Income Tax Self- Assessment Lifecycle SA Customers and ...

Security Marking: Official | May 2016 | 1

Income Tax Self-

Assessment Lifecycle

SA Customers and

their Obligations

Principles

ITSA Lifecycle SA Customers and their Obligations


Contents

Page

Introduction 3

Learning outcomes and study objectives 3

Study advice 4

1.1 SA Customers 4

1.1.1 How customers register for SA 7

1.2 Notifying Chargeability 7

1.2.1 Obligation to notify chargeability 9

1.2.2 Class 2 National Insurance Contributions (NIC) 110

1.2.3 Penalties for failure to notify 121

1.2.4 Failure to notify chargeability to IT or CGT 13

1.2.5 Failure to notify Class 2 liability 14

1.3 Filing Obligations 16

1.3.1 Obligation to file 16

1.3.2 The SA return 20

1.3.3 Failure to make a return 221

1.4 Record Keeping Obligations 28

1.4.1 What records to keep? 28

1.4.2 Retention periods 29

1.4.3 Penalties for failure to keep records 32

Review 33

Before moving on 35



Introduction

In this Learning Guide you'll look at which customers are within ITSA,

what their obligations are for notifying HMRC, their obligations to file

a return and keep records and what happens if they do not meet

those obligations.

Learning outcomes and study objectives

The following table sets out what you will be able to achieve after you

have successfully studied this Learning Guide.

Learning outcomes Study objectives

You will To achieve this you need to be able

to

know which HMRC

customers fall into the

SA regime and what

their obligations are.

describe which customers meet

HMRC's SA criteria

state the requirements to notify

chargeability to NIC and IT/CGT

and the consequences of failing

to do so

outline customer's obligations to

file a SA return and the

consequences of failure to meet

these obligations

summarise customer's

obligations to keep records and

the penalties that apply for

failure to meet their obligations.



Study advice

We think it will take you approximately this long to finish the Learning

Guide.

Reading main text 1 hr 30min

Completing activities 15 minutes

Total 1 hr 45 min

This is only a guide. The important thing is for you to make sure you

understand all the material in the Learning Guide.



Part 1

1.1 SA Customers

Most of HMRC's individual customers have straightforward tax affairs,

paying all their income tax liability 'at source'. This means that when

they receive income it has already had tax deducted from it by the

payer. The payer is responsible for passing the tax deducted on to

HMRC.

You will most often see tax deducted at source from

payments made by employers and pension companies using PAYE

system

interest payments made by financial institutions.

The SA system is there to deal with customers whose tax affairs are

not so straightforward.

Customers have a legal obligation to notify HMRC if they have tax

liability that will not be collected at source. This is known as the

obligation to notify chargeability.

There are two ways HMRC can deal with these customers.

Ask the customer to complete (file) a SA return showing all their

taxable income and gains.

Collect the extra liability from other income that is subject to

PAYE through the PAYE system.

HMRC publishes a set of criteria that broadly reflects the

circumstances when a customer, who is obliged to notify

chargeability, will be dealt with through SA. HMRC asks anyone who

meets any of the criteria to register for SA. But there will be some

customers who do not meet the legal requirement to notify

chargeability who still fall within the criteria.

You’ll look in detail at the obligation to notify chargeability and the SA

criteria.



Which customers meet HMRC's SA criteria?

HMRC has a legal right to ask any person to file a SA return, to

establish the correct amount of income tax and CGT the person is

liable to. Legislation uses the terms 'file' or 'filing' in connection with

SA returns. These terms mean to deliver or submit a SA return to

HMRC.

In practice, HMRC only wants SA returns from customers who are

likely to have additional liability to pay through SA or have affairs

that are more complex. Therefore, HMRC publishes guideline criteria

indicating which customers should register for SA. Customers

meeting these criteria are asked to register for SA, many will also

have a legal obligation to notify chargeability. You'll look at the legal

obligation further on in this Learning Guide.

HMRC asks customers to register for SA because they

receive a certain type of income, or

are a certain type of employee, or

for some other reason.

Certain types of income

Self-employment

Partnerships

Capital gains

Income from savings, investment or property

Income from other sources

Particular employees

The majority of employees have their tax deducted under the PAYE

system. They will not normally be SA customers, unless they have

other sources of income that fit the SA criteria, but there are some

exceptions below.

Company directors

High earning employees

Employees claiming expenses and reliefs

Other customers within SA

Customers in this category tend to have complex affairs or are

subject to particular rules that PAYE cannot apply.

TMA70 S8



Customers with particular roles or positions

Minister of religion (any faith)

Members or names at Lloyd's of London (a specialist insurance

market)

Trustees or personal representatives if the trust receives taxable

income or makes taxable gains. This includes the trustee or

personal representative managing the estate of a deceased person

Trustees of certain pension schemes

Higher earning child benefit recipients

Customers living in the UK but domiciled abroad

Non-resident customers

You can find more information about residency and foreign income in

the Residence and Foreign income module.

1.1.1 How customers register for SA

Customers who meet the SA criteria can register for SA in a variety of

ways.

Self-employed customers

Registration for SA can be made by

sending in form CWF1 (on paper or online)

calling the newly self-employed helpline, or

registering online

A single notification using any of these methods will register the

customer for SA (for that tax year) and Class 2 NIC.

Partnerships and partners

Partnership

One of the partners, known as the nominated partner, takes

responsibility for registering the partnership under SA by

sending in form SA400 (on paper or online), or

registering online.



Partners

Each new partner in a partnership, including the nominated partner,

must also register to receive a SA return and pay Class 2 NIC. They

can do this by sending in form SA401 on paper or online.

Non-business customers within SA

Non-business customers can register for SA by sending in form SA1

'Registering for Self Assessment and getting a tax return' on paper or

online.

All customers can sign up for online services once registered.

Unique Taxpayer Reference (UTR)

When a customer notifies HMRC that they are liable to complete a SA

tax return they will be issued with a unique 10 digit taxpayer

reference number (UTR).

HMRC keeps all the SA records relating to the customer under this

UTR. These SA records include

details of the SA returns sent in

the tax liability shown on each SA return

details of payments made.

SA customers use the UTR whenever they contact HMRC about their

SA liability to ensure that all payments, returns and correspondence

are matched to their SA record.

Certain customers are obliged by legislation to notify HMRC of their

liability to IT and CGT within specific time limits. Customers can

satisfy these notification obligations by registering for SA within the

time limits. You'll look at these notification obligations next.



1.2 Notifying Chargeability

Customers who meet HMRC's SA criteria may not always register for

SA. So legislation is in place obliging certain customers to notify

HMRC if they are chargeable to income tax or CGT in any year of

assessment (tax year), unless certain exceptions apply.

Chargeable means that a person has income or gains that are

taxable.

Remember, there are two ways HMRC can deal with customers who

notify chargeability. Through the SA system or by collecting liability

from other income that is subject to PAYE. Generally customers who

meet the SA criteria and have an obligation to notify chargeability

will be dealt with through SA.

Any reference to income tax in taxes legislation includes Class 4 NIC.

Self-employed customers aged over 16 and under state pension age,

are liable to pay Class 2 and Class 4 NIC unless they fall under

certain exceptions. Class 2 is a set weekly contribution and Class 4 is

a percentage of business profits.

So the obligation to notify chargeability for IT also applies to

chargeability to Class 4 NIC.

Separate legislation obliges customers who are liable to Class 2 NIC

to notify HMRC.

1.2.1 Obligation to notify chargeability

The legislation that covers the obligation to notify chargeability for IT

and CGT is at section 7 of the Taxes Management Act (TMA70).

The legislation requires every person who is chargeable to income tax

or capital gains tax for any year of assessment who

has not received a notice to file a return for the year of

assessment, or

received a notice to file but has been notified that the notice has

been withdrawn

to give notice to an officer of the Board that they are chargeable.

TMA70 S7

S7(1) TMA70

S8 TMA70

S8B TMA70



Exceptions

The obligation does not apply if the person

has no chargeable gains

isn't liable to a high earner’s child benefit charge (from 2012/13

onwards)

has met all liability through PAYE

is not liable to pay income tax above basic rate and all liability

comes from savings and investment income that has had tax

deducted

could not have any liability from a self-assessment in the year.

The effect of these exceptions is that customers are obliged to notify

HMRC if they have chargeable income or gains and have additional

liability to pay.

Customers with no additional liability are not caught by s7 even if

they come within the SA criteria.

Example

Two similar cases highlighting exceptions on meeting total liability

through PAYE for you to review has been created.

The example is in the PowerPoint:

Income Tax Self-Assessment Lifecycle – SA Customers and their

obligations

Time limit for notifying chargeability

Customers must notify chargeability under s7 within 6 months of the

end of the tax year. That is no later than the 5 October following the

end of the tax year.

Example

This case highlights the customer’s requirement to advise

chargeability for you to review has been created.



obligations

S7 (3) – (7)

TMA70



Annual obligation

The obligation under s7 is annual. Customers caught by s7 who don't

receive a notice to file a SA return must notify HMRC even if they

have made a notification in previous years.

Example

This case highlights the need for the customer to notify annually if

there is a new declarable source of income for you to review has been

created.



obligations

How to notify chargeability

Customers can notify HMRC that they are chargeable by registering

for SA or by notifying HMRC in another way, for example by letter.

Customers who are caught by s7 may incur a penalty if they do not

notify HMRC in time. You'll look at penalties soon.

1.2.2 Class 2 National Insurance Contributions (NIC)

Self-employed customers, including partners in a partnership, are

liable to pay Class 2 NIC unless they fall within certain exceptions.

They must notify HMRC that they are liable to make Class 2 NIC.

Time limit for notifying liability

A self-employed customer's liability to Class 2 NICs starts on the date

their business starts. Self-employed customers who are liable to pay

Class 2 NIC's should notify HMRC of their liability immediately.

You can find out more about when a business starts in Income Tax

Self-Assessment – Business Income.

NIPG206005



How to notify liability

Customers can notify HMRC of their liability to pay Class 2 NICs by

registering for SA or by contacting HMRC.

If a customer fails to notify their liability to Class 2 NICs they may be

liable to a penalty. You'll look at penalties shortly.

1.2.3 Penalties for failure to notify

Customers who fail in their obligations to notify

chargeability for IT (including Class 4 NIC) and CGT, or

liability to make Class 2 NIC

may be liable to a failure to notify (FTN) penalty.

FTN penalties are tax-geared penalties. Tax-geared penalties are

based on the amount of tax or duty that is not paid at the right time

because of the failure.

When is a penalty charged?

A FTN penalty may be charged for each failure to notify unless the

failure

is not deliberate, and

the customer has a reasonable excuse for not complying with

their obligations.

What is reasonable excuse?

Reasonable excuse is normally where an unusual event that is either

unforeseeable, or

something beyond the customer's control has occurred, and

it prevents the customer from taking steps to meet their

obligations to notify.

What is reasonable will differ according to the customer's individual

circumstances and abilities. The customer must remedy the failure

without undue delay once the reasonable excuse has ended to avoid

a penalty.

CH71520



1.2.4 Failure to notify chargeability to IT or CGT

Customers who fail to notify chargeability to IT (including

Class 4 NIC) or CGT may be liable for an FTN penalty under

Schedule 41 FA08.

Amount of penalty

The penalty is a tax-geared penalty. It is a percentage of the

potential lost revenue (PLR).

For a failure to meet obligations under s7 the PLR is the liability to IT,

CGT and Class 4 NIC not paid by the 31 January following the tax

year the failure relates to. This means that a customer who is

potentially liable to a penalty can avoid a penalty if they pay all their

liability by 31 January following the tax year.

The penalty percentage is calculated by taking into account

whether the disclosure of the FTN was prompted or unprompted

the underlying behaviour that gave rise to the failure

the quality of disclosure.

The penalty will be between 0 and 100% of the PLR.

If a FTN penalty is imposed you may need to reconsider the amount if

it was later established that the liability that the failure to notify

penalty was based on was insufficient. For example if the liability is

changed for any reason. You'll look at changes to liability in Income

Tax Self-Assessment Lifecycle – Payments Principles.

Sch41 FA08

CH71140

CH72520



Example

This case shows the circumstances of when failure to notify penalties

are charged and the amounts for you to review has been created.



obligations

You can find more information on penalty behaviours in the Powers,

Deterrents and Safeguards module or the Compliance Handbook.

1.2.5 Failure to notify Class 2 liability

Customers who are liable to Class 2 NIC should notify HMRC and start

paying these contributions as soon as their self-employment starts.

If they do not notify liability on time they will be liable to any arrears

of Class 2 NIC. In addition they may also be liable to a penalty if the

failure to notify liability continues until after the 31 January following

the end of the tax year in which their liability first arose.

Amount of penalty

Where the customer commenced self-employment on or after 6 April

2009 any FTN penalty charged is a percentage of the potential lost

revenue (PLR).

The PLR is the Class 2 contributions due and unpaid from

the date self-employment started until

the 31 January before the day on which HMRC received

notification of, or became fully aware of, the customer's liability

to pay Class 2 contributions.

Reg87a-87g

Social Security

Regulations

2001

NIPG 206000

onwards



Example

This case shows the circumstances of when a penalty is charged for

failure to register for Class 2 NIC for you to review has been created.



obligations



Part 2

1.3 Filing Obligations

Section 8 Taxes Management Act 1970 (TMA70) gives HMRC the

authority to issue a notice to file a SA return to any person. A notice

to file a SA return is issued to establish the customer's chargeability

to income tax (IT) and capital gains tax (CGT) for the tax year.

HMRC sends customers a notice to file a return if they have

registered for SA because they meet SA criteria, or

notified their chargeability under s7 TMA70 and HMRC is not

going to collect the liability through a PAYE source.

HMRC may also issue a notice to file a return to any customer to

establish their tax liability for the tax year.

As long as no return has been filed for the year of assessment, HMRC

may agree to withdraw a notice to file a return if it is agreed that a

SA return is not required. HMRC must give the customer notice under

s8B TMA70 specifying the date of the withdrawal of the notice to file

the return.

The withdrawal of a notice to file a return does not prevent a

subsequent notice to file being issued for the same year.

You’ll look at the customer's obligation to file a SA return following

the receipt of a notice to file, the types of return and when each

should be used, and what happens if customers do not meet their

filing obligations.

Legislation uses the terms 'file' or 'filing' in connection with SA

returns. These terms mean to deliver or submit a SA return to HMRC.

We will use these terms throughout.

1.3.1 Obligation to file

Customers receive a notice to file a SA return in the form of notice

SA316.

If a customer filed their previous year's SA return online, the notice

to file is normally issued just after the end of the tax year the return

is for.

When a customer is new to SA, that is they have been set up on SA

during the current tax year, the system will issue a form SA316 at

the bulk annual issue (ITAR) the following February.

S8 TMA70

SAM120001

S8B TMA70



Customers who continue to be within SA are sent a notice to file each

year. You saw earlier that the obligation to notify chargeability under

s7 is an annual one. If a customer does not receive a notice to file for

a year when they fall under this obligation they must notify HMRC

within the time limit.

A customer who receives a notice to file is obliged to file a SA return

by a specific filing date.

The return can be filed either

in paper form

electronically online.

The completed return should include all the information needed to

establish the customer's annual liability to income tax, Class 4 NIC

and capital gains tax, not just the income that brought them into the

SA criteria or that generates any additional liability.

Filing dates

A SA return must be filed by a specific filing date. The filing date

depends on whether the return is in paper form or filed online.

The filing dates for SA returns issued to individuals, partners, trustees

and most partnerships for the years 2007/08 onwards are shown in

the table below.

Notice to file

issued

Paper filing

date

Online filing date

Up to 31 July

following the end of

the tax year

31 October following

the end of the tax

year

31 January following

the end of the tax

year

1 August to

31 October following

the end of the tax

year

3 months after the

date we send it*

31 January following

the end of the tax

year

1 November or later

following the end of

the tax year

3 months after the

date we send it*

3 months after the

date we send it*

*The computer system actually allows 3 months and 7 days to allow

for printing and posting.

S8 TMA70

SAM121025



Customers who wish to file online for the first time need to register

and create an online account before they can file the return.

Example

This case shows the two different filing dates and when they apply for

you to review has been created.



obligations

There are two exceptions to the above filing dates.

Returns that cannot be filed online.

Partnership returns if the partnership includes a limited company.

SAM14100



Returns that cannot be filed online

It is possible to file most SA returns online, although some pages can

only be submitted using commercial software. However, some less

common supplementary pages have to be filed on paper because

there isn't the software to support online filing.

If a customer needs to file supplementary pages that cannot be filed

online, the paper filing date is the same as the usual online filing

date.

Notice to file issued (Online) filing date

Up to 31 October following

the end of the tax year

31 January following the end of the

tax year

1 November or later

following the end of the tax

year

3 months after the date we send it*

Details of which pages can be filed online for each tax year can be

found on the HMRC website.

Note that this exception does not apply to the short version of the SA

tax return. Although the short return cannot be filed online the

customer can still file online, by the online filing date, using the full

version of the return.

You'll look at different types of SA returns shortly.

Partnerships that include limited companies

The filing dates for partnerships where at least one of the partners is

a company are different. For these partnerships the nominated

partner must file the completed partnership return by

the later of 31 October following the end of the tax year or

9 months from the end of the relevant period, for paper based

returns

the later of 31 January following the end of the tax year or

12 months from the end of the relevant period, for online

returns.

The relevant period generally ends on the same date as the

partnership period of account.

http://www.hmrc.

gov.uk/sa/softwar

e.htm

SAM120033



Example

This case shows the filing dates where a Partnership includes a

company as a partner for you to review has been created.



obligations

Calculating the tax due

Paper returns

If a paper return is filed on or before 31 October following the end of

the tax year the return is for, HMRC will

calculate the tax (including any Class 4 NIC) due

tell the customer how much to pay by 31 January of the following

year, or

arrange for tax owed (if less than £3,000) to be collected through

the tax code if the customer has income subject to PAYE.

Online returns

If the return is filed online the tax (including any Class 4 NIC) liability

is automatically calculated.

Customers who file online and want any tax owed collected through

PAYE must file their return by 30 December following the end of the

tax year. This is to allow time for the adjustment to their tax code to

be made.

1.3.2 The SA return

There are two types of SA return, the short return and the standard

return. Each type of SA return gathers information about the

customer and their tax position. Whether a customer files a short or

standard SA return depends on the amount and type of their income.

You may find it useful to look at the current year's copies of some of

the tax return forms as you work through this section. Copies can be

found in the customer adviser guide by going to the letter 'S' in the

forms index or on HMRC's website under Self-Assessment. Short tax

return (SA200).

Customers with simple tax affairs may be sent short tax returns.

These returns contain less detail than a standard return.

http://bg.inrev.

gov.uk/cagempl

oyer/index.htm

http://bg.inrev.gov.uk/cagemployer/index.htm





HMRC issues short returns to customers that the SA system

anticipates will have simple tax affairs based on previous returns and

other information held. Customers cannot request a short tax return.

Some customers are not eligible for the short tax return. Full details

of who is not eligible are shown in the return (SA200) and

accompanying notes. If a customer receives a short return but is not

eligible to complete it then they must let HMRC know.

Standard (full) return (SA100)

Customers who are not eligible to complete the short tax return must

use the standard or full self-assessment return (SA100).

The standard return consists of

basic pages, that all customers complete, and

supplementary pages that customers only complete if they have

income from particular sources or capital gains.

If a paper SA100 is sent to the customer it is accompanied by

explanatory notes. Explanatory notes for any supplementary pages

are also provided.

If the customer is filing online the explanatory notes are available

online.

Supplementary pages

A full list of the supplementary pages available for the tax year is

included on page 2 of the standard SA return (SA100).

Customers receive supplementary pages based on their previous

year's return or HMRC's records. Customers can download or order

any additional supplementary pages they need.

Separate supplementary pages are needed for each employment,

self-employment and partnership that a customer has.

Short versions of supplementary pages

There are two versions of the self-employment (SA103) and the

partnership (SA104) supplementary pages, a short version and a full

version.

If a customer/partner is not eligible to complete a short tax return or

wishes to file online they may still be able to complete a short version

of the supplementary pages for self-employment or partnership

income if they meet certain criteria.



1.3.3 Failure to make a return

You have seen that customers must file their SA returns by a specific

filing date. Not all customers meet their filing obligations. They may

file a return after the filing date or not file a return at all.

You’ll look at what happens if the customer does not file their return

on time.

Penalties for failure to file on time

Customers who do not file their return by the filing date are liable to

penalties for failing to file on time unless they have a reasonable

excuse for the failure. These penalties are often referred to as late

filing penalties but also apply if no return has been filed.

Penalties will be due even if the customer files a return showing they

have no additional tax liability. This is because the customer has still

failed to meet their obligation to file a SA return on time.

As long as no return has been filed, HMRC may agree to withdraw a

notice to file a return. Any penalties already applied for failing to file

the return on time will be cancelled.

The table on the next page shows the late filing penalties that apply if

a notice to file was issued on or after 5 April 2011. The penalties are

applied as they become due so a customer who is 12 months late

filing their return will receive an initial, 3 month, 6 month and

12 month penalty.

Sch55 FA09

CH63020



How late Penalty How issued Partnerships

1 day

(Initial penalty)

£100

Automatic

Penalty is

applied to each

partner. 3 months

(Daily penalty)

£10 a day*, up to and including

the day the return is filed, for a

maximum of 90 days (£900).

6 months late

(Tax-geared

penalty)

The greater of 5% of the tax

due or £300.

**Automatically

issued (and

updated when the

return is submitted

if 5% of the tax due

is more than £300). A partnership

does not have

its own liability

so a £300

penalty is

applied to each

partner.

12 months late

(Tax-geared

penalty)

The greater of 5% of the tax

due or £300.

12 months late and

the person has

deliberately withheld

information which

would have assisted

HMRC in calculating

the correct liability

(Behavioural

penalty)

The greater of £300 or a

percentage of the liability

between 20 and 100%

calculated with reference to the

behaviour, quality and type of

disclosure. (See CH63200).

Penalties greater than 100%

could be charged if the failure

involves an offshore matter.

Manual calculation

usually as part of a

compliance check.

*If the filing date is 31 January, daily penalties start on 1 May.

**If liability from the return is adjusted following a compliance check

the penalty amount may need manual adjustment. You'll look at

compliance checks in Income Tax Self-Assessment Lifecycle – Risk

and Compliance Principles.

Time limit for failure to file penalties

Penalty assessments for late filing penalties must be raised within

certain time limits.

The time limit is the later of

2 years from the filing date

12 months from the date the liability is finalised.



Calculating the penalties

The SA computer system automatically calculates initial, daily and

tax-geared late filing penalties. The system also automatically issues

a penalty assessment.

Most late filing penalties are applied automatically by the SA system;

however any 12 month behavioural penalties due must be raised

manually within the time limit.

If a caseworker considers that a 12 month behavioural penalty may

be due they should refer to the Compliance Handbook for further

information.

In the absence of a return the SA computer system

calculates late filing penalties using the online filing date

charges the minimum £300 penalties if 6 or 12 month penalties

become due.

If a customer subsequently files a return

with liability resulting in 6 or 12 month penalties greater than the

minimum, the computer system will automatically recalculate

these penalties

on paper, the computer system will automatically recalculate the

penalties due from the paper filing date.

A customer who files a paper return late cannot avoid or reduce

penalties by filing a second return online before the online filing date.

Example

This case shows the penalties that can be charged for a late submitted

individual return for you to review has been created.



obligations

CH64200

CH401224

SAM120530



Adjusting tax-geared penalties

If the customer incurs tax-geared late filing penalties you may have

to make an adjustment to prevent an excessive penalty charge. This

can occur in two circumstances.

Total tax-geared late filing penalties exceed 100% of the liability

from the return.

More than one type of tax-geared penalty is charged on the same

liability such as a late filing penalty and a failure to notify

penalty.

Guidance of when and how to make adjustments to tax-geared

penalties in these circumstances can be found in the Compliance

Handbook.

You should consult the guidance in the Enquiry Manual for penalties

relating to periods before April 2011. You can find more information

on penalties and appeals in the Powers, Deterrents and Safeguards

curriculum.

Determination of liability

HMRC can estimate a customer's tax liability if they do not file their

SA return on time. HMRC does this by making a 'Revenue

Determination' (determination). This is an estimated assessment of

the customer's liability made to enable HMRC to take action to

recover the customer's tax liability.

Who makes the determination?

HMRC's debt management and banking (DMB) teams are responsible

for raising determinations and applying them to the customer's SA

record. Compliance caseworkers can ask DMB to make a

determination.

A determination is an enforceable debt so DMB can take action to

collect the liability shown together with any interest and penalties

due. Interest will accrue on the amount of the determination from the

due date for the return. Late payment penalties may be charged if

the determination is not paid within 30 days. You'll look at late

payments in Income Tax Self-Assessment Lifecycle – Payments

Principles.

A determination should be made for the amount that is the

officer's best estimate of the liability due for the year of assessment.

So the basis of any determination must be reasonable and

proportionate. For example, if the customer is in business, the

previous years' profits is usually a starting point for estimating likely

profits in the year with the missing return.

CH65040

EM 4560

S28C TMA70



That profit figure will be used in a calculation using the rates and

thresholds for the year to arrive at the estimated liability for the tax

year.

When is a determination made?

A determination can, in theory, be made as soon as a return is late.

However, DMB will usually wait to see if imposing daily late filing

penalties persuades the customer to submit their return.

Time limit for determinations

The time limit for making determinations on or after

1 April 2012 is 3 years, beginning with the filing date for the

tax return.

The filing date for this purpose is the online filing date, or

the end of a 3 month period, beginning with the day on which the

notice is given, if the return was issued after 31 October following

the year of assessment.

Example

This case shows the time limit for making a determination for you to

review has been created.



obligations

Determinations and late filing penalties

Customers who receive a determination are still liable to penalties for

failing to file a return. These apply even if the customer pays the

liability resulting from the determination.

Any tax-geared automatic penalties that have been already issued

are adjusted by the SA system to reflect the liability on the

determination.

TMA70 28C(6)



Displacing a determination

If a customer disagrees with the figures used in the determination the

only way they can displace it is by sending in their return.

Customers cannot

appeal against a determination

ask to pay the liability in the determination by instalments

ask for postponement of the liability in the determination.

When the outstanding return is filed the liability on the return will

replace the liability in the determination. The SA system will

automatically adjust any tax-geared penalties charged to reflect the

liability shown on the return.

The time limit for a customer to displace a determination by filing a

return is the later of

12 months beginning with the date of the determination

3 years from the filing date.

The filing date for this purpose is the online filing date.

Penalties for inadequate determinations

If the estimated liability shown on a determination is less than the

actual liability would be, there will be an underassessment of tax.

If the customer fails to notify HMRC of an underassessment of tax

within 30 days of the determination being made they may be liable to

a penalty. This is a further incentive for the customer to bring their

affairs up to date.

In reality an underassessment may not come to light until some time

later such as when

the customer displaces the determination with the return

an enquiry into a return is concluded

HMRC discovers that the determination is insufficient (you'll look

at discovery provisions in Income Tax Self-Assessment Lifecycle

– Risk and Compliance Principles.

The penalty is tax-geared and based on the PLR. This is the difference

between the liability shown on the determination and the actual

liability for the return, when that is established.

Any penalty due under this legislation would need to be raised

manually when the underassessment is established. The penalty may

need to be adjusted by any other tax-geared penalties charged on

the same liability including for late filing of the return.

Sch24 Para2 FA07



You can find more information on these penalties in the Powers,

Deterrents and Safeguards curriculum or the Compliance Handbook.

1.4 Record Keeping Obligations

Customers must keep and retain records in order to file a correct and

complete return or claim. They must do this even if they don't need

to file a return or make a claim every year. Customers must keep

these records and supporting documents for a specified period.

You’ll look at the records that must be kept, how long they must be

kept for and the penalties that can apply for failure to keep records.

1.4.1 What records to keep?

Customers' record keeping obligations are set out in legislation.

General record keeping requirement

All customers who may be asked to file a return have to meet the

general record keeping requirement. Under this requirement

customers must

keep records that would allow them to file a complete and

accurate return

retain these records for a set period of time.

The legislation also sets out additional record keeping requirements

for business customers. You'll look at these requirements later in this

Learning Guide.

What records must be kept?

Legislation does not specify the exact records that customers must

keep.

The type of records needed to meet the general record keeping

requirement and ensure that a return would be complete and correct

depends on the individual circumstances. Typically these could

include

bank or building society records

records of payments received such as payslips, P60, dividend

certificates, remittance advices and so on

receipts and invoices for expenses claimed

correspondence relevant to entries made on the return such as

severance terms

contracts

S12B (1) TMA70

CH11300

S12B (3) TMA70

CH13100

CH13300



birth, marriage or death certificates particularly where allowances

and reliefs are claimed.

This is not an exhaustive list.

It may be necessary for a customer to create a record to allow the

completion of an accurate return. For example, a mileage log, a

record of tips received or a calculation to arrive at figures in the

return. Once created these records form part of the

customer's records along with any documents which support the

figures used.

Business customers

There are additional, more specific requirements for business

customers in addition to the general record keeping requirement.

Individuals or partnerships who are carrying on a trade, profession or

vocation, or those who are letting property, are in business for the

purposes of record keeping requirements.

Legislation specifies that business customers must keep records

showing all the income and outgoings of the business whether that is

receipts and expenses or sales and purchases.

So a business customer is expected to keep some form of business

records which could include, for example

cash book

stock records

sales invoices

till rolls

purchase invoices

business bank records

wages records.

This is not an exhaustive list.

If a business customer is involved in the construction industry they

will need to keep records relating to payments, receipts and

deductions of tax made under the construction industry scheme

(CIS).

Business customers should keep separate business and private

records. If there is dual (business and private) use of assets, or

private expenditure paid by the business, the customer must keep

sufficient records to work out what is business and what is private.

CH11300

S12B(3) TMA70

S12B(3) TMA70



Capital gains

If a customer makes a capital gain they need to keep records to

support

the purchase price or market value of the asset when it was

acquired

any expenditure they have incurred on improving the asset

the sale price or market value of the asset at disposal.

This may include invoices for work done, valuations and contracts or

deeds of purchase and sale.

If the asset is a

business asset or an asset involved in property letting, then the

record keeping rules and retention period for businesses apply

private asset then the general rules and retention periods apply.

You'll look at retention periods soon.

Original or copies?

Customers can usually satisfy the record keeping requirements by

keeping the original documents, or by preserving the information

contained in the original documents.

Customers who preserve the information contained in original

documents electronically, for example on a computer, do not need to

retain the original documents provided

the electronic copy is an exact replica of the original paper

documents, and

the documents can be reproduced in a legible form.

Some documents have to be kept in their original form. These are

documents generally relating to income received with tax deducted,

such as payslips, or a tax credit applied, like share dividend vouchers.

If business customers complete stock records, sales and purchase

ledgers, cash books or other records on paper or electronically they

must keep these as well as any original documents (or exact

electronic replica) that were used to prepare them.

1.4.2 Retention periods

Customers need to retain their records for specific periods of time.

The retention period depends on whether the customer is a non-

business or business customer. CH14550



Records must be kept until the later of

1. the first anniversary of the 31 January that follows the end of the

tax year the records relate to for non-business customers.

2. the fifth anniversary of the 31 January that follows the end of the

tax year the records relate to for business customers

(including property letting).

3. the completion of an enquiry into the return.

4. the end of the day on which the enquiry window closes and an

enquiry has not been opened.

Example

This case shows the period that a business customer has to keep their

records for you to review has been created.



obligations

Example

This case shows the period that a non-business customer has to keep

their records for you to review has been created.



obligations

More than one retention date

Customers who are required to keep records for SA purposes may

also have to keep records for other reasons, for example VAT records,

wages records for PAYE and landfill tax records. Each set of records

may need to be retained for a different period. If the retention

periods are different then the customer should retain the records for

the longest period required.

Customers may be permitted to reduce the retention period for some

records kept for VAT purposes. This will not normally reduce the

period to less than is required for other taxes.

CH14100

CH15300



Lost or missing records

Customers whose records are lost or destroyed should try to obtain

replacements.

If the customer is not able to fully replace any missing records by the

filing date they should indicate on the return if they have used figures

that are

estimated – but final. The figures shown on the return are the

ones the customer wants HMRC to accept

provisional – until the final figures can be found and used to

replace the provisional ones.

If provisional figures are used the customer must indicate when the

final figures will be provided.

Example

This case shows the differences between estimated and provisional

figures following the loss of the customer’s records for you to review

has been created.



obligations

1.4.3 Penalties for failure to keep records

Customers who fail to keep adequate records to support their SA

return could be charged a penalty. The penalty can be up to £3,000

for each year of assessment affected.

SA Returns 2008/09 and later

Customers who file SA returns which are found to contain

inaccuracies may be liable to penalties for the inaccuracies.

Inaccuracy penalties are tax-geared and based on a percentage of

the potential lost revenue (PLR). The percentage charged is based on

the

type and quality of the disclosure

the customer's behaviour leading to the inaccuracy.

Although record keeping failures may be indicative of the

customer's behaviour, they cannot be directly reflected in the

inaccuracy penalty.

S12B(5) TMA70

Sch24 FA07



It may be appropriate, in cases of serious record keeping failures, to

consider a penalty for this as well as a penalty for inaccuracies in the

return.

Where a penalty is to be charged for record keeping failures

caseworkers need authorisation and should follow the guidance in the

Enquiry Manual.

SA returns for 2007/08 and earlier years

If a return for 2007/08 or an earlier year is not correct any penalties

are dealt with under different penalty legislation. This does allow

record keeping failures to be directly reflected in arriving at the

penalty percentage. Therefore it will not normally be necessary to

look at a separate penalty for record keeping failures.

You can find details of the penalty legislation that applied to 2007/08

and earlier years in the Enquiry Manual.

One last point

Many benefits are paid by the State and in general are all taxable. For

example:

State pensions

Many people are entitled to a state pension, based on the amount of

national insurance contributions paid or credited and the number of

qualifying years. The amount is taxable.

If this is their only income it will usually be covered by the Personal

Allowance with no tax ultimately due.

If a taxpayer is in receipt of other employment or occupation pension

income the tax code is usually reduced to collect any tax due on the

State Pension.

People who are self-employed show the pension on their return and

pay the tax due with their normal tax payments in January and July

each year.

EM4650, 4655

EM4801

EM8000 onwards



Other State benefits

Other taxable State benefits may include

widowed parent’s allowance (a non-taxable allowance for each

dependant child)

bereavement allowance

employment and support allowance (a non-taxable, income-

related element)

carer’s allowance (child dependency payments are not taxable)

jobseeker’s allowance

statutory sick pay

statutory maternity, paternity or adoption pay.

These are all taxable with the exception of the elements in brackets.

One benefit that is completely exempt from tax is a War Widows

Pension.

This is the end of the learning material for this Learning Guide.



Activity

To consolidate what you have learned take a look at the review

summary below. You might also like to check your knowledge by

completing the questions in the Activities workbook:

Income Tax Self-Assessment Lifecycle

SA Customers and their obligations



Review – Part 1

SA is a system for the assessment and collection of tax. HMRC asks

customers to register for SA if they meet certain criteria.

Customers who are chargeable to IT, Class 4 NIC or CGT who

do not fall within one of the exceptions, and

do not receive a notice to file a SA return, or

have had a notice to file a return withdrawn.

Have an annual obligation to notify HMRC of their chargeability.

Customers notifying chargeability may be dealt with through the SA

system or by having additional liability collected from a source of

income that is subject to PAYE.

Notification must be made by 5 October following the end of the tax

year. Customers who do not notify on time may be liable to a penalty

unless they have a reasonable excuse.

The penalty is a percentage of the PLR. The PLR is the

customer's unpaid liability on 31 January following the tax year. A

customer who does not notify chargeability by the 5 October deadline

can avoid a penalty by paying their liability by 31 January following

the affected year.

Self-employed customers must notify HMRC that they are liable to

Class 2 NIC as soon as they start in business. A single notification will

cover the customer for notifying for SA and Class 2 NIC.

Customers who fail to notify liability will be liable to a penalty, based

on their unpaid Class 2 liability, unless they have a reasonable

excuse.



Review – Part 2

HMRC can issue a notice to file a SA return to any customer to

establish their tax liability for the year.

SA customers who receive a notice to file a return are obliged to file

their return by a specific filing date unless HMRC agrees to withdraw

it or it is issued in error. The usual filing dates are

Paper filing – 31 October

Online filing – 31 January.

Different filing dates may apply where the

return cannot be filed online

return is issued to a partnership that includes a company

return is issued late and there is no failure to notify.

Customers who do not file their return on time are liable to penalties.

HMRC can issue a determination of a customer's liability, within

3 years of the filing date, if a return is not filed. Customers can only

displace a determination by submitting their return within 3 years of

the filing date or 12 months of the determination.

All customers who could be sent a notice to file a return are subject

to record keeping obligations. They must keep sufficient records to

allow them to file a complete and accurate SA return.

Business customers, including those with rental income, must also

keep records of their business income and expenditure.

Records must be kept for a specific period of time. The retention

period is different for non-business and business records.

Business customers who fail to keep adequate records may be liable

to a penalty of up to £3,000.



Before moving on

If you have answered the questions in the Activities workbook

correctly, you will have successfully completed the learning outcomes

and the study objectives for this Learning Guide, which you can see in

the table below.

Learning outcomes Study objectives

You will To achieve this you need to be able to

know which HMRC

customers fall into the

SA regime and what their

obligations are

describe which customers meet

HMRC's SA criteria

state the requirements to notify

chargeability to NIC and IT / CGT

and the consequences of failing to

do so

outline customer's obligations to file

a SA return and the consequences

of failure to meet these obligations

summarise customer's obligations to

keep records and the penalties that

apply for failure to meet their

obligations

If you had difficulty in achieving any of these objectives, have

another look at the relevant part(s) of the Learning Guide and try the

activities again. You should be confident that you have achieved them

before moving on. There is also a space for you to note any points

you might want to discuss with your line manager or tutor.

Notes:

Income Tax Self- Assessment Lifecycle SA Customers and ...

Documents