ICAEW’s representation to the Tax Administration Framework Review pointed out that the criteria for who does and doesn’t need to file a self assessment tax return are arbitrary and need to be reviewed. The Tax Faculty explains the rules as they currently stand.
Legislative framework
Taxpayers who have not been issued with a notice to file a self assessment (SA) tax return have an obligation under s7, Taxes Management Act 1970 (TMA 1970) to notify HMRC of any liability to tax. The deadline for doing so is six months from the end of the tax year (ie, 5 October).
The obligation to file a return arises only when HMRC issues a notice under s8, TMA 1970. HMRC has only had a formal power to withdraw the requirement to file a return since Finance Act 2013 was passed.
Neither the legislation nor any regulations specify who must file a tax return. HMRC has considerable freedom to set the criteria for who should be in the SA population and generally seeks to minimise the number of taxpayers required to file a return. The simple assessment power introduced in Finance Act 2016 has given HMRC further scope to reduce the SA population and instead collect any tax due by raising a simple assessment.
HMRC generally accepts voluntary, unsolicited SA returns. However, all new sources of trading income must be registered (on a CWF1, SA401 or online equivalents) so that the correct Class 2 national insurance contribution (NIC) charges are created.
Voluntary returns do not stop a PAYE tax calculation or simple assessment (P800 or PA302) being issued and formal registration via a CWF1, SA401 or SA1 or their online equivalents is recommended to avoid duplicate income tax calculations being issued.
Who is in SA for 2020/21?
The criteria for 2021 SA returns (ie, returns for the tax year 2020/21) are unchanged since 2017/18 and are set out in HMRC’s Self Assessment Manual at SAM100060. There is a simplified version and a checking tool on gov.uk. Table 1 illustrates most of the criteria.
Table 1: Criteria to file a 2021 sa return |
|---|
Self-employment of partnership income (including foster carers). |
Property income of £2,500 or more (see note 2) (if there is a live PAYE record a return is not required unless the gross rental income exceeds £10,000). If a taxpayer qualifies for the property income allowance and has turnover up to £1,000, they do not have to register for SA unless they are seeking a refund of tax paid under the non-residents’ landlord scheme. |
| Savings or investment income of £10,000 or more before tax (see note 2) |
| Dividend income of £10,000 or more before tax (see note 2) |
| Income in excess of £100,000 (including benefits) and a live PAYE record. |
A liability to capital gains tax (CGT), or a capital loss that needs to be established. Where the CGT has been paid through the UK property reporting service or the real time transaction service a tax return is not required if none of the other SA criteria are satisfied. |
| A liability to the high income child benefit charge |
| Taxable foreign income (unless it is foreign dividend income covered by the dividend nil rate band and no other SA criteria are met) |
| Share fishermen |
| Ministers of religion (any denomination) |
| Trust or estate income where additional tax is due |
| Lloyd’s members and names |
| MPs and members of devolved administrations |
| A liability to tax on an unauthorised payment from a pension scheme |
| Other untaxed income of £2,500 or more (see note 2) |
| Claim for employment expenses in excess of £2,500 |
| Claim for community investment tax relief |
Claim for enterprise investment scheme, seed enterprise investment scheme, social investment tax relief or venture capital trust, where the relief claimed for each item is more than £10,000. |
Note 1
Taxpayers in receipt of income from self-employment or a partnership which is fully covered by the trading income allowance will need to file an SA return if:
- They want to pay voluntary Class 2 NIC to build entitlement to contributory benefits like the state pension.
- They want to preserve their record of self-employment, for example to support an application for maternity allowance.
- They incur childcare costs and would like to claim tax free childcare based on their self-employment income.
- They are sub-contractors and want to claim back their construction industry scheme deductions.
Note 2
There is an obligation to notify HMRC of untaxed income, but an SA tax return will not usually be required where this income is under the limits noted.
How is income tax collected if a tax return is not required?
Where a tax return is not required HMRC seeks to collect any income tax due through the PAYE system, by making an adjustment to a tax code and/or issuing a simple assessment.
The notification requirement remains and unless HMRC is told about any change to the amount of income being taxed through a tax code, it will carry the adjustment forward to subsequent tax years. Taxpayers in this situation need to review their tax codes very carefully and tell HMRC about any changes that are needed.
If there is no PAYE record an SA return will be required to collect tax on any untaxed property, interest or investment income.
Simple assessment is currently used to collect income tax in the following two situations:
- pensioners who receive a state pension of more than their personal allowance and who have no PAYE source of income; and
- PAYE taxpayers (not in SA for any other reason) who have an underpayment which cannot be collected by an adjustment to a tax code.
See TAXguide 09/18 on simple assessment for further details.
HMRC had been expected to expand the use of simple assessment to remove further categories of taxpayers from SA, but that work has been on hold for several years.
Paper versus online returns
There are certain situations in which paper tax returns must be filed. The online filing exclusions and special cases lists for 2021 can be found on gov.uk.
Where a return is on the exclusions list and cannot be filed online, HMRC will accept that the taxpayer had a reasonable excuse for failing to file a paper return by the normal 31 October deadline provided that a paper return is submitted on or before 31 January following the end of the tax year to which the return relates. A reasonable excuse claim should accompany the paper return.
Some (but not all) commercial SA software will allow certain returns to be filed online even if they appear on the exclusions list. The tax liability may be incorrectly calculated in such cases so great care is needed. HMRC does run a manual correction process, but that should not be relied on.
Where a paper return is filed in an exclusion case this should be very clearly noted on the front page of the return along with the number of which exclusion applies.
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