The UK’s tax system is currently based on “Self-Assessment”.
People who have untaxed income (such as rents from property or income from self-employment), or who have high incomes generally, are sent an annual Self-Assessment Return for each tax year, shortly after the end of that year on 5 April.
If you are in this category, you will already be familiar with the way the system works, and the relevant deadlines for filing your return and paying the tax.
If you do not receive a Self-Assessment return or “notice to file” each April, however, and you have:
- Started a trade, such as property development
- Started receiving untaxed income, such as rental income from property, or
- Made a capital gain which is not exempt from CGT (and see the new regime for residential property disposals below)
– then it is your responsibility to notify HMRC and to request a Self-Assessment Return.
In most cases, the deadline for this is 5 October after the end of the tax year, so if (say) you first let a property during the year ending 5 April 2021, you must notify HMRC of this by 5 October 2021. Once in the “Self-Assessment” system, you are required to file the return (by 31 October after the end of the tax year if you file a paper return, and 31 January if you do it online) and pay any tax due by 31 January following the end of the tax year – so for 2020/21, the tax (and the return if filed online) will be due on 31 January 2022.
In future years, you will be required to make annual payments on account, on 31 July and on 31 January (again – which can make 31 January very expensive!) – your Self-Assessment Return will explain the details.
There are penalties for failing to notify HMRC of your new source of income, or your capital gains, by the 5 October deadline, so do not delay!
Introductory Example Illustrating Self-Assessment Timings on Commencement
Davina works (say) as an employed chartered surveyor, and already pays Income Tax through PAYE at the higher rate of 40%. In July 2020, she decided to undertake a project, to buy, develop and sell on a run-down property near where she lives. This is the first time that Davina has done something outside of her paid employment. As this new activity commenced in the 2020/21 tax year, she has until 5 October 2021 to notify HMRC.
Davina sold the developed property in March 2021, making a profit of £30,000. She decides that she has made a decent return on her investment of time and money, so she will carry on the property development activity. She notifies HMRC that she has a new chargeable income source in April 2021, and HMRC duly sends her a notice to file a 2020/21 tax return.
Davina has until 31 October 2021 to file her 2020/21 tax return on paper, or until 31 January 2022 to file online.
If we assume that PAYE has deducted the correct amount of tax from Davina’s employment income during the 2020/21 tax year, and requires no further adjustment, then Davina’s Self-Assessment Income Tax as a 40% taxpayer bill will be £12,000 (roughly: ignore self-employed NICs for simplicity).
Davina started the self-employed activity in July 2020, and made profits by 5 April 2021 of £30,000, but has not yet paid any Income Tax.
Davina decides to file her tax return online, which means that she will file her first tax return, and make her first payment of Income Tax through Self-Assessment, on or before 31 January 2022.
In her first year, she will have to pay the first £12,000 in full on 31 January, AND make her first 50% Payment on Account for the next tax year – 2021/22 – of £6,000. She will need to make this additional interim payment because she is continuing in self-employment beyond the initial project. (She can, however, apply to reduce her payment on account if she thinks her Self-Assessment tax bill will be lower in 2021/22 than in 2020/21. Note that, while Davina has the option to reduce the payment, she does NOT have to pay more than 50% of the previous year’s liability, if she thinks her profits may rise).
Davina will therefore have to pay £18,000 on 31 January 2022. This is a substantial amount, but note that Davina will have been in business for more than 18 months by this date.
She will also have to pay £6,000, (a further 50% of the previous year’s bill), on account of her anticipated 2021/22 Self-Assessment liability, by 31 July 2022 (again, Davina could reduce her interim payments for 2021/22 if she thought that her self-employed profits would fall, and her eventual tax bill would be lower than for 2020/21).
Let’s assume that Davina makes a net taxable profit of £30,000 in the 2021/22 tax year – the same as for 2020/21. She has therefore paid all of the tax due already, in her 2 interim payments of £6,000, being part of the £18,000 paid on 31 January 2022 and the payment of £6,000 on 31 July 2022.
Davina’s Balancing Payment for 2021/22 – due 31 January 2023 – will therefore be £nil. She will, however, have to make her first Payment on Account for 2022/23, which will be based on 50% of the previous year’s liability.
If Davina continues to make £30,000 taxable profits from self-employment annually then, all other things remaining equal, she will continue to owe (roughly) £12,000 through Self-Assessment, making payments of £6,000 each on 31 January and 31 July.
There is a substantial “catch-up charge” when the first Self-Assessment payment is required but, provided profits remain flat, the tax payments themselves will level off.
Given that Davina managed to make £30,000 in taxable profits in just 9 months in her first period self-employment, we might expect her to make higher profits in her first full year – and, potentially, to make higher profits as she gains experience and her self-employed business grows. Under the regime as it currently stands, there is an effective lag until 31 January the following calendar year, to return and pay for those higher profits, and start making correspondingly higher Payments on Account, etc., etc.
This is a simple example. Complicating factors include:
- National Insurance Contributions (as noted above)
- Choice of “year-end”: Davina has chosen to make her first self-employed accounts up to 31 March 2021. As she is trading, she could choose a different “year-end”, which could further retard when she has to recognise higher profits in later years – and pay for them. (Note that property rental businesses do not generally have this discretion).
- Use (or not) of Capital Allowances: this is a separate regime that gives tax relief for expenditure on qualifying capital assets – from office furniture to tools, to vans.
- Adoption of the traditional “accruals basis” of accounting when preparing the accounts, or “cash accounting” instead.
- Valuation of closing stocks and work-in-progress, depending on the accounting basis adopted.
New Regime for CGT Payments on Account for Residential Property Disposals
With the 2019 Finance Act, the government introduced a new regime for making CGT payments on account, for disposals of residential property. Taxpayers will have to notify HMRC and make a payment on account of the CGT estimated to be due, within 30 days of completion, for sales (or other chargeable disposals) of residential property taking place on or after 6 April 2020.
This measure is simply designed to improve the Crown’s cashflow, to the significant inconvenience of everybody else involved. This new regime is in addition to a taxpayer’s existing Self-Assessment obligations and such disposals will still need to be included in their Self-Assessment tax returns as well (although people will no longer have to enter the Self-Assessment regime just to file a “one-off” tax return to cover a capital gain on a residential property disposal).
Practically speaking, the vast majority will still have to estimate the CGT due for the purposes of the 30-day payment on account, and then re-calculate the actual liability once the tax year is complete and other income, gains and losses can be included and/or claimed as appropriate, as part of their ongoing Self-Assessment return cycle.
From the perspective of property businesses, note:
- A property developer selling a property that was acquired and developed for sale at a profit will not be affected because that is a trading asset – stock – rather than a fixed asset subject to a capital gain.
- UK-resident companies are unaffected by the new regime because they do not pay CGT through Self-Assessment, but Corporation Tax on capital gains instead.
- Where a property developer, etc., does sell a residential property either personally or out of the fixed/investment assets of his or her unincorporated business, (including partnerships), then the new regime will apply and a notification and provisional payment of CGT will be required – but only if CGT is actually expected to be due (so not if reliefs, etc., should be sufficient fully to offset the capital gain).
- For those individuals who are resident in the UK for tax purposes, the regime applies only to UK residential property on which CGT is estimated to be due, but for persons who are not resident in the UK for tax purposes, the regime extends to cover any disposals of any UK land or buildings, including commercial property, and regardless of whether or not tax is due on the disposal. It also applies in some cases even to disposals of shares in UK-resident companies that are effectively owned by overseas / non-resident parties, and are UK “property-rich” – the companies’ worth derives predominantly from UK land assets – in other words, it can catch scenarios where the shares that own UK land (or property) are sold or otherwise disposed of, not the UK land itself.
- In particular, note that a gift or similar transfer is still generally chargeable to CGT – HMRC still wants its slice even if you’re happy to forego your proceeds – unless it is a disposal to one’s spouse or civil partner, or a special category of asset (such as cars, or certain qualifying business asset, where the gain on the gift can be postponed if not extinguished).
Making Tax Digital (MTD) and Self Assessment
This is a new regime, set to revolutionise how businesses keep their financial records and “file their taxes”:
- Businesses will be obliged to keep their accounting records digitally, rather than on paper.
- They will also have to make online returns of income and expenditure on a quarterly basis.
Essentially, only certain “HMRC-approved” software packages may be used, since HMRC sets the criteria for compliance. (People can use spreadsheets as part of their accounting systems, but as those spreadsheets must be able to “talk” to HMRC’s software, their facility and flexibility is likely to be significantly curtailed).
In time, MTD will likely outgrow the Self-Assessment framework into which it now slots. HMRC certainly anticipate that it will generate significantly higher tax revenues as businesses are forced, in HMRC’s eyes, to become more compliant.
Timetable for Implementation
- Businesses (including landlords and property developers) with VAT-taxable turnovers in excess of the VAT registration threshold (currently £85,000) had to move to the new digital regime from April 2019. In other words, those businesses that have to be VAT-registered were obliged to operate MTD (but only for VAT purposes) from April 2019.
- From April 2022, all VAT-registered businesses – regardless of turnover – will be required to adopt MTD – digital record-keeping and online submission of returns, for VAT purposes.
- From April 2023, MTD for Income Tax Self-Assessment will apply to all unincorporated businesses – including property businesses.
- HMRC is understood to have pencilled in trials for MTD for Corporation Tax from April 2024, with mandatory adoption from April 2026.
Businesses with a turnover below £10,000 annually will not have to comply with MTD (unless they want to). But note that for individuals, this threshold applies to annual income aggregated across all their businesses, and the exception will therefore apply in very limited circumstances.
Basically, the only parties driving this forward are HMRC and bookkeeping software companies.
Businesses themselves, and their advisers, are hugely concerned about the additional cost and time involved. Property development businesses often do not need to register for VAT but sometimes they will do so voluntarily, so as to be able to reclaim VAT on their costs (although strictly, notification is mandatory even if taxable supplies are zerorated). Other property developers are obliged to register for VAT, depending on the nature of the work that they do. All but the smallest businesses will need to keep an eye on the MTD regime as the story unfolds – and will do well to ensure that their bookkeeping software, etc., is capable of being made MTD-compliant.
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