Chapter 6 - Tax Compliance And Self Assesment Flashcards
Rory, who is self-employed, has a tax liability for 2022/23 of £18,000. If he files his 2022/23 tax return online, by when must he have done so, and what first payment on account for 2023/24 is made at that time?
a. 31 January 2024 and a £9000 first payment
b. 31 October 2023 and an £18,000 first payment.
c. 31 January 2023 and an £18,000 first payment.
d. 31 October 2024 and a £9,000 first payment.
a. 31 January 2024 and a £9000 first payment
The first payment on account is due on 31 January in the tax year concerned. The second payment on account is due on 31 July after the end of the tax year concerned.
Geoff is a self-employed builder who has net profits of £40,000 for 2022/23, and an income tax liability of £86,000. His turnover was £60,000
but he expects this will rise to £80,000 this year. Under self-assessment, assuming this is his only income, his first payment on account for 2023/24 is
a. £6000 on 31 January 2025.
b. £3000 on 31 January 2024.
c. £8,000 on 31 January 2024
d. £12,000 on 31 January 2023.
b. £3000 on 31 January 2024.
The first payment on account is due on 31 January in the tax year concerned. The second payment on account is due on 31 July after the end of the tax year concerned.
Each payment on account is usually based on half the previous year’s liability under self assessment. This includes:
income tax (over and above any tax that has been deducted at source or under
PAYE);
- class 4 NICs; and
- the high income child benefit charge.
Sian makes a gift aid donation to charity in 2023/24 and she has been advised to have this backdated to the previous tax year. What would the position be?
a. She could have it treated as being paid in the previous tax year, and she will receive relief in 2023/24 as a repayment.
b. She does not have the option to backdate the donation for tax purposes.
c. She could have it treated as being paid in the previous tax year, and her previous year’s tax liability X will be amended accordingly.
d. She has the option to choose how the tax relief is allowed, either backdated or treated as a repayment.
a. She could have it treated as being paid in the previous tax year, and she will receive relief in 2023/24 as a repayment.
Some tax reliefs can be carried back to previous years, e.g. gift aid donations to charity. In these circumstances, the past year’s self assessment is not reopened.
The procedure is:
• The relief is calculated as if it were being given for the earlier year.
•It is actually given as a repayment in the tax assessment for the year in which the claim arises. For example, the year in which the gift aid payment is made.
• Payments carried back do not amend the previous year’s assessment and therefore do not reduce payments on account for the current year. The payments on account are always based on the full tax liability of the year before deducting any relief carried back.
At a board meeting on 10 January, a company decides to pay its managing director a bonus of £25,000. This is documented in the meeting minutes, which are distributed to the board members on 20 January. The bonus is paid on 2 February and is ratified formally at the company’s AGM on 1 March. On what date will PAYE be operated in respect of the bonus?
A. 1 March.
B. 2 February.
C. 20 January
D.10 January
D.10 January
The date of payment depends on whether the recipient is an employee or a director.
For the majority of employees who are not directors, PAYE is operated when the employee is entitled to receive payment, even if payment is made at a later date.
For directors, PAYE is generally operated on the earliest of the date when.
•the payment is made;
• the director becomes entitled to be paid;
•the amount is credited in the company’s books, even if the director cannot draw it immediately; or
• the remuneration is fixed or agreed: for example, when the shareholders vote the remuneration at the time they approve the company’s annual accounts at the annual general meeting (AGM), or at an extraordinary general meeting in the case of many companies.
An employer pays HMRC all money owed for PAYE and National Insurance contributions electronically. For the tax month of September this money must be paid across to HMRC by:
A. 14th Oct
B. 19th Oct
C. 31st Oct
D. 22nd Oct
D. 22nd Oct
A tax month begins on the 6th day of the calendar month and ends on the 5th day of the following month.
By the 22nd day, following the end of each tax month (19th if not paying electronically), the employer must pay to HMRC all money owed for PAYE and NICs for that month.
What is the latest date by which an employer must give their employees a P60 for 2023/24?
A. 31 May 2024
B. 31 oct 2024
C. 6 april 2024
31 July 2024
A. 31 May 2024
Each employee who is still employed at the end of the tax year must be given, by 31 May, a P60 form showing details of:
• their total pay for the year;
• income tax deducted or refunded for the year;
• National Insurance details (number, contributions, earnings on which NICs are payable);
Statutory Sick Pay (SSP), SMP, Statutory Paternity Pay (SPP), Statutory Shared Parental
Pay (ShPP) and Statutory Adoption Pay (SAP); and
• student loan deductions.
Jed, who is self-employed, fails to make his balancing payment on 31 January 2024. How long will it be before he is charged a 5% penalty on any tax that still remains unpaid?
a. Once 21 days have passed.
b. Once two months have passed.
c. Once 30 days have passed
d. Once 14 days have passed
c. Once 30 days have passed
A 5% penalty is levied on any tax remaining unpaid more than 30 days after the balancing payment is due. If tax remains unpaid after a further five months, then another 5% penalty is charged, and again when tax remains unpaid after a further six months (i.e. eleven months after the initial penalty date).
William made a net profit of £30,000 in the tax year 2023/24. Under self-assessment, when will he need to pay his balancing payment for this tax year?
a. January 2025
b.January 2024.
c. July 2025.
d. July 2024.
a. January 2025
The balancing payment is due on the following 31 January.
• The balancing payment consists of an adjustment calculated by comparing the actual tax payable for the year with the total tax already paid through the payments on account. This could involve a payment to or from HMRC.
• The balancing payment also includes any class 2 NICs and any CGT payable (after deducting payments on account made in respect of UK residential property disposals) and any student loan repayment.
Within how many months of their receipt of a self-assessment tax return does HMRC usually have the right to carry out a compliance check into its accuracy?
a Six.
b. Twelve.
c. Nine.
d. Three.
b. Twelve.
• A HMRC compliance check must usually be started within twelve months of the date
HMRC receives the tax return. After this period, HMRC may open a compliance check only if:
- it has reason to believe that there has been fraudulent or negligent conduct; or
- the taxpayer has not provided enough information to enable HMRC to be satisfied that the return is accurate and complete.
An employer failed to pay HMRC money owed for PAVE and National Insurance contributions on two occasions during 2023/24. Both times
the payment was two months late. What penalty will be incurred for the second late payment, which was for an amount due of £68,500?
a. £3,290.
b. £6,850.
c. £685.
d. £1,370.
d. £1,370.
Employers are charged penalties on a monthly basis if their submissions are made late.
• There is no penalty for the first late submission during a tax year, but thereafter a monthly late-filing penalty of between £100 and £400 is charged depending on the number of employees. An additional 5% penalty may be charged when a submission is three months late.
Penalties may also be charged for inaccurate full payment submissions made during the tax year.
• Penalties may be charged when monthly or quarterly payments of PAYE are paid late.
There is no penalty for the first late payment in a tax year (unless it is more than six months late), but penalties then start at 1% of the late amount. The rate of penalty increases for subsequent late payments within the same tax year. A 5% penalty may be charged if payments are more than six months late, with a further 5% charged if payment is still not made after twelve months.
• In addition, any late payment will be charged interest on a daily basis.
As this is two failed payments they will be charged 2%, a percentage for each failure
How should an employed additional-rate taxpayer, with significant self-employed earnings, normally account for his self-employed income under the self-assessment tax regime for a given tax year?
A. By a single annual payment by the 31 January in the following year.
B. By a single payment within 9 months of his accounting year end.
C. By payments twice a year together with any balancing payment by 31 January in the following year
D. Through the PAYE system, operated by his employer.
C. By payments twice a year together with any balancing payment by 31 January in the following year
The balancing payment is due on the following 31 January.
• The balancing payment consists of an adjustment calculated by comparing the actual tax payable for the year with the total tax already paid through the payments on account. This could involve a payment to or from HMRC.
• The balancing payment also includes any class 2 NICs and any CGT payable (after deducting payments on account made in respect of UK residential property disposals) and any student loan repayment.
In respect of taxation, the Ramsay principle is used to
A. focus on the most serious offences in cases of multiple tax evasion.
B. give the benefit of doubt to a taxpayer in cases of accidental underpayment of tax.
C. ignore a series of transactions undertaken solely for tax avoidance, determining the transactions’ tax liability by the end result.
D. limit the investigative powers of the tax authorities to a maximum of five years.
C. ignore a series of transactions undertaken solely for tax avoidance, determining the transactions’ tax liability by the end result.
the courts can go beyond the normal tax consequences of each step on its own and look at the end result of the scheme. This is generally known as the Ramsay principle (from the case of Ramsay (WT) Ltd v. IRC (1981).
The House of Lords in Craven v. White (1988) laid down three conditions that must be present in order for the Ramsay principle to apply to a tax avoidance scheme:
- There must be a preordained series of transactions or a single composite transaction.
- There should be no commercial purpose apart from avoiding, deferring or mitigating tax.
- The series of transactions does not have to be part of a legally binding arrangement; it is enough that there was no practical likelihood of the transactions not taking place in the envisaged order.
The Ramsay Principle has been used by the courts to:
A allow HMRC to obtain details of interest paid to UK residents by overseas banks
B penalise income shifting between spouses in small family companies
C allow HMRC to reduce penalties where a taxpayer, not under investigation, has made a voluntary disclosure
D consider a series of transactions with no commercial purpose except tax avoidance and ignore them for tax purposes
D consider a series of transactions with no commercial purpose except tax avoidance and ignore them for tax purposes
The courts have held that when a taxpayer enters into a preordained series of transactions that includes one or more steps that have no commercial purpose other than tax avoidance, those steps and their tax consequences can be ignored for tax purposes. In other words, the courts can go beyond the normal tax consequences of each step on its own and look at the end result of the scheme. This is generally known as the Ramsay principle (from the case of Ramsay (WT) Ltd v. IRC (1981).
Caterin, a higher-rate taxpayer, invested £50,000 in an onshore tfe assurance bond just over 6 years ago. The bond consists of 100 segments and is now valued at £80,000. She would like to realise £40,000 from the bond, either only by partial withdrawals or only by surrenders with the minimum tak being generated at the time.
How may this be achieved? Assume Caterin’s personal savings allowance has been fully used.
A. A partial withdrawal across all segments of 1400 per segment without any tax liability
B. A partial withdrawal across all segments of £400 per segment with a 20% tax liability on £22,500
C. Surrender of 50 segments resulting in a 20% tax liability on
£2,500
D. Surrender of 50 segments resulting in a 20% tax liability on
£15,000
D. Surrender of 50 segments resulting in a 20% tax liability on
£15,000
As this was a £50,000 investment clustered into 100 policies, each cluster was for £500.
Caterin can make a partial withdrawal across all the segments of 1400 but there would be a 20% tax liability on the extess over 7 years worth of 5% withdrawals.
She can take 5% of the original investment each year as a tax deferred withdrawal. 5% of £500 equals E25 and the bond has been held for just over 6 years’ i.e. 7 years. 7 x £25 =
E275.
£175 can therefore be taken without an immediate liability to tax. By taking £400, she will mate a takable gain on each policy of £225. Multiply this by 100 to give an overall gain of £22,500. As a higher-rate taxpayer, Caterin would then be liable to 20% income tax on this amount which comes to £4,500.
Alternatively, she can cash in sufficient segments to give her £40,000. This would mean cashing in 50 segments at £800 each.
The profit on each segment is £800 - £500 = £300.
£300 × 50 = £15,000 total gain.
Tax liability of 20% on £15,000 = £3,000.
The second method produces the lowest tax liability for Caterin. The correct answer is therefore D.
Mr Black is self-employed and pays tax under the self assessment system.
State, for the 2023/24 tax year, by what dates the tax payments must be made.
Answer
31 January 2024
31st July 2024
31st January 2025
Detailed explanation
All payments are due on the 31 of the month.
The first payment on account is made in the January during the tax year concerned, so for the tax year 6 April 2023 to 5 April 2024, this is January 2024.
The second payment on account is made in the July following the end of the tax year concerned, so for the tax year 6 April 2023 to 5 April 2024, this is July 2024.
The final balancing payment is made in the following January, so for the tax year 6 April 2023 to 5 April 2024, this is January 2025.
CIl R03 Study Text Chapter 6, Section APA & A2B
