A gift from the taxman
As traders struggle to come to terms with the new self-assessment tax rules, there is good news for those who began a business before5 April 1994. The Inland Revenue will tax only half the profits for the year ending 31 March 1996 and for the current financial year.
To get through the difficult transitional period from the ending of the present tax system to the start of the new one, the taxman plans to average out the profits made during the two years and then levy tax on just 50%.
For example, if a restaurant owner made a profit of £25,000 in the year to 31 March 1996 and £35,000 in the year ending 31 March 1997 - a total of £60,000 - the assessment will be on just £30,000.
Where is the catch? There is no catch. In fact, as the Institute of Chartered Accountants has suggested businesses should try, within reason, to make as much profit as possible during this period.
If profit is £5,000 above normal, only half this amount will incur tax. So that is a good reason for pulling out all the stops in the coming months.
This year's tax return, which you will have recently received, states that accounts are not needed by the Revenue at present as it will be seeking these details at the end of the next financial year.
Accounts should still be prepared, however, and should not be put off until Christmas. At the very least, your accountant will need them, because as well as the tax benefits already mentioned, the transitional period may offer other advantages about which you will need to get professional advice. This is definitely not a do-it-yourself job.
Keeping records
It is now a requirement to save and keep ready for inspection all paperwork about sales and purchases for five years. The records to be kept include details of buying and selling of assets, payments to staff and any deductions, and end-of-year stocktaking.
The Revenue's decision not to seek your accounts does not mean you will escape a demand for tax this year. On 1 November, there will be a "charge" for the same amount of tax as you paid for the previous year. This will be payable in two instalments.
Self-assessment begins formally on 6 April 1997, when you will receive a new-style form. This must be completed in full, as it will no longer be acceptable to make entries such as "see accounts" or "as per schedule to follow". Figures will have to be given for every item. Either the Revenue calculates your tax-liability or you can do it yourself.
The completed return must be sent back by 30 September if the Revenue is to do the calculations, and by 31 January if you decide to do the work yourself. As you might expect, there will be automatic penalties for late returns.
Investigations
So how will the Revenue check whether you have made a mistake or are trying to pull the wool over its eyes? All returns will be subjected to a "process now, check later" sequence, which is a fundamental change from the way the Revenue works at present. Staff will correct any obvious errors in the return before entering the information on the computer.
The Revenue will then go over returns in more detail. For example, if the gross profit rate at the time appears to be very low, the inspector might consider the return worth investigating. There will also be random checks - the Revenue may select the accounts of any trader. Enquiries may range from a simple factual question about a single figure to in-depth probing to test the return and its underlying records as a whole.
If enquiries show that extra tax is due, the Revenue will demand this together with interest from the date it should have been paid, as at present. If no enquiries are made within the 12 months allowed, the return becomes final except where fraud, negligence or failure to disclose information is suspected.
Under the new system, you will have the right to amend a return within a year of the fixed filing date. Beyond this period, you can still make an error or mistake claim.
