evidence of tax deducted and be aware of the dangers of unrecorded cash payments. It is also very important to ask for and keep any written evidence such as contract terms, P60s, P45s and payslips. These may be needed to resolve any problems and ultimately ensure that workers pay the correct tax.

If Habiba is pursued for tax by HMRC, this is a case for the crisis team at TaxAid.

(Intro) PRESENTER;

What about Krzystof ? He’s got a different sort of problem – one common enough for migrant workers: self employment in the construction industry.

The construction industry has always taken on a large number of migrant workers. This, plus the fact that cash wages are common place, is why a special scheme for taxing subcontractors in the

construction sector exists. The migrant worker in construction has therefore to grapple with the special Construction Industry Scheme – CIS - and issues of self employment. Under CIS, although workers are self employed, they normally have 20% tax deducted from their earnings. This should be paid across to HMRC by the main contractor. Krzystof has brought in a statement from his main contractor. He is concerned because this statement seems to show more income than he has received, and this would affect his council tax benefit claim.

(Action 4) KRZYSTOF:

I wanted to do the thing right. I know there are a lot of guys who don’t do it like that, and I didn’t want to be one of them. So I see HMRC, I register under the CIS scheme as a subcontractor. I know

I have to do a tax return at the end of the year. My money gets 20% taken off by the contractor all through the year. And now I ask him for a statement.


Q. Krzystof’s statement should show his gross income and any taxes deducted. a.

The contractor will have deducted tax and National Insurance from Krzystof’s money b.

The contractor will only have deducted flat rate tax from Krzystof’s money

(Answers) a.

No. Only employees have tax and National Insurance deducted. b.

Yes. The statement should show gross income and tax deducted.

EXPERT

Labour-only subcontractors in construction will usually have 20% tax deducted from their income

“on account” for their tax. But as they are self employed they will also need to submit a tax return, and administer and pay their own National Insurance.

TEXT



Subcontractors in construction have flat rate tax deducted from their income – usually 20%



They must file tax returns and pay any additional tax or claim refunds



Self-employed, they will have to administer and pay their own National Insurance


The statement the contractor gave me covers the whole year. But when I went through it with my friend, the figures look strange. Far too high. Even allowing for the 20% taken off they show far more

than I’ve been paid. There are enough people where I work who aren’t registered with HMRC.

Someone said they’re not working legally, they’re using someone else’s tax reference and National

Insurance number. It’s making me very jumpy. What’s going on?

(Picture of statement)

(Question Break 2) EXPERT:

Krzystof should expect a statement from his contractor, at least every month, showing the gross amount paid and the CIS tax deducted. It looks a bit like a payslip – but CIS workers are selfemployed, not employees. What Krzystof has is a statement just of gross pay from the date he started work to 5 April. It seems to include amounts paid, in cash, most likely to other workers.

Which statement is correct? a.

Krzystof should take action to try to resolve the differences before he sends in his tax return. b.

Krzystof will have to put on his tax return the amounts shown on the contractor’s statement c.

As Krzystof prepares his own tax returns, he can simply put down the amounts he actually received. He can ignore the contractor’s statement.

(Answers) a.

Yes. Krzystof should try to resolve the matter now, initially with his main contractor. b.

No. Krzystof would face an unmanageable tax bill if he simply uses the figures from the contractor’s statement. c.

No. He should not ignore the contractor’s statement and send in his own tax return showing only the amounts he received.

EXPERT

If the main contractor makes returns to HMRC showing that Krzystof was paid more gross income than the figure shown on his tax return, HMRC is likely to ask questions. It can be very difficult to prove that you have not received money paid in cash. Even with 20% CIS tax paid, if sufficient additional income is added, Krzystof would face a tax bill.

Krzystof will only get credit for the 20% deductions if he puts them on the tax return. HMRC may check their records to see if the amounts he claims as CIS tax deducted matches the monthly returns from CIS contractors. If there is any dispute Krzystof will need his statement as proof of the tax deducted.

So Krzystof should try to resolve the matter now, with his main contractor. If that fails he should take it up with HMRC. If this does not get the situation sorted out he should take professional tax advice.

TEXT



20% CIS deductions are credited only if put on a tax return

 HMRC compare information from Contractors’ monthly returns with subcontractor’s annual tax returns



Sub-contractors could face unexpected tax bills for any unresolved irregularities


I took my papers to an “accountant” recommended by my mates. They say I should have a big refund.

He took details of what I earned, and said he will put in the expenses. He will take his fees from the refund before it is paid to me, so it will cost me nothing.

(Conclusion) PRESENTER:

Unfortunately we’re leaving Krzystof on the brink of another potential disaster. There are rogue

“accountants” who will offer to obtain refunds for CIS subcontractors on the basis of inflated figures for expenses, taking a cut of the refund as their fees.

Under the self assessment system, returns are dealt with on a ‘process now, check later’ basis. This means that large refunds may be issued, which are later recalled. The scam perpetrated by the unscrupulous “accountant” is to ‘disappear’ before HMRC challenges the figures. Krzystof may then face a large tax bill – even if he never saw the refund!

It is advisable to check with a reputable professional body for a local, qualified and registered adviser such as those listed.

TEXT



The Chartered Institute of Taxation,



The Institute of Chartered Accountants of England and Wales



The Association of Chartered Certified Accountants



The Institute of Chartered Accountants of Scotland

Thank you for joining us for this module. Do not forget to download the very useful supplementary material. We look forward to seeing you again. Good bye

MODULE 3: tax troubles in retirement

Intro: PRESENTER):

Retirement – a time for winding down? In fact, as far as tax goes, retirement can be a stage in life when tax affairs get more complicated. Most pensions are taxed under PAYE – but not the State pension – even though it’s taxable. How the tax is collected on the State pension is one complication.

Another is that many people continue with some work after retirement. Semi-retired people, or those taking early retirement following redundancy or ill health, have potentially the most complex tax affairs of any low income group. Even when all a person’s income is taxed under the PAYE system, there can still be tax surprises. First we’re going to look at issues that can arise when someone semiretires.

Let’s listen to Yvonne’s story. Yvonne is a teacher. She turned 61 in July. In November she will reach her state retirement age. But she is thinking of deferring her state pension for a few years.

As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try. Once you answer correctly you can carry on with the story. Good luck!

(Action 1) YVONNE:

The tax people sent me a form. They want to know what my plans are. Well, I’m not sure, really. I don’t think I want to work right up until I’m 65. But I might like to keep busy for a few more years.

I’ve been working full-time via an agency and they suggested I might like to think about going parttime.

I have got a small private pension that I’ve decided to take in November. So part-time work might be just the thing. Then maybe I’ll take the state pension in a couple of years’ time and stop working completely. I haven’t really decided about part-time working yet. But they need this form back, so for the moment, I’ll put down the 1st November as the date I stop work as that’s when my pension will start. Then at least they’ve got something, haven’t they?

(Question break 1): EXPERT :

The form Yvonne has received is called a P161 Pension Coding form. If she is unsure about her plans for part-time work, she should: a.

Complete the form with the date she will start taking her pension, and update HMRC with any changes later.

b.

Wait until she decides what she is going to do about her work before sending in the P161, even if this means delaying a few months.

(Form P161)

Answers a) Yes. The P161 form affects the tax paid on both her work and pension, so it should be sent before the pension date. She should update HMRC when she decides about her work. b) No. HMRC needs the P161 now to get the tax code right on the private pension.

EXPERT

Usually HMRC send the P161 form a month or so before someone reaches state retirement age which, during tax year 2012/13, is 65 for men, and 61 for women. They will also send the form to women who will be 65 during this current tax year.

They use it to confirm a taxpayer’s sources of income and their entitlement to the age-related personal allowances. These facts are key in ensuring that correct PAYE codes are issued for pension and employment income. So it is important for the taxpayer to try to give HMRC as up-to-date a picture as possible of their circumstances.

Age-related personal allowances will no longer be available for those who do not reach 65 by 5 April

2013.

Many people retire in stages. A snap shot of their circumstances when they complete a P161 won’t ensure that future PAYE codes are correct. They should notify HMRC of any changes, especially a return to work, and particularly if this happens during the year they draw a State Pension. Therefore, even once they have sent HMRC the P161 form, taxpayers must keep checking their PAYE codes.

TEXT



Form P161 is used to ensure correct PAYE codes are used for pension and employment income



Taxpayers should continue to check their PAYE codes are correct



Changes in circumstances? HMRC should be notified

(Action 2) YVONNE

So I’ve just cut my hours down. Working part time, and with the private pension, I seem to be keeping about level, even having deferred the state pension.

The funny thing is, I am paying less tax. I had heard retired people pay less tax, so that’s probably why.


Yvonne is paying less tax because she is getting more tax-free pay now she has reached state retirement age. a.

False? b.

True?

(Answers) a.

Yes. Yvonne is not due an increase in tax-free pay as she is 61. She is probably paying less tax because she is getting her tax-free allowance twice by mistake. b.

No. Yvonne is only 61; there is no increase in the tax-free allowance.

EXPERT

Yvonne sent back her P161 form saying that she was going to stop work in November when she took her private pension. But in fact she carried on working and hadn’t told HMRC she had changed her mind.

So when Yvonne keeps working her tax codes will be wrong and she will get too much tax free pay.

Yvonne could face a significant tax bill later on.

You cease to have to pay NI at the State Retirement Age – which for women is progressively being put back towards 65.

If you continue to work after State Retirement Age you will need to give your employer a Certificate of Exemption from the National Insurance Contributions Office. See the DirectGov website for state retirement ages.

TEXT



After state retirement age no National Insurance is deducted. See www.direct.gov.uk

for state retirement ages.



Increased age allowances are reduced once income is over a set level



Failing to update HMRC can mean you face a tax bill later

(Action 3) YVONNE:

Bill, my tennis partner is self-employed and he said he didn’t get a P161 form from the tax office when he retired. Now he only works part time.


Should Yvonne’s friend Bill have got a P161 form to tell HMRC that he had reduced his hours? a.

Yes b.

No

(Answers) a.

No. As Bill is self-employed he will submit a tax return; he doesn’t have to submit a P161 b.

Yes. HMRC does not normally send out P161 forms to the self employed.

EXPERT

HMRC do not generally send P161 forms to self-employed people. But if you have some PAYE income as well as self-employment income it may be a good idea to complete one when you get the

State pension. This could avoid an unexpected tax bill. The State pension is taxable. But it is paid without tax taken off. If you have pension or employment income taxed under PAYE, HMRC will collect the tax on your State pension through your PAYE codes.

If you are self-employed and don’t have PAYE income, you will need to include your State pension on your self assessment tax return. If a self-employed person has PAYE income such as a private pension they should still check their codes to ensure that significant over and underpayments are not building up.

The self-employed can ask HMRC for a form P161, download one, or complete one on-line.

TEXT



Completing form P161 will help avoid unexpected tax bills



Pensioners who carry on with self-employment will normally pay tax under self-assessment



Completing a P161 does not replace checking PAYE codes



The State pension is taxable – but paid without tax deducted



Conclusion PRESENTER

So, as Yvonne has found, taking a pension can be a tricky time for tax, especially if you semi-retire, or stagger the starting dates for different pensions, or decide to top-up your pension by working.

(introduction) PRESENTER :

For some people, retirement is triggered by being made redundant or having to stop work due to ill health. Matters can also be complicated further by bereavement. This is Mr Cox’s story.

(Action 4) Mr COX:

I’d always worked for the council. In the October when I was 64, they made me redundant. I got a lump sum from the council – though I paid a lot of tax on it! And I’ve got a small pension. When I was made redundant, I went to the advice agency. I thought I might be due a tax refund. They told me to phone HMRC, but all they said was wait till April. Do I really have to wait that long?

(Question break 1) EXPERT :

Is Mr Cox due a refund? a.

Mr Cox may receive a refund before April. b.

Mr Cox is due a refund because he was made redundant, and the first £30,000 of any lump sum is tax free.

(Answers) a.

Yes. Depending on his circumstances, he may be due a refund before April. b.

No. Refunds are not always due following redundancy.

EXPERT

Some money paid at the time of redundancy is taxable and would normally be taxed under PAYE.

This depends on the employee’s contract and particular circumstances. Taxable redundancy payments may be included in the P45 (leaver’s form) – but can also be paid after the employment terminated.

Look at “compromise agreements” or the employer’s letter as well as P45.

Whether Mr Cox is entitled to a refund may depend on how his redundancy was paid – all on his P45, or part after the job terminated. And when he can get a refund will also depend on what he did next – get another job, or claim Job Seekers Allowance. Mr Cox did not need to wait until the end of the tax year to check the position. His P45 and any letter from his employer can be checked to see if there is an unexpected tax bill or refund.

Let’s continue with Mr Cox’s story.

TEXT



Redundancy payments that are taxable are normally taxed at the point of payment via PAYE



Following redundancy there could be a refund or even an additional bill



Check your tax position at once following redundancy



Keep all documents relating to your contract and redundancy agreements (P45, compromise agreement)

(Action 5) MR COX:

Judith, my wife, died in the November after I was made redundant. I started to receive Bereavement

Allowance. I told HMRC that Judith had died. They sent a form and I filled in all the details. Now they tell me I owe them money! How can I? What can have gone wrong?


Mr Cox will have completed a Bereavement Benefit coding form when his wife died. That’s a special version of the P161 form and gives HMRC the information they need to ensure Mr Cox pays the right amount of tax.

(Copy of form)

What should Mr Cox do now? a.

Mr Cox is liable to pay the tax. b.

Mr Cox should refuse to pay the tax demanded.

(Answers) a.

Yes. Mr Cox will normally be liable to pay the tax, but should take professional advice on possible options. b.

No. Mr Cox is liable to pay the tax.

EXPERT

Bereavement allowance is a taxable benefit. Form P161 should have enabled HMRC to issue the correct PAYE tax codes to Mr Cox’s pension provider. If the pension provider failed to use this code,

Mr Cox may ask HMRC to consider recovering the underpaid tax from the pension provider. Mr Cox may need professional help to check his options. He may have grounds for a complaint if HMRC has made an error, and exceptionally, he may ask HMRC to write off tax in some circumstances.

But in most circumstances Mr Cox will probably have to pay. HMRC will generally spread the collection of the tax via his PAYE code, over 12 months. They may agree to spread it over a longer period.

TEXT



Bereavement allowance is a taxable benefit



Income above the personal allowance: tax is due on the bereavement allowance



Normally collected via PAYE coding over 12 months



May be grounds for dispute; employer or pension provider error



The tax is normally due. Professional advice may be needed to challenge the bill

(Action 6) MR COX:

I’ll be 65 this year. So that will mean a higher tax allowance. If everything goes to plan, I’ll take a part-time job at the hardware shop for a couple of years. Overall then, I should be paying a bit less tax.


Which of these is correct? a.

Mr Cox will pay less tax this year, because he is entitled to more tax-free pay. b.

Mr Cox may have more tax allowances than in previous years, but possibly also more taxable income.

(Answers) a.

Not necessarily. His overall tax position will need to be looked at. b.

Yes, Mr Cox is now a widower and probably will also start to receive state pension, so his tax position may become more complicated.

EXPERT

The 2012 Budget proposals include the withdrawal of age-related personal allowances for people turning 65 after April 2013. Taxpayers who already have the higher age allowance will continue to receive it. These additional amounts of tax free income are reduced where income exceeds certain thresholds (£25,400 in 2012/13). As people retire, they often get more sources of income. This increases the possibility of errors – particularly in PAYE tax codes.

Bereavement can bring a whole new dimension into someone’s tax affairs, with additional income if the survivor inherits their spouse’s savings income or occupational pension.

Mr Cox needs to check that his PAYE codes are adjusted for his state pension. He will need to check the tax impact of any income inherited from his wife. Is bank interest being taxed correctly? Does inherited income affect his age related allowances?

It’s a complex mix. And it needs constant vigilance to avoid unexpected tax consequences.

TEXT



State pension is not taxed at source, so PAYE taxpayers should expect a change in tax code on work or pension, when they take their state pension



There are age-related allowances for those aged 65 by 5 April 2013

 Age allowances are tapered if income is “too high”



On bereavement any additional income due to the surviving spouse could affect tax liabilities



There is an HMRC bereavement helpline to help deal with tax 0845 3000627 (option 2 then

4)


Retirement is a time of major transition and the possibility of errors in someone’s tax affairs is very high. This is particularly so in the first year that someone starts to receive a pension. It is important to keep HMRC up to date with what’s going on. Forms that are received should be returned promptly.

But taxpayers must monitor their PAYE codes and contact HMRC if anything is unclear or looks wrong. Tell HMRC about significant changes in circumstances. Keep the paperwork, in case something goes wrong.


MODULE 5: PAYE underpayments – the P800

( Introduction) PRESENTER:

Employees think that they don’t have to worry about tax. Their employer does it. But for

PAYE to operate correctly, HMRC must issue the correct codes, employers must use them – and employees must check them. If the codes aren’t right, people will pay the wrong amount of tax.

Under or overpayment of tax may only come to light when HMRC do reconciliations once the tax year has ended. These amounts are reported to the taxpayer in a Tax Calculation – a

P800 – for the year. If a refund is due, the amount is repaid. However , many people seek help about P800s because there has been an underpayment and HMRC are trying to collect some more tax.

Let’s look at Olga's case.

Olga is a paramedic. For a number of years, she has had two jobs – her main one and one through an agency for medical staff.

As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try. Once you answer correctly you can carry on with the story. Good luck!

(Action 1) OLGA:

I received a letter from the tax people. A tax calculation, it said. It was a confusing thing, but the bottom line was that I owed over £1000 in tax. Well I was baffled – how could I owe any tax? I mean all my pay had tax deducted. But I suppose it is correct.

On the back of the calculation it gave all sorts of methods on how to pay the money, well I better see which one is best and start paying.

(Question break 1)EXPERT:

Q Should Olga accept HMRC’s calculation? a.

Olga should check the P800. b.

Olga should start paying the debt as it is probably correct.

(Answers) a.

Yes, Olga should check that the bill is correct and if it can be challenged. But she may need to make a payment arrangement as it is legally due. b.

No. P800 bills are usually correct, but they should still be checked. Olga may be able to ask HMRC not to recover the debt.

EXPERT:

Unfortunately, the P800 calculations show one total for all PAYE income and the tax deducted, and one total of state benefits (which would include the State Pension). You should check that these details agree with your paperwork. P60s show the year’s income from employment or pension, and letters from DWP will include details about benefits. .

Sometimes identity fraud or just simple error can lead to income being incorrectly included.

Also, there will usually be an amount shown for the tax-free allowance – is this what the taxpayer expects? For example, does it show the age related allowance if they are entitled to it?

So, is Olga’s P800 correct?

[P800 picture]

TEXT



Check that you agree the income on P800



P60s supplied end of year by employers and pension providers



P11D benefit-in-kind forms



P45s include end of employment total of income from that employer



Check tax-free allowances and tax deducted


I went to the advice agency and they helped me check the P800 and work out where the debt had come from. It’s all due to me doing my extra job – apparently the agency used the wrong code – gave me too much tax-free pay. I don’t know why they got it wrong – I mean I filled in all the forms they gave me and they knew about my main job. Surely as it isn’t me that got things wrong I shouldn’t be the one to pay?

( Question break 2) EXPERT:

Q. Does Olga have grounds to dispute the demand? a.

Olga won’t have to pay the tax as it wasn’t her fault b.

Olga may be able to challenge some or all of the debt.

(Answers) a.

No. It’s most likely she will need to make an arrangement to pay, but it may be worth considering if there has been employer error. In exceptional cases it may be possible to ask HMRC to write off the debt. b.

Yes. It is worth looking to see if employer error has led to the debt.

EXPERT:

PAYE is a means of collecting tax on your income. HMRC is unlikely to accept that a simple error made in good faith on the part of the employer makes it their liability. HMRC requires evidence of systematic failure to operate PAYE, to agree “employer error”.

TEXT



HMRC may collect a PAYE debt from employer in cases of employer error



But in practice only if systematic failure by employer to operate PAYE



If in doubt of source of error, ask HMRC to investigate


Well HMRC checked their records and , they still say I have to pay. At least I don’t have to start paying it back straight away; they’re going to collect it through my PAYE code for next year – I can just about manage that.

So that’s me – and I thought we were all done with letters from HMRC, but then my husband got one. Another P800! Well I thought this was a bit odd as he only has long-term incapacity benefit. He did some permitted work – June last year it started. So how can things have gone wrong?


Q. What is the impact on a tax code of taxable benefit and permitted work?

a.

The code on his “permitted work” employment should be reduced to take account of the incapacity benefit. b.

His employment was “permitted work” so he was entitled to a full personal allowance.

(Answers) a.

Yes, this is correct. b.

No, the code on his permitted work should have been changed to tax the incapacity benefit.

EXPERT:

Many State benefits are taxable – but are paid without tax taken off. The tax on benefits should be collected through the PAYE on the permitted work. So a full tax code on permitted work will be incorrect.

HMRC are notified by DWP that someone is receiving taxable benefit and should amend

PAYE codes accordingly. It looks as if this hasn’t happened in Olga’s husband’s case and unfortunately this is all too common.

Where a taxable benefit or state pension has been omitted from a tax code ESC A19 may apply. But the rules of ESC A19 usually require a delay of 12 months, so it is unlikely to apply for 2011/12 P800 demands which arrive before 5 April 2013. How to claim Extra

Statutory Concession A19 or employer error is explained in the download notes and more guidance on checking and challenging P800s is given on HMRC’s website in “Understanding and checking your P800 Tax Calculation”.

TEXT



Tax due on benefits is normally dealt with through the PAYE code on other income



HMRC should be notified of taxable benefits by DWP and adjust tax codes



HMRC expects individuals to check their code and inform them to correct it



When taxable benefit or state pension is omitted, consider applying for Extra

Statutory Concession A19 but check the download to this module for details first



But HMRC have conditions that are difficult to meet, including proving that it was reasonable to believe that the code was correct



Employer error could apply in some cases

(Action 4) OLGA

It seems that we may have to pay the tax back.

PRESENTER (conclusions):

We have seen that it is important to remember that P800 debts are legally due and enforceable, even if you don’t think it was your fault. So check that the P800 debt is correct and consider if you have any grounds for challenging the debt. You may need professional help to choose the best route.

PRESENTER (intro)

And what if HMRC actually gives you a refund and then wants it back?

Let’s meet Hannes and see what happened to him.

Hannes was made redundant from his job as a marine engineer in November 2010 - he was laid off on a small pension. He still continued with another part-time job that he’d had for a number of years.

In October 2011 he got a tax refund which was a pleasant surprise. But now HMRC want the money back.

(Action 5) HANNES:

I got a big cheque from HMRC back in autumn 2011. With a tax calculation - it showed they owed me nearly £1,600! And then the money arrived. As I say, I wasn’t expecting anything, but it was all official: I assumed they’d checked things. We had a great Christmas. With my part-time job and the pension we were doing okay.

Then the bubble burst. The design team that I worked for part-time lost its funding, so I lost that job too. And to cap it all the Revenue said the refund was a mistake and, even worse, the new P800 says I owe them £1,900. But I haven’t got it!

(P800 form)


Originally Hannes will have been sent a P800 tax calculation in 2011 that showed he was due the refund. But it looks as if HMRC have revised their year-end calculations and issued an updated P800 now showing that tax has actually been underpaid.

Q. Can HMRC ask Hannes to repay the original refund? a.

No b.

Yes

(Answers) a.

HMRC can ask Hannes to return the refund b.

This is correct. The law sets out how much tax is due on a certain income – a mistake by HMRC does not generally change this.

EXPERT:

Unfortunately, HMRC can make refunds of PAYE only to subsequently say they need paying back. In some circumstances, if it is over 12 months after the end of the tax year in which the refund was made, the taxpayer may be able to apply to keep the refund under

Extra Statutory Concession A19 – but only if it was reasonable for them to believe the refund was right. For Hannes, HMRC have acted relatively quickly so A19 will not apply, but he still needs to check the P800s and consider if his employer or pension provider made a mistake.

TEXT



Make sure you understand why a refund of PAYE is due to you



If HMRC ask for the refund back more than 12 months after the end of the relevant tax year, ESCA19 might apply



Check P800s – is all the income included?



Consider if employer or pension provider could have made a mistake


I went to an advice agency. We checked the income on the P800s with my P60s, P11Ds, and

P45s. The original P800 had my new job where the code was wrong. My other job and the pension had been missed off. And that was why I got the refund. On the second P800, everything was shown correctly and we found what had gone wrong - I was getting a full

personal allowance for both jobs. If I owe the tax I don’t have much income now, just my pension. So how can I pay it?


Q. What can Hannes do now? a.

Hannes will have to make a time to pay arrangement. b.

HMRC will collect the tax due through his PAYE code for his pension.

(Answers) a)

Yes. Debts of £3,000 or more, cannot be recovered through PAYE, so Hannes will have to make an arrangement to pay. b) No. Hannes’ debt is too large for HMRC to collect through PAYE.

EXPERT:

For debts under £3,000, where the taxpayer has a PAYE source of income, HMRC will usually collect the underpayment by adjusting the PAYE code for the next tax year. This effectively spreads the repayment over 12 months. If this will cause hardship, taxpayers can ask HMRC to spread the payment over two or three years instead.

However, for debts of £3,000 or more, such as in Hannes’ case, HMRC will try and collect the debt directly from the taxpayer. The PAYE Underpayment Support Team may allow up to 36 months interest free.

One option with debts of £3,000 or more is to make a payment to reduce the debt to below

£3,000 and then clear the remainder through PAYE.

If the P800 calculations show tax underpaid of less than £50, HMRC will write this off.

Let’s continue with Hannes’ story.

TEXT

 Debts of less than £3,000 are normally collected via PAYE coding



If 12 month term of repayment via PAYE causes hardship, you can ask for payment to be spread over a longer period



Consider reducing the debt to below the PAYE collection limit of £3,000



Otherwise ask for time-to-pay arrangement

 Debts of less than £50 should be written off


I decided to see if I could get an agreement to pay off the debt over 36 months. But could I agree with HMRC how much I could afford – no!

So they said they were going to send me tax returns. Didn’t quite see how this solves things.


Q. If Hannes is issued tax returns: a.

The amount that Hannes has to pay could go up? b.

Under self assessment the amount owed is fixed?

(Answers) a.

Yes, under self assessment, Hannes could incur penalties and interest if he doesn’t file his returns and pay his tax by the deadlines. b.

No, he needs to meet all filing and payment deadlines.

EXPERT:

If a taxpayer cannot reach an agreement with HMRC to pay a PAYE underpayment, HMRC will usually issue tax returns. This brings the individual into self assessment. Tax Returns must be completed and tax paid within deadlines, otherwise the usual penalties and interest under self-assessment will be added.

TEXT



Without an agreement with HMRC to pay, HMRC will put the taxpayer into self assessment



Tax returns will need to be completed within deadlines



Penalties for late returns and interest will be included in the debt.

(Action 8) HANNES

I am frightened by the idea of self assessment and the debt going up. I think I’d better agree

36 months time-to-pay now, before they issue any returns.


There are a lot of misapprehensions surrounding the subject of P800s. Tax on a P800 is normally due, even if it is not your fault that the debt arose.

The avenues for disputing P800 debt are increasingly restricted. Check the downloads to this module to assess any grounds for a challenge.


MODULE 6 – Employment problems

(Intro:) PRESENTER:

Clients may come to you about trouble with employers, getting what they believe they are due as benefits or refunds on their tax. But there could be more tricky problems underlying the issue they bring to you.

New flexible ways of working mean it’s not always clear if you’re working as an employee, or as your own boss in your own business as a self employed person.

But when it comes to dealing with tax, the distinction between employed and self-employed is critical.

Let’s look at Zak’s story, and see the sort of problems that front-line advisers need to be aware of.

As you watch the following case studies, at different points you will be asked questions. You must answer the question correctly to proceed with the story. If you get the question wrong simply go back and have another try.

Once you answer correctly you can carry on with the story. Good luck!

(Action 1) ZAK:

I got work repairing windscreens. I travelled all over the country. The boss provided a van and got me all the work and dealt with all the payments. I just provided my tools. That was great, as I hate paperwork. He paid me at the end of the week - kept £50 back. I thought the money for the admin and all my tax and stuff. There were no payslips though and all cash in hand.

Then I had an accident and broke my leg. Boss said they wouldn’t pay when I was off sick. And then when I tried to get some benefits, it turned out I’d got no National Insurance contributions. But I’d been working two and a half years! HMRC said they couldn’t find a thing on their records – no tax, no National Insurance. Nothing.


Q: How do you think Zak will be treated for tax? a. Zak could be taxed as self employed, even though he never registered as such. b. Zak is clearly an employee and his boss is liable to pay the tax and National Insurance.

(Answers) a. Yes. Employed or self-employed status is a matter of fact, so Zak may be self-employed. b. No. Zak might be an employee on the facts – but the evidence is not clear.

EXPERT

Employment or self-employment is a matter of fact. You can’t just choose. Even if he is an employee, HMRC may ask him to pay his tax and NI – and not his employer.

You can make matters much clearer if you have a written agreement – either an employment contract or a contract for self-employment services. In each case, if there is a dispute, HMRC will need evidence of how the work was actually performed. Without a written contract, HMRC will apply its guidelines to its understanding of the actual relationship. For guidelines see the download to this module.

Looking at Zak’s situation, it is not clear-cut. If he wants to argue he was an employee he will need to provide evidence. To see the implications of this, let’s continue with Zak’s story.

TEXT



Make sure you have an accurate contract and keep to it



Self-employment status check: see the download

(Action 2) ZAK:

It’s been a nightmare. I’ve got a letter from the tax people asking what I’ve been doing. They say I could have broken the law by not telling them about my income at the right time. And there can be tax, interest and penalties – even for tax returns I didn’t know I had to send in! I took it up with my old boss. I was never an employee, he said. What about the £50 a week, then? Insurance, training, admin - and cheap at the price, he told me. And to cap it all, he said that the business no longer existed. He’d shut it down. So where does that leave me?


Q: What should Zak do about replying to HMRC? a. Zak can deal with HMRC by letter telling them that he was an employee b. Zak needs specialist help to deal with the investigation.

(Answers) a) No. Employment tax investigation will need serious evidence. b) Yes. HMRC considers Zak has failed to register as self-employed.

EXPERT

HMRC will decide on Zak’s employment status according to tax law. The letter from HMRC indicates a tax investigation . HMRC are treating him as a self-employed person who has failed to notify his income. This means that Zak needs immediate professional advice. He could be facing significant penalties and a long list of questions. He will need to bring his affairs up to date. If he considers he was an employee he will need to provide detailed and specific information and evidence.

Even where it is decided that a worker is an employee, that is not the end of the problem, if tax is unpaid. The employee can be liable for the tax where HMRC considers that they colluded in being paid without tax deduction as an employee.

TEXT

 Is the worker’s position clear: check with contracts and agreements



If HMRC are investigating, specialist advice is needed



If collusion is suspected employee may have to pay, even if employer has not operated

PAYE properly

(Action 3) Zak

So without the paperwork I’m not going to be able to claim the benefits!


Ambiguity in work relationships can spell disaster. As a basic minimum, employees need a payslip showing gross pay, tax and National Insurance deductions. This should be supported by a P60 at the tax year-end, and a P45 if they leave a job. An employee is entitled to these. If they don’t get them, it can be difficult to prove they are employed. See the download for more information.


Edith came in to the ‘one stop shop’ for advice. Things are difficult. Actually it’s the housing problem that brings her through the door here; but before very long, it’s obvious that there’s a tax issue, too.

As in Zak’s case, one of the questions that’s being asked is – is this employment? Or is it self employment? What do you do if the reality of your work is a bit messy round the edges – doesn’t really fit those neat boxes? Let’s listen to Edith and find out.

(Action 4) EDITH:

Don’t get me wrong. I am working. I’ve got seven different jobs. Office cleaning for three different firms mainly, and occasionally for some others. Anything I can manage. Most of the places I clean are taking off 20% tax but two of them don’t – I’m very confused.

(Question break 1: EXPERT:

Q: Does working at a lot of jobs mean Edith is self-employed? a. As Edith works for so many different firms, she must be self employed. This means she can ask to be paid without deduction of tax.

b. Her employment status is not clear and her tax position needs to be looked at further.

(Answers) a) No. The number of jobs does not necessarily point to self-employment. It depends on a number of factors. b) Yes. Her tax position needs to be checked.

EXPERT:

Edith is in a difficult position. Office cleaners and agency workers should be employees – even if they have a number of jobs. Edith needs to find out why 2 of her jobs are not deducting tax. She needs to check with HMRC that she is on record for both jobs. Not having tax deducted could mean

PAYE is being handled incorrectly. But that does not make her self-employed for that job. See the download for more information on employed v. self-employed.

Life these days isn’t a world of nine-to-five jobs. Often like Edith, people juggle numerous jobs, but then also have some other sideline to earn some extra cash. Where does this leave them with tax?

Let’s hear some more of Edith’s story.

TEXT

 Employment status is a “fact” and you should have a clear written contract.



Office cleaners and agency workers should be employees



Check with HMRC that tax is deducted for employees


To top up my income I’m doing a market stall at weekends now. I doubt I’ve made £1,000 over the twelve months yet, though. So I haven’t been paying any National Insurance, or tax.

(Question break 2 EXPERT:

Q. Does Edith earn too little to register this activity as self employment? a.

Edith may need to register for self assessment despite being an employee. b.

She earns so little she doesn’t need to tell HMRC about the self-employed income

(Answers) a.

Yes. Edith may need to register for self-assessment. She needs specialist tax advice. b.

No. Edith needs to take professional tax advice urgently – or she could break the law.

EXPERT

In a complex situation like Edith’s it is important to take professional advice. Low income clients can ask TaxAid for help. Higher earners should ask an accountant or tax adviser. Edith’s market stall trade

is a self-employment and she needs to register. She is trading to make a profit, even if it’s small so far. Even if traders make less profit than the personal allowance they may need to register with

HMRC by 5 October following the end of the tax year in which they start. Failing to do this is a criminal offence.

Even if the business is making a loss, it may still be necessary to inform HMRC.

TEXT



Inform HMRC by 5 October of any start up of trade in the previous tax year.



Take professional advice at once; before you start if possible



Keep good records. It is essential that you can prove your income and business expenses


It turned out I could have been in big trouble because I needed to tell HMRC about the stuff I sell at the market. Can’t believe it, I mean I won’t owe any tax anyway, not on the amount I’m making.

So I have told HMRC and they’ve sent tax returns to do. They already tax my cleaning money so I don’t need to put that down.

Question break 3) EXPERT:

Q:What does Edith need to put on her tax return? a.

Edith only needs to include her self employed income from the stall in her tax return.

b.

All of Edith’s income for the year needs to be included in her tax return.

(Answers) a.

No. A tax return has to include all a person’s taxable income for the year. b.

Yes, this is correct.

EXPERT:

Self assessment tax returns are not just used to report a person’s self employment. As well as including her profits from her market stall, Edith will have to include all her employment income. She must also include the tax that she has already paid through PAYE. She must calculate her taxable profit from the stall, not just the money she takes. She should get specialist tax advice to help get this right. She will have to keep proper records to be able to work out her profits. Edith’s assumption that no tax will be due on the market stall profits may well be wrong. She also has her income from her cleaning work. If she has already used her tax-free personal allowance against that income, she will have tax to pay on the profits from the market stall.

TEXT



Self-assessment tax returns are not just used to report a person’s self employment



Include all employment income and include the tax already paid through PAYE



Calculate taxable profit taking into account all allowable expenses

(Action 7) Edith

Luckily I had some help with my tax returns and got it done early so now I can budget for the £200 I will owe in January.


Sadly, the tax system does not cope well with low-income employment and self employment.

Workers here are vulnerable and may be unaware of their employment status and the associated tax implications. They may need advice in order to manage their tax affairs. Knowing how and when to intervene can make all the difference. There is more information on the download for this module and on the website www.taxaid.org.uk

.

Thank you for joining us for this module. Do not forget to download the very useful supplementary material.

We look forward to seeing you again. Good bye

MODULE 7 – Tax Returns – when do you have to do one?


Under the self assessment tax regime, taxpayers have duties: to notify HMRC, to make returns and to pay tax. All of these have set deadlines. Missing them means penalties and interest charges. The most common group that find themselves in self assessment are self-employed taxpayers. But it is not only the self employed who may have to deal with self assessment.

In this module we are going to look at who must register for self assessment, when, how and why.

We will also think about alternatives to self assessment, and circumstances where it may not be necessary to register.

Let’s meet Róisín. Róisín originally came in for advice about working tax credits, but as we will see she also needed advice more generally about tax.



(Action 1) RÓISÍN:

I’d been employed by the same publisher for over ten years - as a picture researcher. It was a big shock when they said there would be redundancies last year. I didn’t expect it to be me! There’s some freelance work around, but basically I’m taking whatever comes up. Proof reading mostly. With the freelance picture research as well, that suits me.


Róisín became self employed in October 2011. With the change in her employment status what does

Róisín need to do? a.

Nothing, her former employer will let HMRC know. b.

Contact HMRC within three months of starting self employment? c.

Register as self-employed within 6 months of the end of the tax year?

(Answers) a.

No. Róisín’s former employer will only report about her earnings from when she was an employee. b.

No. This rule has changed. c.

Yes. Róisín must register within six months of the end of the tax year in which she started – so by 5 October 2012.

EXPERT:

The rule is that the self employed must register within six months of the end of the tax year in which they started – so for self employment starting in the tax year 2011-12, by 5 October 2012. TaxAid would always recommend that you notify soon after you start.

If the 5 October deadline has been missed penalties can be avoided provided a taxpayer pays any tax due and files their tax return on-line by the following 31 January. However, taxpayers still need to start to sort their affairs well before this date if they are going to be in a position to file their returns on time.

This is more apparent as we continue with Róisín’s story.

TEXT



The tax year runs from 6 April to 5 April the following year



Self employed must register within six months of the end of the tax year in which they started



For self employment starting in the tax year 2011-12, by 5 October 2012



If October deadline is missed, file and pay any tax due by following 31 January


Last week I was asked if I would like to get involved in a new research project for one of the publishing firms I freelance for. That will be great, but it means that I will be too busy to sort things out with the tax office. I can’t owe anything for last year, so it can only be a formality at the moment.

Anyway, you have ‘til the end of January, don’t you?


Q: Do you think Roisin is going to be at risk of penalties?

a.

As long as Róisín pays her tax by 31 January 2013, she will be in the clear. b.

The longer Róisín leaves things, the more difficult it will be to sort out.

(Answers) a.

No. Even if she managed to pay the tax by 31 January 2013, if she has not made her tax return on time she will still incur penalties. b.

Yes. The later Róisín leaves things the more chance she will fail to meet the deadline for filing her tax return. Beyond the 31 January deadline there are more penalties and interest.

EXPERT:

Penalties are due if the deadline for filing a tax return is missed. For

+2010/11 onwards, these are not reduced even when the returns show that there was no tax to pay, or the tax due was paid on time .

Allow plenty of time to sort out the steps to file your tax return as a Unique Tax Reference number

(UTR) will be needed prior. For deadlines and timescales see the download for this module.

TEXT



Deadline for tax year ended 5 April 2012 is 31 October 2012 for a paper return



Deadline for online filing is 31 January 2013



Register for self assessment (to get a UTR) by 5 October



Register (separately) if you want to file on-line



Allow at least 2 weeks to get the on-line filing set up


So, I realise that I need tell HMRC as soon as possible that I am self employed and keep a record of my business income and expenses.

The upside is that my friend says I won’t have to pay any National Insurance.


Is Róisín’s friend right? a.

Yes, Roisin will have no National Insurance to pay. b.

Róisín may have National Insurance to pay.

(Answers) a.

No. Normally Róisín will have to pay National Insurance though she may be exempt if she has low earnings. b.

Yes. Róisín will have to pay National Insurance unless she qualifies for the small earnings exception.

EXPERT :

Self employed taxpayers pay Class 2 NI contributions and possibly Class 4 as well. They may be eligible for the ‘Small Earnings Exception’ for class 2 National Insurance.

TEXT



The self employed may have to pay Class 2 and class 4 National Insurance

 Class 2 is £2.60 weekly and gives entitlement to some benefits



Class 4 contributions are due on profits over £7,605 in 2012/13



Deadline for claiming Small Earnings Exception for tax year 2011-12 is 31 January 2013.

(Action 4) RÓISÍN

Well that settles it. Even though I’m busy I obviously need to keep track of tax and get my

National insurance sorted out. Being prepared means that I won’t miss the deadlines..

PRESENTER (conclusion):

If taxpayers delay in telling HMRC that they are self employed they risk not being in a position to submit their returns on time: late returns mean penalties and interest. Class 2 National Insurance will be payable from the start of the self employment.

PRESENTER (intro):

It’s important to notify HMRC early on if you start to be self employed. But what if you receive other taxable income that has not been taxed at source? For example, rental income, taxable State benefits or investment income? Do you have to be in self assessment for these as well? Let’s meet Jon.

(Action 5) JON:

I was on Job Seekers Allowance for two months, before I got a job in June last year. That was a big relief as I had built up some debts. But someone said I needed to fill in a tax return as I had received

JSA. So I went to my local advice bureau.


Does Jon have to complete a tax return? a.

b.

Yes.He must complete a return as his taxable job seekers allowance is not taxed at source.

No. Jon’s tax should be sorted out through PAYE.

(Answers) a.

No. Jon would not need to register for self-assessment just because he had received JSA. . b.

Yes. The Job Centre will have issued a P45 when Jon stopped claiming. He should have given this to his new employer. Any tax adjustment should be dealt with through PAYE.

EXPERT:

Taxable benefits are usually below the tax-free personal allowance.

The usual way to deal with tax on benefits for anyone with a PAYE source of income, like an employment or an occupational or private pension, is for any tax due to be collected through the

PAYE system.

If it is not apparent that someone’s PAYE code has been adjusted to collect any tax due, then HMRC should be contacted to check they know about the untaxed benefit income.

TEXT



Where there is PAYE income and taxable benefit the total may be over the personal allowance



Normally tax on benefits is collected through an adjustment to the PAYE code on the main pension or employment income

(Action 6) JON:

I was still struggling with my debts, so my gran suggested I move in with her for a while and I rent out my flat. This was a great idea; my mortgage was almost covered by the rent, so, OK, I wasn’t making a profit but at least I had cut down on my living expenses.


Does Jon have to do a tax return as he is renting out his flat? a.

Jon is not making a profit from the rental so there is no need to tell HMRC. b.

c.

Jon must tell HMRC but he may not have to make a tax return.

Yes, Jon must make a tax return.

(Answers) a.

No. Jon may have to make a tax return. b.

c.

Yes, Jon must tell HMRC, although he may not have to do a tax return. .

No, Jon may have to make a tax return. It will depend on the taxable income and profit from his flat.

EXPERT:

You need to notify HMRC if you start to let out a property. You will also need to keep records. If your profit is below £2,500 you may not need to complete a self assessment tax return. But you still need to notify HMRC and pay tax on the profits. HMRC may collect the tax through your PAYE without a Self Assessment tax return.

You will need to fill in a tax return if: most of your income is taxed under PAYE; your profits are more than £2,500 or you have losses you want to claim. In looking at profits from rental income,

“breaking even” on cashflow does not mean there is no taxable profit. For example, the capital element of any mortgage payment is not tax deductible. Various other, sometimes complex, rules apply.

If you are renting out only one room in your home – these rules may not apply. The rent-a-room scheme has different rules, but means that up to £4,250 of income may be exempt from tax. See downloads for details.

TEXT



HMRC may need to be told about rental income, even if a tax return is not required



The capital element of mortgage or loan repayments is not tax deductible



Income on which additional tax is due, must be notified to HMRC

 Requirements to file tax returns related to rental income are on HMRC’s website

(Action 7) JON:

Although my situation was getting better, I was still being chased quite aggressively by some of my creditors, so my gran said she could lend me a little bit. She said she had her NHS pension so she didn’t need her savings at the moment. I got a real shock when she showed me her savings account at how much tax was taken off as I know she has only a small pension. I wondered if she should be completing a tax return to get a refund?


Should Jon’s gran be completing a tax return to get a refund? a.

b.

Pensioners should always do a tax return.

It depends on her income.

(Answers) a.

No. Some pensioners will need to do one. b.

Yes. Some pensioners will need to do one.

EXPERT:

Some pensioners will need to file a tax return, even if on low income. In most cases, if it is clear that pensioners are due a refund they should be able to get one through completing an R40, rather than being in the self-assessment system. Taxation of pensioners is covered in Module 4.

TEXT



Tax for pensioners is complicated and covered in Module 4



Avoid self assessment by asking HMRC for form R40 to reclaim tax on savings income Call

Tax Help for Older People for advice if in doubt 0845 601 3321



Check personal allowance for older taxpayers



Refunds might be due on tax paid on interest: complete HMRC form R40

(Action 8) JON

It’s obviously tricky for retired people to keep on top of the different bits of income coming in, particularly if they are close to the limit before tax is due. Luckily Tax Help for Older People is only a phone call away if Gran needs to check she’s getting it right.

PRESENTER;

Self assessment is a complicated system. Having to submit a tax return can now mean on-line filing, deadlines and penalties; and some of these penalties apply even if no tax is due. So it’s not a system to join unnecessarily. On the other hand, failing to join at the right time can be very expensive.

If HMRC have sent you a tax return, you must complete it. If you get a tax return, but don’t think you should be in Self Assessment, contact HMRC. If you receive taxable income which is not already taxed, tell HMRC – you may be able to pay the tax due while staying outside Self Assessment.

Thank you for joining us for this module. Do not forget to download the very useful supplementary material.

We look forward to seeing you again. Good bye

MODULE 8 – Tax Debt – Self-Assessment

(INTRO : PRESENTER:

The starting point these days to finding out what tax you owe is on-line. The information supplied on the paper Statement of Account is less informative, and is little more than a reminder of the next payment due. For taxpayers who are in debt, there is only a ‘brought forward’ total to cover all tax debt arrears. So if someone comes in waving a tax bill, the first step, before giving any advice, is going to be ‘get a detailed statement of account from HMRC’.

Take Lee. He has been in business for many years and now has a large tax bill.



(Action 1) LEE:

I’ve been in business over six years now. I deal in coins and medals. I started in October 2005, and for the first six months I didn’t make any money. But after that things improved and I have really made a go of it.

I filed returns for the first couple of years, but then I let things drift. Now I’ve had a real shock - there was a massive bill. I contacted HMRC for a detailed statement of account which showed they seem to think I made a load of money in 2008-09. Well, even in the better years I never made that much.

( QUESTION BREAK 1) , EXPERT:

{Picture of statement?}

On Lee’s detailed statement from HMRC, there is an amount for a ‘Determination’ of £2550 and two penalties of £100 for 2008/09. Can Lee challenge these amounts? a.

If an amount is on the statement it must be paid. b.

The amount of tax can be challenged.

(Answers)

a.

No. A Determination is an estimate by HMRC, so it might be possible to challenge this amount. Lee may not be able to successfully challenge the penalties. b.

Yes. This is correct. Lee may be able to challenge the tax bill, but he may not be able to successfully challenge the penalties

EXPERT:

If HMRC do not receive a tax return from a person registered for self assessment, they may issue an estimate of tax due – this is a Determination. This is what has happened to Lee as he did not submit a tax return for 2008-09.

HMRC can enforce this debt even though it is an estimate. The only way Lee can challenge the amount of tax is by submitting a tax return and replacing the estimate with the correct amount . There is a time limit for doing this. He will have to submit a return for 2008-09 by 31January 2013, that is, within three years of the filing date. In general, except in very limited circumstances, once this time limit has passed, the Determination will stand. The £100 penalties are late filing penalties. For treatment of these see the download for this module.

Let’s continue to see if we can help Lee further.

TEXT



Replace an estimate with the correct amount by submitting a return within time-limits.



For years earlier than 2010-11, late filing penalties will be cancelled if no tax due

(Action 2) LEE:

It was a big relief to hear that I might not owe all that money for 2008-09. The advisor helped me do my tax return for that year and I was surprised that I had made a small profit. But apparently this was below my tax-free amount, so no tax to pay for that year– great.

But there was another strange thing on HMRC’s detailed statement - the amount for 2009-10. It was as much as the 2008/09 bill! It was made up of two figures called ‘payments on account’.


Payments on account are half the previous year’s tax bill. a.

Payments on account are legally due, but can be changed. b.

Payments on account are fixed as they are based on the previous year’s tax bill.

(Answers)

EXPERT: a.

Yes. If profits are falling, it may be possible to reduce the payments on account. b.

No. Payments on account are based on last year’s tax bill, but they can be changed.

Taxpayers in self assessment will often have to make three payments towards their tax bill for a particular tax year. The first two of these are called Payments on Account, due on 31 January during the tax year and on 31 July after the tax year.

They are based on the tax assessed for the previous year. The final payment, the Balancing Payment, is due on the 31 January following the tax year. It is calculated as the total tax owing per the tax return, less the amounts paid ‘on account’. Interest is charged if any of these payments are late.

Payments on Account matter if profits are falling. If Lee had been up to date with his tax returns, payments on account would have been nil.

TEXT



The tax year runs from 6 th April to the following 5 th April

 Payments on Account are based on the previous year’s tax assessment



You can reduce your Payments on Account if your profits fall because these are part payments of tax due for the following year

(Action 3) LEE:

I filed all my returns. But, it turned out that I had messed up my stock figures. So the amounts for the last two returns are wrong! Next year I’m going to get an accountant. But is there anything I can do to sort it out now?


As Lee has submitted tax returns, the tax due is due and he can’t change it? a.

Tax due, based on the return, is fixed once the filing date has passed. b.

It may be possible to change the tax due, even after the filing date.

(Answers) a.

No. Lee might have made an error, and may be able to change the return. b.

Yes. There might be an error in the return and it may be possible to change it.

EXPERT:

Where a tax debt is based on a submitted tax return, it is still possible that it is incorrect. Tax is calculated from the figures in the return. HMRC deals with returns on a “process now, check later”

basis, so if there is an error in the return, however obvious, it may not have been picked up. So check the return is correct.

Common errors include figures in the wrong box, or failure to claim for tax already paid. Where the taxpayer finds an error in a return and it is within 12 months of the normal filing deadline, the return can be amended. You can still correct errors up to 4 years from the end of the tax year by making a claim. See further details in the download.

As Lee has made errors in the 2010/11 and 2011/12 returns, he can simply amend the figures. This is because he is still within 12 months of the filing date for the 2010/11 return – which was 31 January

2012.

TEXT

 HMRC deals with returns on a “process now, check later” basis and errors may not be picked up until later



Check for glaring errors: figures in the wrong box, the wrong period of trading



Amend errors within 12 months of filing deadline



Claim overpayment relief up to 4 years from the end of the tax year

(Action 4) LEE

I would have saved myself a lot of financial juggling if I had known that I could reduce the payments on account. And I would have paid a lot less interest if I had worked out my profits on time and kept up to date!


It is important to realise that the tax debt that HMRC is trying to collect might not be the correct amount. So before giving any advice on how to deal with the debt, it is vital to check how the debt is made up. To find out what is going on, it will normally be necessary to ask HMRC for a detailed statement of tax liabilities. This will show any estimated tax bills, penalties and interest. If there are tax returns outstanding, the bill is not going to be correct. Interest and penalties can be scaled down if the underlying tax bill is reduced.

Intro (PRESENTER)

Even when someone is up to date, payments on account can cause problems when income falls.

We will find out more about this in Tom’s story. He has come for help as he cannot pay his latest tax bill. Let’s hear what has happened to Tom.

(Action 5) TOM:

I set up as a potter three years ago and up until the middle of last year things had gone really well - I started selling at the country shows and then I got a few contracts with some shops. But last year orders dried up. I’ve always been good about my paper work and tax, but I couldn’t pay the tax bill last January – it was huge - and now I’ve just got another bill that was due this July.

I know the amounts are right. But what can I do?

(Question break 1) EXPERT :

What was included in Tom’s tax bill due on 31 January 2012? a.

This will be the amount of tax due for the tax year 2010-11. b.

This will be an amount still due for 2010-11 together with a payment towards the 2011-12 bill.

(Answers) a.

No, there are probably amounts relating to the next tax year as well. b.

Yes, this is correct, it will include a payment towards 2011-12

EXPERT:

As we learnt before when we looked at Lee’s case, the tax payment rules are not straightforward under self assessment. On 31 January 2012, Tom would have been due to pay the balance outstanding for the 2010-11 tax year and make a payment on account for 2011-12.

If Tom did his tax returns correctly, the only thing he may be able to do to reduce his debt is a claim to reduce the Payments on Account for 2011-12. These are based on the previous year’s tax return, so are likely to be too high if profits are falling.

If payments on account are reduced, it is important to do the tax return as soon as possible, so that the correct tax liability is known. This is because:



Interest will run from the due date if the payments on account were reduced too much



Reducing payments on account and failing to file a return by 31 January increases the risk of a determination

TEXT



Payments on Account are due:

January 2012

Balancing payment 10-11 &

1 st Payment on Account 11-12

July 2012

2 nd Payment on Account 11-12

January 2013

Balancing payment 11-12 &

1 st Payment on Account 12-13



On 31 January, Self Assessment taxpayers have to find money for previous year – and advanced payment for following year.



Where profits are falling consider a claim to reduce Payments on Account



If Payments on Account are reduced, prepare the tax return as soon as possible

(Action 6) TOM:

After getting some advice, I made a claim to reduce my Payments on Account for 2011-12. I was able to show my business profits have really gone down. But to be honest I am still struggling to pay the tax bills. I wonder if they might give me some time to pay?

( Question break 2) EXPERT:

Is it worth Tom asking HMRC to see if he can have time to pay? a.

Tom will be able to negotiate to pay the debt monthly at level he can afford. b.

Tom can ask for time to pay, but will normally only get up to 12 months to spread any payments. c.

Tom will have to pay the amount due immediately.

(Answers) a.

No. HMRC have limits on the period of time instalments can be spread which might prevent

Tom from negotiating a level of payment he can afford. b.

Yes, this is correct, it is usually set at 12 months. c.

No. It is usually possible to come to some agreement with HMRC to pay tax.

EXPERT:

Tom can contact HMRC to ask about paying his tax by instalments; this is a Time-to-Pay Agreement.

Although up to 12 months may be given to clear the debt, a shorter time scale is more normal. HMRC may agree longer in exceptional circumstances. Unfortunately, the limited time-scale means that it is not always possible to reach a Time to Pay Agreement. This will also depend on overall circumstances, such as assets. In case of temporary difficulty, such as where someone is out of work,

but expects to get work soon, HMRC may consider suspending collection for a short period. Coming to an unrealistic Time-to-Pay agreement can be disastrous. Court recovery or distraint are likely to follow.

Let’s see what Tom did.

TEXT



Time-to-pay agreements are usually for up to 12 months



In exceptional circumstances you might plead for a longer period to pay



Consider asking for suspension of collection for a short period of ‘temporary difficulty’

(Action 7) TOM:

I spoke to HMRC and they agreed that I could spread the debt over 12 months. I wasn’t really happy about this – I was going to struggle to meet the payments - and of course I was right. I stopped being able to pay and then HRMC really started getting heavy with me – I probably didn’t help by ignoring their letters.

They wanted me to clear all the rest of the debt straight away – well of course I couldn’t.

Then a big shock, the tax office threatened to come and take away my van. I mean how stupid is that?

– I am never going to be able to pay if I can’t run my business.

There must be something I can do!

( Question break 3 EXPERT:

What options are open to Tom now? a.

Should Tom demand that HMRC accept a new Time-to-Pay agreement? b.

Could Tom make a formal complaint? c.

Tom has reached crisis point and needs specialist advice

(Answers) a.

No. HMRC is under no obligation to make a new Time-to-Pay agreement. b.

No. So long as HMRC is working within its own guidelines, there would be no grounds for complaint. c.

Yes. There is a real risk that Tom will lose his business. He needs accurate and specialist advice .

EXPERT:

Once a Time-to-Pay agreement has been broken, it will prove very difficult to renegotiate Timeto-Pay. Very exceptionally HMRC may allow, a ‘second chance’, but usually they will require a

County Court Judgment to be in place first.

HMRC may take distraint action instead. This is enforcing their legal power to take possession of goods without a court order. This can be a very real threat to a business. HMRC may invite a final time-to-pay offer, just before carrying out distraint. They may suggest a specific figure, but the timescale is likely to be much shorter than 12 months. Vehicles, in particular, are very much at risk of distraint.

Unfortunately for Tom, HMRC is able to take vans and, in some cases, even the tools of the trade can be at risk. Basic household goods are protected.

In very exceptional circumstances, such as if the client has evidence of severe and on-going mental ill-health, and HMRC has not followed its own guidance on mental health, there may be more flexibility to deal with the debt.

TEXT



Breaking a time-to-pay agreement makes renegotiation of the debt difficult



Distraint could shut down the business



Basic tools of the trade can be at risk

(Action 8) TOM

I need to do everything to avoid distraint. It could destroy my business. I’m making a list of what I could sell quickly to raise some money. Perhaps if I can beg or borrow enough to pay half the money off now, HMRC may give me 6 months to pay the balance.


Tax is different. And HMRC is a very different type of creditor. The best way to think about

HMRC’s time to pay is that it’s a one-off, fixed term agreement. Not one to be stretched, renegotiated or adjusted. Applying commercial debt negotiation tactics will be of little use. HMRC works according to national policy – not just individual circumstances.

When thinking about arranging a time to pay agreement, it’s vital to evaluate the client’s situation realistically. Part of the agreement is nearly always that “new” tax will be paid on time.

Inappropriate time to pay, far from gaining time, is likely to reduce a taxpayer’s manoeuvring room – and it could have disastrous results.


MODULE 9 – Tax Debt part 2: unexpected bills


There have been very significant changes in tax debt recovery recently. Changes in the law and changes in policy. What this means for advisers is that more than ever, we need to pinpoint exactly what type of debt we are dealing with, and what stage of recovery the process has reached. This is necessary if we are to achieve a successful outcome.

Take Clive. Clive has been out of work for a year. He is now hoping to set up in business to get back to work. But now he has received an unexpected letter from HMRC.



(Action 1) CLIVE:

I started a car valeting business back in 2006. Sent in tax returns for a couple of years. But in 2008, I rented new premises. Business rocketed. I took over the forecourt and bought some equipment.

I had four or five part-time workers. The site lease was over £20,000 on its own.

But it wasn’t actually making any money, and there’s a loan from the bank. So after about 16 months

I packed it in. Now the tax people have sent me some papers. They want to take me to court for

£24,000 in back tax!

(Question Break 1) EXPERT:

Q. what should Clive do? a.

Clive should dispute the tax debt and go to court if necessary? b.

Clive should contact HMRC and find out which years the tax is owing for?

(Answers) a.

No. You should not “dispute” a tax debt, especially in court. b.

Yes. Clive should contact HMRC. The amount of a tax debt cannot be disputed in court.

EXPERT

Rather than disputing the tax debt, Clive should contact HMRC to find out how the debt is made up, if it contains estimated debts, which tax years are involved, and if there are any tax returns outstanding.

He may need tax advice to resolve the position.

TEXT



Firstly investigate whether the tax debt is correct



Have all tax returns been filed?



Does the demand include estimated figures?



Which tax years are involved?


When I asked HMRC about the debt, they said it went back three years! About a third of it’s interest and other charges. I got a detailed statement. The bill for 2009 looks like they’ve guessed. It’s a round sum. On the paper, it says ‘determination’.

I can’t sort it all out now. I’ve no records. I’ll just have to make an offer to the court. Try to compromise.

(Question break2) EXPERT

Q. What would you advise Clive to do? a.

Clive should make an offer of payment to the court. But he should dispute the solicitor’s costs and the estimated bill. b.

Clive should try to bring his affairs up to date with HMRC. HMRC may agree to settle for less than the amount shown on the court papers.

(Answers) a.

No. The Court is not the place to dispute costs whether estimated or not. b.

Yes. Getting up to date with his tax affairs and agreeing the actual amount owed is a priority.

EXPERT

The court demand may include amounts of tax that are provisional or estimated. These are legally due and enforceable, but HMRC will accept settlement at less than the full amount of a Court Judgment if it is later shown than not all the tax is owing.

If Clive is able to submit tax returns to bring his affairs up to date, this may reduce the amount of tax owed by replacing determinations and payments on account with actual figures. But Clive will only be able to do this if he is within the right time limits, normally 4 years. See the download for details.

Where there is a determination for a year which is now out of time, the taxpayer should not dispute the bill in Court. To do so could rule out the only possible challenge to an out of time determination – a procedure called Special Relief.

TEXT



Estimated debts can be included in the Court Judgment and will be legally due



Submitting Returns may reduce the amount owed by replacing the estimated debt with actual figures, even after a CCJ is issued



Time limits apply – there is only 3 years from the filing date to replace a

‘determination’ (an HMRC estimate)


I didn’t go to court. I obtained an adjournment and saw an accountant. He sent in all the tax returns they’d been waiting for. Four years of them. There was still tax to pay for the first year, but far less than their estimate. I was out of work last year, but they won’t cancel the penalties. Even though I owe no tax at all!


Q. Is Clive liable to pay these penalties? a.

Clive is still liable for last year’s late filing penalties, even though he does not owe any tax b.

Clive will not have to pay the late filing penalties as he owed nothing. He will have to pay the rest of the bill.

(Answers) a.

Yes. Clive is still liable for the penalties for late filing for 2010-11 even though he owes nothing. b.

No. The rules changed for 2010-11. So Clive is still liable for the penalties for late filing for

2010-11 even though he owes nothing.

EXPERT

The harsh penalties regime introduced in April 2011 means that for tax years 2010-11 onwards, even where no tax is owed, late filing penalties will stick. A penalty can be appealed on the grounds that there was a ‘reasonable excuse’ for late filing. In some cases, HMRC may agree to withdraw a tax return where one was unnecessary. But this is a complex area and Clive would need to take professional advice. In practice, HMRC’s debt recovery section, Debt Management and Banking, will not consider any time-to-pay on the remaining tax until all tax returns are filed.

TEXT



For tax years 2010-11 onwards, even where no tax is owed late filing penalties stick



In exceptional circumstances, there can be a reasonable excuse for late filing



If it appears that no tax return was needed for the year, HMRC may consider withdrawing the return. Professional advice should be sought first.

 Don’t get a tax return cancelled if a refund would be due

(Action 4) Clive:

It’s lucky I didn’t rush into Court, but it has shown that managing the paperwork is as important as doing the job!


Dealing with tax debt in the County Court is getting more expensive – and more complicated.

Disputing an out of time estimated tax debt in Court will rule out Special Relief as a possible solution.

Failing to submit returns within the time limits could mean paying far too much tax! In a change of policy, HMRC is adding in a figure for its own costs to County Court cases. All told, it is an area where ignorance can have disastrous results.


In the world of tax, time limits and deadlines are all-important. Time limits have been reduced by recent legislation. As time limits are reduced, estimated debts and payments on account will become fixed sooner. For ‘no contact’ cases, and those where the taxpayer has made no acceptable offer of payment to the court or to HMRC, all too soon the debt can arrive at the Enforcement and Insolvency

Service Office.

Let’s see what Steve’s story tells us.

(Action 5) STEVE:

I’d registered as self employed. Bought a van and it blew up. Never even got as far as taking one job on!

So when I saw an offer of work in New Zealand, I didn’t think twice. Went out for five years and got back in October 2011 and got a job straight away.

Now, of all things, I’ve got a bill. For £60,000! I’d think it was Monopoly if I hadn’t had a letter from the Enforcement and Insolvency Office. Says they’ll make me bankrupt if I don’t pay at once!


Q. Given this level of debt is bankruptcy Steve’s only option? a.

Steve’s best option is to go bankrupt as he has no means to pay. b.

Steve should not allow HMRC to enforce bankruptcy without exploring other options.

(Answers)

a.

No. Steve has been out of the country. This means that it is very likely that the debt is estimated. . He needs to check the details before making any decision. b.

Yes. As Steve has been out of the country, it is very likely that the debt is estimated.

EXPERT

Even at this stage in debt enforcement it is still important to ask “is the debt right?”. Delay is not an option. Seek specialist tax advice. See download to this module for background information.

TEXT

 Important to ask “is the debt right?”



Enforcement & Insolvency will expect immediate payment



May be some scope for making a deal regarding payment e.g. part payment and a few months time to pay



Delay is not an option

(Action 6 ) STEVE:

I had no choice but to get an accountant. I had no taxable income for anything but the first year. On his figures, I had no tax to pay. There were five years of tax returns to do. Got them in just after

Christmas 2011.

But HMRC won’t process the first two years. That could still leave me with a bill of over £9,000,

There’s a bill for 2006-07 – that’s estimated. And late filing penalties for 2005-06. Do I really have to pay all that – even though my tax returns show there’s no tax due?


Q. Does Steve have to pay this demand? a.

Steve may be able to change the debt, and HMRC may cancel the penalties as there would have been no tax to pay if the returns had been filed on time b.

As Steve was never actually self employed, HMRC will cancel the debt and the penalties.

(Answers) a.

Yes. Steve may be able to change the debt, using a route called Special Relief. HMRC will normally cancel the late filing penalties where out–of-time returns show no tax liability b.

No. Even though Steve never traded, HMRC will not automatically cancel the bill. Late filing penalties will usually be cancelled if the out of time returns show no tax liability.

EXPERT:

For tax years up to and including the year ended 5 April 2010, HMRC will normally cancel the late filing penalties where the returns, including those that are out of time, show no liability. But it is getting increasingly difficult to displace out-of-time estimated tax bills.

Let’s continue with Steve’s story.

TEXT



Determinations for a tax year can only be replaced by submitting a return within three years after the 31 January normal filing date for that tax year



Where no determination has been made in that tax year, the time limit to submit a return is four years from the end of the tax year



HMRC will normally cancel the late filing penalties where the returns, including those that are out of time, show no liability for years prior to April 2010

(Action 7) STEVE:

The adviser said HMRC should cancel the penalties for the two years as the returns showed I had no tax liability.

That leaves the estimated tax bill. I’ve got some advice on Special Relief. There are a lot of conditions.

But the fact that I didn’t tell HMRC I’d given up the self employment, and didn’t file my first tax return aren’t going to make it easy. It could be much harder to get the estimated bill cancelled.


Q. Will HMRC accept that Steve qualifies for Special Relief? a.

HMRC will agree Special Relief? b.

HMRC might agree Special Relief, but it is far from guaranteed?

(Answers) a.

No. There are strict conditions for getting Special Relief. Steve may not qualify. b.

Yes. Steve should apply for Special Relief, but the outcome is uncertain.

EXPERT:

Special Relief was introduced in April 2011. It replaced the concession Equitable Liability. HMRC will allow Special Relief if it is, in their view, “unconscionable” for the tax bill to stand. HMRC has issued comprehensive guidance on what this means. The relief will not normally be given where alternative routes were available to the taxpayer, and the taxpayer did not use them.

So, for example, HMRC expects people who register as self employed but never trade, to write and tell them. They would also expect self-employed taxpayers who stop trading to update HMRC with any new address. These are only a few of the conditions! So, Steve’s claim does not seem strong.

Steve will benefit from specialist tax advice in making a claim.

TEXT



Special Relief will not normally be given where alternative routes were available to the taxpayer, and the taxpayer did not use them



HMRC expects people who register as self employed but never trade, to write and tell them



HMRC has issued detailed guidance on conditions for making a claim



Special Relief will not be given if HMRC has taken Court proceedings to recover the debt, and the person was present or legally represented.

(Action 8) Steve

It seems like you can’t leave your tax behind just because you leave the country!

(Conclusion PRESENTER:

Tax debt recovery can be harsh. Anyone who is involved in the self assessment tax system needs to be aware of the rules. Otherwise they run the risk of a large estimated bill which can’t be changed – and that’s a heavy price to pay. For some people the only option left then – will be bankruptcy.


MODULE 10: Tax Debt – bankruptcy


We are going to look at Debt Relief Orders and Bankruptcy. The impact of Debt Relief Orders and

Bankruptcy on tax debt are very different. So we need to choose the route with care. We must watch out for hidden tax debts and be aware of the impact of timing.

How can we make these debt solutions as effective as possible in giving someone a new start?

Estelle thinks a Debt Relief Order may be the best way out. But will tax derail her plans?



(Action 1) ESTELLE

Money’s a problem. I was using my credit card to buy food and look after the kids. Now I’ve got a bill from HMRC.

My ex-partner was running a kitchen-ware shop. I think it was a tax dodge. He put me down as a partner in the business. I never had anything to do with it really.

First off he had an accountant, but then he did everything himself. It turns out he hasn’t paid the tax or sent in the paperwork for last year.

There’s £2,000 owing now – I can’t pay: and he’s not even in the country.

I saw a money adviser and they said I’d have to pay, even though it’s all his doing really. They said to get a Debt Relief Order. Could include up to £15,000 debt, they said. The sooner the better, I think.

(Question break 1EXPERT:

Q. What should Estelle do? a.

Should Estelle take tax advice before applying for a Debt Relief Order? b.

Should Estelle get a Debt Relief Order as soon as possible?

(Answers) a.

Yes. Debt Relief Orders only cover tax bills that have actually been issued. So Estelle needs to take tax advice to ensure the Debt Relief Order is effective. There could be hidden tax debts. b.

No. An immediate Debt Relief Order may not cover all Estelle’s tax liabilities.

EXPERT

The £2,000 may not be all the tax that is due for the kitchenware business. Tax returns are sent in after the end of the tax year. So there could be additional tax on the outstanding return; and tax for the next trading period. If this is not sorted out before the Debt Relief Order,

Estelle could have more tax to pay.

TEXT



Some tax debts are hidden



Submitting tax returns could crystalise the debts as well as reveal additional outstanding tax



Timing is important if we want to include as much tax debt as possible

(Action 2) ESTELLE:

I’ve got the partnership debt confirmed. But I’ve had some part-time jobs since last year when money was tight. The accountant said I’m paying the wrong tax on the jobs, and there could be more to pay.


Q. Will the DRO solve all Estelle’s tax debt problems? a.

If Estelle gets a Debt Relief Order, she may still be liable for underpaid PAYE b.

A Debt Relief Order would include all tax owing, including underpaid PAYE as an employee

(Answers) a.

Yes. Debt Relief Orders only include tax debts which have been issued and are collectable.

Underpaid PAYE for which Estelle has not yet had a bill may not be included. b.

No. Debt Relief Orders only covers debts included in the order –PAYE debts which exist, but which are not listed because HMRC has not sent out a bill, may not be included .

EXPERT

Bills for underpaid PAYE could arrive 12 to 18 months later. This might include, for example, underpaid tax due to wrong tax codes on second or multiple jobs. So Estelle needs to check her tax codes and sort out any underpaid PAYE before the Debt Relief Order.

TEXT



Underpaid tax may arise from wrong PAYE codes



This might not come to light for 12-18 months



Check PAYE tax codes for employment and pensions before the Debt Relief Order



Make sure debts for underpaid PAYE are listed and disclosed in the DRO

(Action 3) ESTELLE:

Now I know I’ve underpaid PAYE for last year at least I can list it and disclose it in the application for the Debt Relief Order. But my code is still wrong this year, so now they are going to want that back through my tax code!


Q. does the timing of a DRO make any difference?

a.

The timing of a Debt Relief Order makes no difference. b.

The timing of a Debt Relief Order can be very significant for tax.

(Answers) a.

No. The timing of a Debt Relief Order can be critical for tax. b.

Yes. The timing of a Debt Relief Order can be critical for tax, both for employees, the self employed and the previously self employed.

EXPERT

The key issue for advisers is spotting hidden tax debt. This can be the result of how the tax system collects provisional amounts of tax before the final liability is calculated. It is sensible to include as much tax debt as possible in a Debt Relief Order. But the time lag in finalising tax bills makes this difficult, particularly for people with PAYE underpayments. Making sure that tax returns are up to date for the self employed will crystallize the debt as far as possible.

TEXT

 DROs can include “identified” tax debts



The final liability for employees will normally not be calculated until HMRC makes the year end reconciliations

(Action 5) ESTELLE

The business debt is taken care of now. And I don’t have to worry about underpaid tax on my jobs. It looks like I’m going to get a new start.


People on low income are at high risk of hidden tax liabilities. These can arise because of things like multiple part time jobs, low-level self employment and ambiguous work relationships where people do not have clear contracts. Many people in these circumstances can’t afford an accountant, which can make life even more difficult.

Hidden tax liabilities can render Debt Relief Orders less effective. So it’s better to watch the timing and discover any hidden liability before a Debt Relief Order is made.

Intro PRESENTER:

Bankruptcy is sometimes billed as a remedy to wipe the slate clean. But how does it interact with tax?

It can be a very effective tax debt solution, taking in much more tax than a Debt Relief Order, but there are pitfalls, particularly for the self-employed.

(Action 6) ANGUS

At 62, I don’t really want to go bankrupt. But there’s £60,000 owing on credit cards. So what’s the option?

I had a few good years in business. Fleet of taxis and six drivers working for me. I suppose we didn’t cut back enough when the work tailed off. Bankruptcy looks like the answer. And then it wouldn’t matter that I haven’t got round to sorting out the tax. They haven’t asked and I haven’t paid.


Q. Will bankruptcy wipe the slate clean? a.

Angus should petition for his own bankruptcy as this would resolve the tax and credit card debts. b.

Angus may owe tax which will not be covered by the bankruptcy unless he sorts his tax affairs first.

(Answers) a.

No. His own petition for bankruptcymay not be accepted unless he brings his tax affairs up to date first. And it might not wipe the slate clean. b.

Yes. Even if he petitions for his own bankruptcy, Angus should bring his tax affairs up to date first

EXPERT

If you are considering bankruptcy for debt other than tax, it is vital that you should get the tax debt wrapped up at the same time. We would need to know more about Angus’ background before

advising further – if he has evaded tax by not notifying HMRC, this is a criminal matter. Fraudulent debt is not wiped out in bankruptcy.

TEXT



Tax debt should be included in bankruptcy petition



Hidden tax debt which is not disclosed could re-emerge later with added penalties and interest

(Action 7) ANGUS:

I know it sounds naïve now, but I didn’t see how I could survive and pay tax to start off with. About five years in all, the business lasted. Might have made £120,000 altogether. Maybe £150,000. I only scraped through that first year. Business picked up when I got a few more drivers and offered a fixed rate to the airport; but by then I was too busy to see to the tax. There was never any spare cash. And I can’t afford an accountant now, anyway.


Q What would you advise Angus to do? a.

Angus needs to tell HMRC about his income and submit tax returns before bankruptcy. Even then, he could be liable if there are errors or omissions from the return. b.

Angus does not need to tell HMRC about his income or submit returns. Bankruptcy will wipe out all his debts. c.

Angus should tell HMRC that he has been trading and submit tax returns. Any tax debts arising from these years will then be covered by the bankruptcy.

(Answers) a.

No. Once returns are submitted, all tax owing for these years should be covered, even if later on it is discovered that there were errors on the returns. b.

No. Bankruptcy will only include tax on trading income if this has been notified to

HMRC. c.

Yes. Once returns are submitted, all tax owing for these years should be covered, even if later on it is discovered that there were errors on the returns.

EXPERT

If Angus doesn’t notify HMRC of the trade, he could be personally liable for the tax owing, even after bankruptcy. Failing to notify a trade, or other untaxed source of income where tax is due, is tax evasion. This is a criminal offence and is therefore not covered by the bankruptcy. Tax returns are usually required in self-petition bankruptcies. HMRC may agree that tax returns are not needed when

HMRC makes the petition for bankruptcy.

TEXT



Tax returns are normally required in self-petition bankruptcies



Failure to notify a trade where tax is due is a criminal offence of tax evasion

(Action 8) ANGUS:

But I don’t want to lose the house. There is some equity in it. Maybe enough to pay the tax or fend off the credit card companies a bit longer. I don’t know.


Will HMRC accept a charge on the house? a.

Even at this stage, HMRC might accept a charge on the house rather than take bankruptcy proceedings, but it is unlikely in this case. b.

HMRC will never accept a charge as an alternative to bankruptcy. c.

Offering a voluntary charge will only be an option where the client has mental health problems.

(Answers) a.

Yes. In limited and exceptional circumstances, HMRC may accept a charge on property as an alternative to bankruptcy action.

b.

No. In limited and exceptional circumstances, HMRC may accept a charge on property as an alternative to bankruptcy action. c.

No. Mental health is a factor, but not the only factor. Where clients are elderly, and/or in ill health/terminally ill, this is an option that HMRC may consider. There is no absolute rule.

EXPERT

There is no absolute rule about taking a charge on property. But HMRC does not want to become a property owner. Where clients are elderly, and/or in ill health or terminally ill, this is an option that

HMRC may consider. Where there is risk of enforced bankruptcy, it is normally preferable to realise assets and avoid bankruptcy, where possible. Home owners may avoid substantial costs in bankruptcy if they decide to sell their house themselves, rather than the Official Receiver selling at a distressed price. Other options, like offering a solicitor’s letter guaranteeing that payment will be made out of the sale proceeds of a house could be considered in the short term. HMRC will not agree to write off a tax bill if there are assets such as a property, or if the individual is still working.

TEXT



TaxAid would normally advise home owners to take debt advice and explore all options



A distressed sale in bankruptcy of the home by the Trustee is usually a worse outcome than selling up themselves



HMRC will not agree to write off a tax bill if there are assets such as a property, or if the individual is still working

(Action 9) ANGUS

If HMRC won’t take a charge on the house, it might be better to sell it ourselves. Instead of having the bankruptcy people sell it for us.


Again and again we have seen that HMRC is no ordinary creditor. For some people, bankruptcy can mean a new start. But we need to be very cautious about tax debt and bankruptcy. Yes, HMRC may make a client bankrupt, but relying on HMRC to do this could be very unwise indeed. For one thing, there are no guarantees as regards timing!

The other thing to bear in mind is that bankruptcy may not be the only way out. If there are no assets, seeking remission early in appropriate cases may avoid the route to bankruptcy. HMRC may consider alternatives to bankruptcy in exceptional cases – there are details in the download


MODULE 1: paying the right amount of tax (intro) PRESENTER Len

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