The witching hour approaches for those filing tax returns

FOR many people, October will be a month for hunting high and low for the information needed to complete their 2007-8 tax returns. Under new HM Revenue & Customs (HMRC) rules, paper-based tax returns need to be filed by 31 October – a whole three months earlier than in previous years. If you want HMRC to calculate your tax liability for you, again you must file your tax return by 31 October.

For those who are able to file electronically, the time limit for submission remains until 31 January 2009, although you should be aware that you will need to register for on-line filing through the Government Gateway, which can take a few days to set up.

Here are some key action points for you to take on board:

1 INTEREST, SURCHARGES AND PENALTIES

HMRC has considerable powers to control compliance and ensure the smooth running of the self-assessment tax system.

2 INTEREST PROVISIONS

The ability to charge interest on late-paid tax provides a powerful incentive for people to pay their tax on time. If tax is paid even a day late, interest will be charged automatically until the tax is paid. HMRC changes the interest rate on late-paid tax as and when the base rate changes.

3 SURCHARGES

Surcharges act alongside interest charges and represent a penalty on late-paid tax. Usually, taxpayers are required to pay any outstanding tax for a year by 31 January following the end of the tax year. If the payment is not made by 1 March, a 5 per cent surcharge on the unpaid tax is charged automatically. If the tax remains unpaid for more than six months, a further 5 per cent surcharge is levied.

4 PENALTIES

Significant changes have been introduced with regard to the penalties that HMRC can charge, which are now behaviour related. Where a person does not tell HMRC in time that they have tax to pay, a rigid system of penalties has been put in place. For a failure that is deliberate and concealed, the penalty is 100 per cent of the tax not paid by 31 January after the end of the year. If the failure is deliberate but not concealed the penalty will be 70 per cent of the tax not paid by 31 January after the end of the tax year.

Whilst the penalties for late submission of the return itself remain (£100 if not filed on time and a further £100 if six months late), new rules are introduced where the return submitted is incorrect. In these cases, penalties can be charged on a sliding scale depending on seriousness of inaccuracies. For instance, careless errors are deemed to be those where the taxpayer has shown a failure to take reasonable care and can result in a penalty of 30 per cent of the potentially lost tax at stake. HMRC can suspend collection of a penalty with strict conditions for up to two years. Similarly, deliberate but not concealed inaccuracies may include not reporting all income in your return and can result in a penalty of 70 per cent of the potential lost tax while deliberate and concealed inaccuracies would incur a charge of 100 per cent of the potential lost tax.

All penalties may be reduced where the taxpayer makes a disclosure, which assists HMRC in quantifying any inaccuracy in a tax return.

In cases where inaccurate returns are submitted as a consequence of innocent errors HMRC has indicated that it will not charge penalties.

All this means that, more than ever before, those filing tax returns need to be mindful of the new dates for submitting their tax returns, pay the tax they owe on time and be aware of the consequences if their returns are incorrect.

• Peter Young is director of tax at Johnston Carmichael