Are you stressing already about your next tax return deadline? There are many pitfalls to filing your tax return at the last minute – advance preparation is essential to tax planning and here’s why.
If you managed to get your self-assessment tax return on 31 January 2017 in on time then no doubt you looked back with relief. The pressure was off and you won’t have to worry about it until sometime around January next year!
Well let me tell you, that’s really a bad idea!
If you’re keen to plan your affairs, budget for potential payments and plan legitimate and potential ways to achieve savings, then you should see the tax return as part of a process. That means thinking about it with your advisor long before the online tax return deadline looms in 2018. Here’s what you should know and action moving forward.
The issues of last minute returns that you need to understand.
Preparing your tax return (for both individuals, sole traders and partnerships) can be easily overlooked when you have countless other things to do. Whether you use an accountant or not, a last minute or a late filed tax return can cause a lot more problems than just a financial penalty! Not only will you be liable to pay fines, but there are several other problems that are often forgotten:
- Lack of budgeting
If you prepare your return last minute, or if you provide all the necessary information to your accountant close to the deadline then this leaves very little room for manoeuvre. You or your accountant will have to process all your sources of income and calculate your tax liability very quickly.
If you’ve sold an asset or had a bumper year in your business and rewarded yourself significant dividends, then you could be looking at a significant tax payment that could be in the tens of thousands of pounds. What if you’ve already spent most of that hard earned money? You would then be faced with a nasty surprise and wondering how exactly you’re going to pay HMRC.
- Poor Tax Planning
You may hand over all of your receipts and payslips to your accountant a few days before the deadline and expect no problems. In order to plan and save tax, working so close to the deadline doesn’t provide time to identify ways to potentially reduce your liability.
For example, might you consider using some of your money for investments that might qualify for various tax reliefs? General areas that come under planning include claiming allowable expenses, taking advantage of exemptions and claiming applicable allowances. A tax return isn’t just a compliance task, if performed properly by all sides it should incorporate all aspects of tax planning – the process.
- Bad Credit Rating
Whilst the most well-known problem with a missed deadline is the significant penalties and surcharges that may be incurred. Something that is rarely touched on is that you can suffer a deterioration of your credit rating which will hurt your future ability to raise finance or negotiate an extension of your bank overdraft.
- Wasted Time
Trying to get hold of HMRC via phone is hard at the best of times, but it is even more difficult in the run up to 31 January. So many people leave their returns and therefore queries to the beginning of the year that it leads to a mass of calls which they really struggle to field. Avoid the lengthy waiting times and get your work and queries out the way well before the new year rush.
- Tax Investigation
If you submit your tax return on time but it contains errors that may have arisen from time pressure, then that will automatically attract the suspicion of HMRC. This may result in a tax investigation which can cost thousands of pounds and can last for several years. Definitely a price and period of uncertainty you want to avoid.
Benefits of an earlier tax return
Completing your Tax Return can be complicated and you’re more likely to make mistakes if you don’t give yourself time to organise all the information. Getting the details sorted well in advance of the deadline can make your life considerably easier.
1. Personal Cash Flow
If you calculate your tax liability in advance of the deadline this is very useful for personal cash flow management and planning. You will know exactly how much you owe in advance which means you can set money aside on a regular basis in the lead up to making your payment.
2. Amendments
If you make an error, there will be time to both spot it and make any necessary adjustments.
3. Refunds
If you are due a refund from an overpayment in a prior year, HMRC’s refunds are accelerated which means you can get the money in your bank soon after your return has been submitted. The later you leave it, the longer the money is in HMRC’s bank, not yours!
How can you be better prepared?
The one good thing about the deadline is that it’s consistent! It always comes around at the same time every year. The best way to avoid facing penalties is to be very organised and maintain easily accessible and up to date records of your income and outgoings throughout the year. The better your record keeping, the easier it will be to complete the return fully and before the deadline.
To use an accountant or not to use an accountant?
Tax is a complex, ever changing area that can be subject to legislative interpretation. If it’s not your specialist area then it will be impossible for you to understand all the reliefs that are applicable to your circumstances. That means you’re likely to complete your tax return incorrectly and could end up either paying too much without realising or not paying enough and risking an investigation.
There are a number of articles and websites out there that list the ways you can make completing your tax return pain free and easy. In reality the only way you can avoid any stress and potential issues is by not having to carry out this work yourself. Why not outsource this hassle to people with in depth knowledge of the rules and regulations and how to apply them?
That way your accountant can deal with all the boring legwork, making sure nothing has been missed. You will then be safe in the knowledge that you’re not paying any more tax than is legally required and have peace of mind that every is in order.
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