by Harry Fone, grassroots campaign manager at the TaxPayers' Alliance
At first glance, 31 January isn’t a date to send a shudder down your spine. But for millions of Brits, its arrival in the calendar is most unwelcome. It’s the deadline by which taxpayers have to submit their Self Assessment tax return. For many it means hours slumped over a calculator and a mountain of receipts trying to decipher complicated forms and then, after all that, handing over their hard-earned cash to settle the year’s tax bill.
Any mistakes can lead to hefty penalties. So it’s no wonder that a recent survey by Intuit QuickBooks revealed that “dread” and “stress” are the emotions most commonly associated with filing a tax return.
What is self assessment?
The majority of workers are automatically taxed on their income through the Pay As You Earn system (PAYE for short). Typically this is handled by their employer. But for those that are self-employed or receive income from rental properties or dividends for example, they must complete HMRC’s self assessment process to calculate how much tax they owe. This year 12.1 million will file a tax return. And despite having had since April last year, many millions will file close to the deadline, with only 45 per cent of returns submitted at the start of this month. Last year, over 700,000 people left it till the very last day!
What’s the problem with self assessment?
On the face of it the process should be relatively pain free. As the former Head of Taxation at the Institute of Directors, Stephen Herring, told me “assuming you're not in business or don’t have multiple sources of income, most people can do a tax return”. He explained that the personal tax system in the UK is considerably simpler than it was 20 years ago, for 95 per cent of people. But there are “very nuanced rules that are easy to get wrong” and HMRC’s online system is “not very intuitive”.
A survey by Which? very much reinforces his view. The consumer magazine revealed that out of 4,000 people asked to answer true or false questions about the process, only three got them all right. On average it takes 2.5 hours to complete a tax return. But worryingly it takes over 5 hours for one in ten people.
Perhaps that’s not surprising, given the threat of a tax investigation by HMRC and the financial penalties (totalling a hefty £21 million in 2017-18) for mistakes. The taxman is well-known for taking relatively minor infractions to the courts. As Herring rightly points out, it would be far better for entrepreneurs to focus on earning more income and grow their businesses rather than worrying about the intricacies of the tax code.
How can self assessment be improved?
Compared to some other wealthy countries, Britain fairs a lot better with its tax return system. In the United States, the system is fiercely complex and the Internal Revenue Service (IRS) is well-known for its harsh penalties. That’s why many Americans pay qualified professionals to make sure their tax affairs are in order. According to Stephen Herring, most Brits are less likely to use an accountant compared to Europe and the US. After all, we do call it self assessment. But that doesn’t mean our way of doing things is perfect.
Stephen says there are numerous examples of ambiguous language in HMRC’s forms. For example, the word “settlement” can have at least three different meanings in tax law. Solving this surely surmountable problem may stop a lot of head scratching and wasted time for millions of taxpayers.
Modern technology has a role to play too. HMRC is keen to digitise tax procedures as much as possible - although there is still a lot of work to be done. But with a raft of companies boasting that their accounting software can rapidly speed up the process and make the form filling simpler the future looks rosier. Although some would rightly argue that it isn’t fair that people need to shell out for expensive software.
Tax is still taxing
Back in the mid-2000s, HMRC ran a series of award-winning ads which parroted the line that “tax doesn’t have to be taxing” - quite right too. But over a decade later it is clear many still feel that tax is taxing. The Office for Tax Simplification and HMRC should do everything possible to make both the process and the tax code itself simpler. Taxpayers would thank them for it. That way they could focus greater time and effort on earning more money and consequently, making the nation more prosperous too. Win-win.