Mark McLaughlin CTA (Fellow) ATT TEP, consultant to TaxDebts, offers some practical advice to taxpayers with tax arrears.
Tax arrears are part of a larger debt problem in the UK. With many banks, credit card companies and others offering larger overdrafts and extended credit facilities to more people than ever, it is perhaps not difficult to see why. The old adage that “prevention is better than cure” has never been truer than in the context of tax debt control. Here are 10 tips for taxpayers to avoid owing arrears to the tax man.
1. Don’t ignore the problem
Spiralling tax debts can have a paralysing effect on some individuals. It may be tempting to ignore the problem and hope that it goes away! Of course, life is rarely that simple. Tax arrears can quickly escalate to the point where they become unmanageable. Don’t let this happen to you.
2. Register for tax
Many people, such as the newly self-employed or those in receipt of rental income from a second property, are aware of the need to register with HM Revenue & Customs, yet fail to do so. Some consider that by delaying telling the Revenue, they can defer their tax bills – maybe indefinitely! However, failing to disclose taxable income can result in penalties as well as interest and surcharges, and even prosecution in more serious cases. These problems can be easily avoided by notifying the Revenue when you need to.
3. …and on time!
Unfortunately, time and the tax man (as a rule) wait for nobody! For example, there is a general time limit of six months after the end of the tax year to notify the Revenue about new income or capital gains. For the newly self-employed, there is also a three-month time limit from commencing business to register. There are automatic penalties for taxpayers who notify late.
4. Get up-to-date
If you receive a tax return from the tax man, deal with it on time. Apart from imposing interest, penalties and surcharges for late filing, the Revenue can also decide how much tax an individual should pay for a tax year. This ‘determination’ of tax can normally only be overturned by submitting a tax return to the Revenue for that year. In addition, if there is tax outstanding for earlier years, the Revenue will not generally consider allowing time to pay unless all outstanding tax returns have been submitted within an agreed time frame.
5. …and stay up to date!
It is probably easier to prepare one tax return at a time, than to deal with a number of returns some months or years later. The Revenue will expect taxpayers who have asked for time to pay outstanding liabilities to stay up-to-date with tax returns and payments. Otherwise, any previous payment arrangements may be withdrawn. The Revenue are less likely to allow ‘repeat offenders’ time to pay, and it would probably be unwise to rely on their ongoing generosity!
6. Check your tax bill
The tax man might be asking for money, but that doesn’t necessarily mean that your bill is correct! Always check Revenue calculations and statements of account against your tax returns and payments. For example, penalties are sometimes incorrect, and may need to be reduced because the tax bill is less than the penalty. Revenue statements of account can often seem confusing so don’t be afraid to query them if necessary.
7. Put money aside for the tax bill
This may be stating the obvious! Unfortunately, some people are too tempted to spend all the money they make, plus a little bit more besides. However, opening a separate ‘tax account’ with a bank or building society and saving on a regular basis should help ease the pain of your tax bill! For example, individuals with ‘buy-to-let’ properties will often be able to estimate their rental profits, and put aside a percentage of that income to pay any tax on that income. Self-employed individuals should also remember to pay any flat-rate Class 2 National Insurance contributions due (less than a few pounds a week!). If you have a professional adviser, they should be able to give you some indication how much you will need to save.
8. Get help!
Preparing tax returns and managing tax payments can be a daunting experience – even for some professionals! Sometimes taxpayers are reluctant to seek expert help because they are worried how much it will cost in professional fees. However, saving fees is often a false economy, because the cost of ‘getting it wrong’ can involve additional tax, interest, and penalties or surcharges. Many professional firms offer peace of mind by providing a fixed fee tax return service. For those taxpayers who genuinely cannot afford professional help, the UK charity TaxAid offers free tax advice on an independent and confidential basis (visit www.taxaid.org.uk).
9. Can’t pay? Get in touch!
Taxpayers who find that they are genuinely unable to pay their tax bill when it falls due should not wait for the Revenue to take action to collect the debt. It will normally be better to confront the issue beforehand. For example, if the Revenue is contacted and time to pay is successfully negotiated a sufficient time before surcharges are imposed (usually on 28 February after the tax year in question), any surcharges can be suspended on the tax paid late. The Revenue are likely to be more receptive and sympathetic towards temporary cash flow difficulties if the taxpayer tries to resolve the problem at an early stage. Of course, some taxpayers may feel intimidated dealing directly with the Revenue, or lack confidence in their negotiating skills! If so, seek help from professionals with experience in this area, as Revenue collection staff includes trained telephone negotiators.
10. Remember…you’re not alone!
Tax arrears are nothing new. Many taxpayers are in the same boat. Surfing the Internet will reveal plenty of helpful advice for those with tax debts. For example, in addition to the TaxAid website mentioned earlier, there is useful information on the Revenue’s own website (www.hmrc.gov.uk), guidance for individuals on low incomes (www.litrg.org.uk) and also on tax debts in general through specialist websites such as Tax Debts (www.taxdebts.co.uk). Learning more about tax arrears and how to deal with them can help to overcome some of the fear and anxiety from facing the unknown.
Following the above tips should help to ensure that paying your tax bill is as painless as it can be!