The IR35 risk may be real, but it’s HMRC self-assessment penalties which are biting now

It’s interesting to note that a leading insurer is claiming that self-assessors whose tax returns were late or sent off with errors last month will arouse HMRC’s suspicions, ‘making it more likely that such taxpayers will face an IR35 investigation.’ 

Well, what we as contractor accounting experts know, with much more certainty, is that the most common mistakes we see limited company directors make in their personal tax returns are wholly innocent, writes Joanne Harris, senior commercial manager at Nixon Williams.

It's not just your clients who 'reasonabe care' applies to

So missing off taxable income is something we see occasionally, but more often than not, it’s things like including expenses on the personal tax return when they should actually be claimed through the contractor’s limited company instead. Moreover, while the penalty regime for errors on your tax return can be spiteful, if you -- the contractor -- took ‘reasonable care,’ there will be no such penalty.

But by now, mid-February, you ought to have received your ‘automatic’ penalty from HMRC if your self-assessment return was received by the department after January 31st.

And if you did miss the deadline, you and your accountant should now be moving very quickly to get your forms completed and in to HMRC. Speed is of the utmost importance because if you don't file a return by the end of April (which is going to be an extraordinarily busy month for contractors), you may receive a further fine of £10 a day for the next 90 days until you do submit a return. This ratcheting up-style system could take the overall total of your HMRC fines to £1,000!

Why you need to file yesterday if you've been fined

Filing is also fundamental because you can’t appeal a penalty with the return still outstanding. If you do wish to appeal, remember that one of the age-old excuses that HMRC will not accept is that you relied on someone else to send your return and that person did not oblige.

In that instance, if the ‘someone else’ is your accountant, you still cannot appeal on the basis that they said they would file your return and failed to do so. However, remember you will have agreed to ‘terms of engagement’ with your accountant so firstly check these terms to see what’s covered and secondly, raise a complaint with your accountant to begin some recourse. If your accountant was at fault, they should agree to cover the cost of the penalty.

Is your personal tax return part of the package?

Yet please note, most contractor accountants would include a self-assessment tax return in their most popular accountancy package. But this will typically be for a “standard tax return” only. That means, if you have additional pages for rental property income, say, or overseas income, it is possible that this goes beyond what they mean by a ‘standard return.’ Another relevant consideration here (if you’re wondering why you’ve received a HMRC penalty even though your accountant said they would file for you), is: ‘Did you confirm the deadline for when you need to submit the information to the accountant that they require in order to complete the return in good time?’ Basically, if it was too close to the deadline, that may explain things – or it may explain why if they did file for you on time and without errors, next time, there may be an additional charge to expedite the additional work.

Either way, contractors are able to file their appeal against an HMRC penalty online through their government gateway account, or by submitting a SA370 form in the post. As stated earlier, such a penalty won’t be for error if you took ‘reasonable care.’ Of course, if you made a deliberate misstatement, and you then try to hide this from HMRC, the tax authority will be unforgiving and will try to charge up to 100% of the unpaid tax liability.

Errors, evasiveness and excuses

As you can see, the tax penalty applied for errors on your tax return depends very much on your behaviours, and whether HMRC prompted the disclosure or you discovered this yourself. And whether you contacted HMRC to correct things.

One error that can crop up and sting contractors relates to Student Loans. In fact, it is quite easy to forget about the impact that student loans can have on your SA tax liability. At 12% (above the threshold), in addition to your tax liability, such loans can add a significant chunk to your payments. So for all affected contractors, it is important to be aware of this and ensure that you are putting enough money aside each month to meet this obligation.

It is possibly someone hanging on to their student days who, in receipt of a penalty from HMRC, apparently tried to get out of it by claiming to tax officers: “I was up a mountain in Wales, and couldn’t find a post box or get an internet signal.” But equally contractors, HMRC won’t accept more ‘high-end’ excuses either, notably: “I’ve been cruising round the world in my yacht, and only picking up post when I’m on dry land.” Both of these howlers were disclosed by the department last moth as examples of what won’t get penalties lifted.

That said, there are some exceptional, less exotic circumstances that HMRC will listen to as a ‘reasonable excuse’ for why someone might have missed the self-assessment deadline, and for which you ought not be fined.

Death, and (company) taxes

These include things like the death of a partner or close relative; an unexpected hospital visit; reasons related to a personal disability, or if a flood, fire or burglary prevented someone from completing their return. In any case, the return or payment must still be sent as soon as possible after the reasonable excuse is resolved. Again, it is advisable to contact HMRC and make them aware of the circumstances.

Oh, and the above excuses will apply for any filing with HMRC, including both personal and corporate tax returns – affecting contractors potentially very soon, as PSC tax returns are due to be filed 12 months after the company year end.  And it these company tax returns, not their personal variants, alongside the company’s accounts, which tax experts have said represent the concluding jigsaw pieces which HMRC may put together to form an enquiry under IR35.

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Written by Joanne Harris

Joanne joined the Optionis Group in 2009 as an account manager, working closely with our agency partners. After developing an interest in the technical aspects of the role, she took the opportunity to train as a chartered accountant. She is now fully qualified, and a member of the Association of Chartered Certified Accountants (ACCA).
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