5 August 2020|Latest Posts, Legals & Compliance, Money
Ercan Demiralay, Partner at Wellers, discusses the pitfalls of last-minute tax returns and explores how efficient tax planning relies on advanced preparation.
Nobody likes filing tax returns – believe it or not, even accountants aren’t fans. It’s easy to forget all about the tax season once your tax return has been filed with HMRC, thinking it’s next year’s problem. However, it is better practice to prepare for your tax return early. Not only will this save the panic and frustration of rushing to make the January deadline, but it will also mean you can benefit from proper tax planning, which could potentially save you a lot of money.
Before we explore the benefits of getting ahead of the game, it’s important to understand the consequences of not giving your tax return the attention it deserves.
Paying more than needed
Like with anything, leaving your tax return until the last-minute means there isn’t enough time to properly prepare. Although you may have kept good receipts throughout the year, there are various tax reliefs available which could save you a significant amount of money, but your accountant may not have time to investigate these fully if they are close to the wire. For example, you could benefit from the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS), if you considered investing a proportion of your earnings.
If you have only just started to think about your tax return in January, it won’t leave you or your accountant much time, so your tax liability will need to be calculated quickly to ensure the deadline isn’t missed.
Although this sounds quite straightforward, it can become quite complicated if, for example, you were able to pay yourself more in dividends then in previous years, or if you sold an asset. In these instances, your tax liabilities will be increased and without thinking, you could have already spent the money.
These are two words that fill any business owner or accountant with dread. Each year HMRC carries out compliance checks on a proportion of all tax returns, the majority of these are random but filing a tax return that contains anomalies or errors will attract suspicion, which is more likely if it was put together quickly. Tax investigations don’t necessarily mean that you have done anything wrong, but you need to be aware of them because they can drag on for many years meaning you could incur significant costs.
Trying to get through to somebody at HMRC is difficult at the best of times. But trying to get hold of someone during the busiest time of the year, in January, is like finding a four leafed clover – rare. In fact, HMRC receives so many calls at the beginning of the year that it struggles to field them all. To save yourself a lot of time, and a headache, it’s much better to get any queries dealt with ahead of the January peak.
Filing a late tax return may not seem like a big deal, sure you’ll incur a fine but what’s the big deal? Although that is true, submitting a tax return late and then failing to pay the tax due in a timely manner can cause you future financial complications and impact your credit worthiness. Late payments won’t turn up on your credit report, but having to pay tax outside of your budget means you’ll have less money available to keep up with your other financial commitments, which could lead to missing payments that will show up on your credit record. If you then want to raise finance, either for personal or business use, you may find it tricky.
So, now we know the consequences of not diligently filing your tax return, let’s also explore the benefits, because there are many, including:
1. Positive cash flow
By keeping an eye on your tax liabilities throughout the year, you will be able to put aside the money each month in the lead up to payment on account. This will save the panic at the end of the year if you don’t have the money to pay the taxman. Equally, if the money is being set aside each month, you won’t even notice it not being in your account, which will also curb the need to make late payments.
As with anything, being organised and having your tax return completed ahead of the deadline allows time for it to be checked and checked again. This allows for any inaccuracies to be spotted and corrected, which could potentially save you from a tax investigation.
HMRC will refund any tax overpayments for the previous year, on tax returns that were filed on time, first. This allows you to benefit from the money, rather than the Government. But if left, the process will take longer, and you will have to wait to get your money back.
Although tax returns have to be submitted every year, the good news is that the deadline never changes. Make sure you use this time to talk to your accountant and ensure that you can benefit from efficient tax planning.