31st October...don’t let your taxes come back to haunt you

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31 October isn’t just Halloween, it’s also the date that (if you do not file online) your Self-Assessment tax return for the fiscal year ended 5 April 2009 should be filed with HM Revenue & Customs (HMRC), reminds Deloitte, the advisory firm.

Online filers have until 31 January 2010 to file. In either case, the deadline for paying your tax liability remains 31 January 2010 and there are some important new issues which taxpayers need to consider for 2008/09 returns.

Who needs to complete a return?

Patricia Mock, a director in the private clients practice at Deloitte, explains: “Firstly, do you need to complete a return at all? If you have been issued with a return, then you will need to complete it. Even if a return has not been issued to you, you will need to complete one if you received income that isn’t taxed at source. For example, employment income is taxed at source through the PAYE system, and banks withhold tax on the interest paid on accounts.

“However, if you are a higher rate taxpayer, i.e. your income exceeds £40,835 in 2008/09 you may have to complete a tax return as some of the tax withheld at source may only be at the basic rate.”

Income not taxed at source can be, but is not limited to, self-employment income, interest received gross (such as from gilts) any capital gains made from sales of assets, rental income from any land or property, any income from trusts or settlements and any untaxed foreign income.

Mock adds: “Many people do not realise that if they are UK domiciled all overseas income and gains must be included on the return. If you are in any doubt, you should contact HMRC for further guidance. If you think you do need to complete a tax return, but have not already been asked to do so by HMRC, you should contact HMRC to request a tax return by telephone or download a form via their website, www.hmrc.gov.uk.”

Non UK domiciles

For non-UK domiciled taxpayers, 2008/09 is the first year you will need to decide whether your non-UK income should be taxed on the arising basis or the remittance basis, ie on amounts remitted to the UK.

Mock says: “Until 2007/08, all non-UK domiciles could be taxed on the remittance basis, but in most cases there is now a £30,000 charge to benefit from this basis of taxation. The main exceptions to the £30,000 charge are people on low incomes and those who have been living in the UK for less than seven out of the previous nine tax years. These people can claim the remittance basis without paying the £30,000 charge.

“However, in all cases, claiming to be taxed on the remittance basis will mean losing your personal allowance and annual capital gains exemption, which for the 2008/09 tax year, stands at £6,035 and £9,600 respectively.”

Clearly, the decision on whether to be taxed on the arising or remittance basis will need careful consideration. Assuming that you do not need to bring the income into the UK, then in general if your overseas income exceeds about £80,000 or gains exceed about £175,000 it will be worth being taxed on the remittance basis. This is a complicated decision and you may need to get professional advice.

If you do decide that the arising basis is appropriate you will need to include all your overseas income on your return, so will need to review your overseas information very carefully to ensure it is reported correctly. If the remittance basis is claimed, whilst tax return completion will be easier (as the overseas income will not need to be reported), a non-UK domicile must also decide whether to claim relief for foreign capital losses, such as from sales of overseas shareholdings or properties.

Mock comments: “This is a new possibility as the previous rules did not allow such a claim. The first year in which the remittance basis is claimed from 2008/09 provides a once and for all opportunity to make the claim.

“However, the decision is not straightforward – it may well mean wasting relief for UK losses, and will undoubtedly mean much more detailed record keeping of foreign losses will be needed.

“As with many areas in tax, this is very complex and you should seek further advice if necessary.”

Foreign currency issues

Whether UK domiciled or not, all taxpayers may need to consider foreign currency issues in preparing returns. Foreign currency is an asset, and capital gains tax may be due if you have made a profit on investing in foreign currency – although there is an exemption for foreign currency acquired for personal expenditure abroad. For example if you had purchased US$100,000 in January 2007, this would have cost approximately £51,000. Converting these US dollars back to sterling in January 2009 would have yielded approximately £69,000 – giving a taxable gain of £14,000.

If you buy and sell assets denominated in foreign currency, then to calculate your UK gain on sale you need to convert the foreign currency figures to sterling at the date of purchase and sale. These rules can give some unexpected results. For example, if an overseas property was purchased for €225,000 some years ago when the rate was €1.5 to £1 and sold for the same Euro amount in 2008/09 when the rate was €1 to £1, the gain is calculated by using the sterling conversion rates at the date of purchase and sale, giving a gain of £225,000 less £150,000, ie £75,000. This gain will be taxable in the UK, even though in Euro terms no gain has been made.

HMRC new penalty regime

Finally, it is worth being aware that HMRC has a new penalty regime which will apply to 2008/09 tax returns.

Mock explains: “Whilst HMRC has always had the discretion to apply penalties for incorrect returns, these have now been further codified. Errors leading to less tax being paid to HMRC than what is actually due, or to a larger tax refund being paid to you, may lead to penalties. These range between 0% (where people can demonstrate they have taken reasonable care to get their taxes right but make a mistake in their return), to 100% if the inaccuracy is deliberate and there has been an attempt to conceal. There are penalties of up to 30% if a person has failed to take reasonable care in preparing their return.

“All in all, it is vital to have an attention to detail when preparing your tax return and to take great care that it is accurate. Don’t let Halloween be a trick for you this year!”

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About Deloitte

In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte LLP is authorised and regulated by the Financial Services Authority.

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