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How to avoid fines & penalties from HMRC

If you submit your self-assessment tax return late, fail to pay any tax you owe on time, or make errors in your submission, you could find yourself liable to a wide range of HMRC penalties.

Here we look at what happens if you are penalised, and provide some easy steps to take to ensure you keep on the right side of the taxman.

Of all the taxes contractors are responsible for paying – Corporation Tax, VAT, PAYE and National Insurance, and Self-Assessment – it is the personal tax return which results in the majority of penalties.

Failure to submit your SA return on time

You will face an immediate penalty of £100 if you miss the 31st January deadline, even if you don’t owe any tax or have paid all your dues. Fines steadily mount up for as long as the return remains outstanding, and any taxes remain unpaid.

“If you leave it more than 3 months to pay then HMRC can start levying additional penalties which start at £10 per day.”

Failure to pay any taxes owed on time

You’ll also be faced with additional fines – starting with 5% of the total tax due if you’re 30 days late.

After 6 and 12 months, additional 5% fines are applied, in addition to the fines imposed previously.

You will also have to pay interest (at a current rate of 3%) on any overdue taxes, so clearly it is in your best interests to make sure you meet the statutory deadline.

Mitigating circumstances

The majority of taxpayers who end up with a SA penalty have only themselves to blame.

However, if you’ve missed a SA deadline for a genuinely good reason – you may be able to get a penalty overturned, but you’ll need a good excuse.

Steps to avoid FINES & PENALTIES

  1. Make a note of the deadlines in the first place. You must submit your tax return by the 31st January following the tax year in question. This is also the deadline by which any tax liabilities must reach HMRC, i.e. the funds must be in the HMRC bank account by close of play.
  2. Keep accurate records during the year, and don’t leave things to the last minute. Paperwork to gather includes; your P60, P11D, bank statements, details of child benefits received, money received from extra business activities (e.g. selling items on eBay), and income from investments and property.
  3. Take great care including all sources of income received during the tax year, as you could face further measures if errors are found within your submission.
  4. Ask your accountant if you’re unsure what you need to include on the return.
  5. Don’t forget that you are ultimately responsible for submitting your SATR on time, not your accountant, so keep tabs on the progress of your return if you aren’t submitting it personally.

Further Information please visit the website https://www.gov.uk/self-assessment-tax-returns/penalties

Tax effects on property sector

  • Allowable finance costs claims reducing 25% every year cumulative from 6th April 2017 to 100% from 6th April 2020.
  • The tax relief on mortgage interest set at 20% even though you are a higher rate taxpayer.
  • Removal of the 10% wear and tear allowance

Landlords actions and challenges

Landlords will pay more taxes on their property portfolio due to recent changes and moving their properties over limited companies to save taxes but facing the challenges of refinancing and paying CGT and SDLT during the transition process.

It is possible to avoid taxes provided you meet with the conditions and take advantage of reliefs available for CGT and SDLT. In most of cases CGT is avoidable however with SDLT, there are lot of considerations you need to look at that depend on individual case bases and the nature of formation of partnership.

CGT

 
Properties transfer over limited companies are subject to CGT. If you can provide the proof of working with/for your properties, then you may be allowed to incorporate your property business without having to pay CGT.

SDLT

You don’t have to pay SDLT when you transfer property or land to another person or limited company provided there is no chargeable consideration (or less that £40,000). However, when you transfer a property to a connected party (wife / husband / kids) or linked transactions, then SDLT will be based on market value of the property at the time of transfer. SDLT may be avoided provided you have genuine business partnership and not just to avoid taxes. The SDLT treatment of partnerships is a very complicated/ unsatisfactory area, which requires careful considerations as anti-avoidance rules are in place.

Mortgage

You may need to inform your mortgage company if you transfer your properties to a partnership/company and mortgage costs are higher for properties in an incorporated business. You also need to consider the admin fee and financial evaluation fee when doing so.

Summary

All the above points are explained so you know from tax year 2017/18 you have to pay higher income taxes due to 25% reductions every year of allowable finance costs. Also you may need to take necessary steps now to structure your portfolio so you can avoid or pay less CGT and SDLT.

For Clients

We can only advise our clients choosing the route of transferring their ownership over incorporated business after assessing their income and expenses over the period of next 3 years.

We provide two separate calculations and analysis based on these calculations, your future tax bill breakdown of up to 3 years under both scenarios (personal ownership and incorporated business). From the analysis, you will be able to decide of how to structure your property portfolio and under which structure you can save more taxes in future.

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