Contractors can use end of year tax return tips to ensure that they file their return accurately, on time and to maximise their tax efficiency.
“As the self-assessment tax return deadline approaches and tax return preparation and checking is underway, it is always a good opportunity to take a hard look at your personal tax affairs,” explains James Abbott, founder and Head of Tax at contractor accountant Abbott Moore.
Abbott has compiled a list of key points for contractors to consider when they are checking their self-assessment tax return prepared by their accountant, or if they are preparing their own return for filing online.
1. Do you have to file a tax return?
“If you are approaching the self-assessment deadline, unless you really like doing tax returns, look at whether you actually have to do one,” continues Abbott. “If you don’t, and you can check HMRC’s criteria online, you can ask HMRC to cancel the notice requiring you to file a return. This is a new initiative by HMRC and even if you need to do a return for last year, it is also worth asking if you need to file a tax return next year
Limited company contractors who are directors will have to file a tax return regardless. Anyone receiving a dividend of over £10,000 must also file a tax return, as does any contractor who earns over £50,000 a year and receives child benefit.
2. Don’t have all the information? File a provisional tax return
“If you are approaching the filing deadline and you, or your accountant, do not have all of the information you need to complete the return, you can file a provisional return,” says Abbott. “It is important that you file a provisional return because you will then avoid having to pay a penalty. You can update the return with the missing information at a later date.”
If you are approaching the self-assessment deadline, unless you really like doing tax returns, look at whether you actually have to do one
James Abbott, Abbott Moore
3. The deadline for amending a previous return is also 31 January
“If a contractor filed a provisional return last year, they should remember that 31 January is not just the deadline for their current return – it is also the deadline for amending the previous year’s tax return,” highlights Abbott.
“This is an opportunity to amend your return, even if the changes are substantial. If you try to make changes later than 31 January, and the changes would be to your advantage, then HMRC may try to prevent you doing so as there are strict time limits. And if the changes mean that you made an underpayment in the previous year then it is best to make sure the return is correct before HMRC has to ask about it.”
4. The payments on account deadline is also 31 January – check your liability
Abbott notes that 31 January is ten months through the tax year and is also the payment on account deadline: “After ten months, a contractor should have a good idea of their likely earnings for the year and the resulting personal tax liability.
“A contractor’s payment on account would have been calculated based on the previous year’s earnings. If you believe that your default payments on account will be too high for the current year’s liability, then you can elect to reduce them.”
Contractors have three methods of reducing their payments on account: by using form SA303; by virtue of filing the tax return with an adjustment; or to file the change on HMRC’s website.
However, contractors who are thinking of reducing their tax payments on account should also give consideration to the implications of the upcoming dividend tax hikes, as Abbott explains:
"Some contractors may well decide to accelerate the amount of dividends they pay out in order to take advantage of the current more favourable tax regime.
"Those who are thinking of doing this need to remember that drawing out more money may increase their personal tax bill, which they must factor in when assessing their prospective tax liability."
5. Pay attention to reliefs
According to Abbott, contractors may also be able to reduce their tax liabilities through tax reliefs: “The personal reliefs tend to be gift aid, so any charitable donations should be included on the return alongside any personal pension contributions.”
6. Don’t forget to include losses
Losses need to be recognised in a contractor’s tax return, too. Abbott explains: “Recording a loss in their tax return can reduce a contractor’s tax liability. Different types of losses have varying deadlines, so contractors should ensure they check past returns.
“For example if a contractor suffer capital losses, such as a loss on a sale of shares within their portfolio, then these need to be reported to HMRC within four years of the end of the tax year in which the loss occurred.
“In contrast, if a contractor makes a rental loss on a buy-to-let property then this should be reported in the tax return for the year in which the loss was made, and is subject to the normal 31 January deadlines.”
7. The child benefit trap
Anyone receiving child benefit and who is earning over £50,000 must file a tax return, as the benefit is taken away via the tax system on earnings between £50,000 and £60,000. HMRC is very effective at identifying taxpayers in this category, so it is important that contractors be proactive if their earning suddenly tips over the £50,000 threshold.
“The 2013/14 tax year is the first full tax year that the child benefit charge has been in operation, therefore it is really important that contractors declare their earnings and pay back any child benefit due via their tax return,” warns Abbott.
8. Rules surrounding taxation of other income may have changed
Whilst rules surrounding dividends and salary are relatively straightforward, contractors with other sources of income are advised to seek clarification on how they may be taxed, as Abbott points out:
"Contractors need to beware that rules change with regards to other sources of income. For example, contractors with buy-to-let properties are no longer able to claim the replacement costs of items that aren't part of the building. E.g. freestanding fridges aren't claimable but built-in fridges would still be allowable.
"If you have other sources of income, make sure you're up-to-date with how that income is recognised by HMRC."
9. The deadline for paying any tax owed is also 31 January
Abbott points out that contractors not only have to file their tax return by 31 January, they also have to pay any tax owed at the same time: “If you have a liability, it needs paying. Otherwise HMRC will charge interest, and if your payment is still outstanding for a further month and you have not paid by 28 February, HMRC will add a 5% surcharge on top.”
Abbott adds: “If you can’t pay by 31 January it really is worth contacting HMRC before the deadline to discuss payment options over a longer period, but you will have to pay interest and may have to produce figures to support the fact you can’t pay.”
10. Don’t leave submitting your return to the last minute
Everyone is up against it at the end of January and HMRC’s helpline is at its busiest. Abbott urges contractors not to leave it until the last minute: “Remember that a provisional return is better than no return at all, so even if you don’t have all of the information required, submit the return allowing plenty of time before 31 January.”
11. Once you have completed your tax return, make sure you actually submit it
“A classic mistake made by many taxpayers who submit their own returns is to do an excellent job of completing the form online, but then forgetting to press the submit button. They then receive a fine for failing to submit by the deadline, even though they completed the form online.”
12. Try and get added value from the tax return process
The vast majority of contractors have no choice about submitting a tax return, but Abbott firmly believes that added value can be gained from the process: “Your tax return is actually a good checklist to work through and ask yourself: ‘why am I paying this tax and is there anything I can do about it?’.
“For example, you might see that you are paying tax on bank interest. Could you reduce this by moving the cash into an ISA and sheltering it from any tax liability? Or, if you are paying higher rate tax on dividends, have you explored the possibility of transferring more shares to a spouse to use their tax allowance?”
“The other thing to consider is that by 31 January, you are 10 months through the current tax year. Is there anything that can be done before 5 April to mitigate your tax liability for when you are next completing your tax return?”