Every January, millions of people can be found stressing over their self-assessment tax forms, many of which fear that the smallest error can result in serious trouble with Her Majesty’s Revenue & Customs.
Filing online is an ideal way of avoiding common errors, because the calculations are automatically performed and help is available with the push of a button. However, lack of organisation, carelessness, and lack of knowledge can still result in serious errors that may raise a red flag to HMRC’s determined auditors. Let’s examine some of the most common errors that may result in an auditor knocking on your door.
It may be tempting to overstate the amount you have spent on computers, printers, photocopying equipment, and other office supplies throughout the year in an attempt to lower your tax bill. However, according to the taxman, every tax return may be subjected to a detailed inquiry, in which case any inaccuracies will be easily spotted.
If you fluff up your business spending, you run the risk of being audited by the HMRC and being considered a tax evader. If this were to happen, you would have to pay back all of the money you saved as well as pay a hefty penalty. Today, HMRC agents are able to visit businesses and verify any tax records.
If you have recently begun renting out an income property, such as a buy-to-let property, and the tenant pays you cash, you may be under the misconception that there is no way to track this income and be tempted not to report it.
Unfortunately, the HMRC’s tax evasion hotline receives hundreds of calls each week, and it’s agents often patrol online sites and newspapers to determine who should be reporting income from rental buy-to-let properties.
If you take to eBay or other venues to sell items for a profit and fail to report this income, you may be surprised by the resources at the HMRC’s disposal. More often than not, it knows about selling activity, especially sales that take place online.
If you simply sell extra household items to make room in your attic, you will not be required to pay a tax on the sales. However, if you regularly buy and sell items, the HMRC considers this as a form of trading, and it must be declared just like any other type of trading venture. Be aware that the HMRC is particularly aware of eBay and online selling activity. In fact, it has even produced a guide for online sellers.
Thousands of people knowingly or unknowingly put in the wrong tax code each tax season, which sometimes results in them paying less than they should. In some cases, people have received thousands of pounds in refunds simply for entering in the wrong code.
Your tax code is typically a three-digit number followed by an L and can be located on your pay slip. Enter this number carefully, because a wrong number can easily send a red flag to the HMRC’s eager auditors.
Another common error people find themselves making is entering in the gross interest amount instead of the after tax net amount that the form is asking for. For instance, you must put the net amount plus the subtracted interest in box 1 of page TR 3. Some account statements will already provide this figure, but others will simply show the gross plus the subtracted interest.
Many people are also tempted to overstate their donations in the “gift aid payments” section in an attempt reclaim a greater basic rate tax on their gifts. For instance, a £100 gift aid donation is worth £125 to the charity, allowing you to reclaim £25 if you pay the standard 40 percent tax rate. If you pay a 50 percent tax rate, you would receive £37.50 back.
When you reach the gift aid section, simply enter the actual amounts that you gave and do not figure in the additional tax relief you believe the charity will receive. This will keep you all square with the HMRC and keep its auditors at bay.
If you make an honest error, don’t worry too much, because the government makes mistakes as well. In fact, the recent PAYE tax errors have led to the need for 1.5 million taxpayers to repay an average amount of £1,400. The errors were discovered by the Treasury after they trawled the way that the HMRC was calculating the PAYE tax. Thanks to the error, the entire system will likely receive an overhaul.
Doing your taxes can be a stressful event, and errors are easy to make. However, by being forthright, honest, and taking your time, these errors can easily be avoided and you can take pleasure in knowing that the taxman will not be knocking on your door any time soon.