Those rushing to submit tax returns must beware the tax return traps

There is an automatic penalty of £100 for late self assessment filings, but the penalties for inaccuracies can be much higher. A recent report from the Committee of Public Accounts has highlighted that HMRC is failing to provide the level of support taxpayers need and this may impact the level of tax collected. In the absence of adequate support, innocent mistakes seem inevitable for those not represented by a tax professional.

Some of the common traps for taxpayers to be wary of include:

1. Investments in certain overseas funds with an HMRC election in place for investors to be taxed on their share of income as it arises rather than when it is paid. This secures the lower capital gains tax rate on gains arising on disposal (up to 20% currently) rather than income tax rates (up to 45%) but investors must declare their share of income received by the fund (known as excess reportable income – ‘ERI’) as it arises, even if it is not distributed to them. Not all investment brokers have provided this information in recent years, resulting in taxpayers having to correct historic tax returns when the oversight has been discovered, resulting in late payment interest and sometimes penalties.
2. Check that all pension, employment income and bank interest has been declared correctly. HMRC will often already hold these details so if the numbers do not match up then it could potentially result in an enquiry. A common mistake is to enter net figures rather than gross figures on a return, leading to a potential underpayment of tax.
3. Taxpayers who have claimed the remittance basis of taxation are only taxed on foreign source income and gains if they are remitted to the UK. Such taxpayers should be mindful of reviewing their remittances of foreign income as some are not always obvious. For example, remittances include using untaxed overseas income or gains to settle a UK credit card bill or buy a plane ticket to the UK.
4. If a UK resident taxpayer has an interest in an overseas company or trust, income received and/or gains realised by the overseas entity may be automatically taxable on them in the UK.
5. Taxes paid overseas can usually be offset against the UK tax liability arising on the same income and gains. However, taxpayers should be aware that restrictions may apply to the amount of overseas taxes that may be credited against the UK tax liability.
6. Generally, all transactions in cryptoassets will create a taxable event which may need to be reported to HMRC, sometimes even when no taxable profit has arisen. In addition, it is commonly assumed profits from cryptoassets will fall within the capital gains tax annual exemption, but they may in some instances be subject to income tax, rather than capital gains tax.
7. Most coronavirus support scheme payments and grants are taxable and will need to be declared. HMRC introduced specific boxes in tax returns for the inclusion of such payments and the absence of these figures, or inclusion in the wrong section, may prompt an HMRC check.
8. Some taxpayers may omit interest and dividend income on the basis that the income falls within the personal savings or dividend allowance and will therefore not directly incur any income tax. However, despite the fact that such income may fall within an allowance and suffer no direct income tax, this income should still be reported as it still counts towards a taxpayer’s total taxable income.
   
   Determining a taxpayer’s total taxable income is important for several reasons as, among other things, it may impact a taxpayer’s:
   • marginal rate of tax on other income;
   • entitlement to benefits and tax allowances, including the married couple’s allowance;
   • amount of high income child benefit charge; and
   • entitlement to allowances such as the personal allowance and personal savings allowance.
9. The high income child benefit charge (HICBC) is often overlooked as it may be incurred by a taxpayer even when they are not directly in receipt of child benefit. The charge, which is essentially a clawback of child benefit received, applies where an individual is in receipt of child benefit and they or their partner have an adjusted net income in excess of £50,000. The charge is assessed on the higher earner, where the recipient is in a relationship, and can only be assessed by filing a self assessment tax return. This can create difficulties where two taxpayers in a relationship do not have joint finances and are not aware of the other’s earnings or benefits received. Additionally, it can cause an administrative headache when two partners have similar or fluctuating earnings as the charge may be assessed on a different partner each year.

In overview, more haste and less speed should be the taxpayer motto and it is important to review all financial documents carefully to ensure accurate reporting and avoid being a target of HMRC’s attempts to close the tax gap.