Compute tax manually before submitting return

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This was a tip Della Hudson picked up from the HMRC webinar on the submission of SA tax returns affected by exclusions.

Why exclude?

There have always been exclusions from online filing for certain types of SA return, but the introduction of the dividend tax and dividend allowance, savings allowance and savings nil rate band have added several more exclusions for the 2016/17 tax year. A list of the 62 current exclusions (including the 16 new ones) can be found on the latest list of exclusions v4.0 dated 19 June 2017.

Why is this a big issue this year?

The Income Tax Act 2007, s 25 requires reliefs and allowances to be deducted in a way which will result in the greatest reduction to a taxpayer’s liability to income tax. For 2016/17 HMRC software (and interfaces from third party software) are currently set up to use the personal, dividend, and savings allowances in a fixed order, which may not necessarily be in the best interests of the taxpayer.  

AccountingWEB first reported this issue back in March 2017, and predicted that many SA tax returns would have to be filed in paper form for 2016/17.

Agent’s responsibility

If the ordering of allowances and reliefs affects any of our clients then we will need to carry out manual calculations and submit a paper return for that taxpayer. If this is submitted before 31 October, the deadline for paper returns, then there is no need to rely on the exclusion.

For those tax agents who are overly dependent on their tax software, and who aren’t confident of calculating the tax manually, the tax calculation summary notes (SA150 notes 2017) may help you to do this. However, those notes don’t cope with more complex situations so you may want to refer to the more detailed tax calculation summary notes (SA110 notes 2017).

This is a great opportunity to get your teeth into some practical tax calculations which are often overlooked by the CPD courses I attend. Do revisit the tax calculation summary notes over the next three weeks as HMRC will be updating that guidance.

Paper return

If you complete the manual SA return and calculation after the 31 October paper return deadline and before the final 31 January deadline, then you should file the paper return with a covering letter or this form claiming a reasonable excuse for the “late” submission, and state: "case is listed as an exclusion".

HMRC staff are trained to look for a covering letter. I know such attachments often get overlooked, but this is the correct process for us to follow as agents. Just making a note in the white space on the face of the SA tax return will not be picked up automatically by HMRC, and the webinar presenter acknowledged this.

Penalties

If you forget to claim the reasonable excuse for the exclusion in a covering letter or form, your client will automatically be issued with a late submission penalty, which can be appealed as usual, referring to the exclusion. Obviously, it’s a lot simpler to avoid the penalty by writing the covering letter with the initial submission.

Remember that the paper return must still reach HMRC by 31 January 2018, so do allow time for it to be delivered by post. If you only discover on 31 January that you are unable to submit a tax return online then you will be unable to meet this deadline. This is another great reason for managing your clients well.

A fix to software

As the 2016/17 year has generated an exceptional number of new exclusions from online filing HMRC is taking the unprecedented action of changing their tax calculation software mid-year in October 2017. It is not practical for them to do this sooner. You will need to check with your own third-party software provider as to whether their software will be updated at this time too.

Any tax returns/calculations already submitted with incorrect tax calculations, i.e. not setting off the various allowances to the benefit of the taxpayer, will be recalculated by HMRC after the revised tax calculation is in place. It wasn’t clear how long it would take for this to happen retrospectively.

Summary of timings

  • If you’ve already submitted a tax return online then HMRC will recalculate this for you after October 2017 so no need to do anything.
  • If you submit a paper return and calculation before 31 October then there is no need to do anything.
  • If you submit a paper return/calculation that will arrive with HMRC after 31 October then send a covering letter or claim form referring to the exclusion. As the HMRC tax calculation should be updated for some of these exclusions in October 2017 you may well be able to submit online anyway.
  • If you submit a paper return and calculation after 31 October 2017 without a covering letter then you will need to appeal the automatic penalty by referring to the exclusion.
  • If you submit a paper return that arrives with HMRC after 31 January then you are late as per normal rules.

This HMRC webinar on SA returns affected by exclusions will be repeated on 23 August (you can book here), which will give you an opportunity to ask HMRC further questions on the topic.

About Della Hudson

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19th Aug 2017 07:22

An excellent article but "HMRC staff are trained to look for a covering letter"? If my experience is anything to go by the covering letter will soon become separated from the return and lost. My advice is to number the covering letter "1 of 2" and the return "2 of 2". At least these trained staff will then be unable to deny receiving it.

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19th Aug 2017 08:54

I always work out the tax before I start the return anyway.

It guards against

a. the software being wrong, and

b. data entry errors.

It also helps me understand the effect of marginal changes.

It's a mistake to rely too heavily on software.

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By chatman
to lionofludesch
21st Aug 2017 12:19

This is a really good thing to do. Doing the calculations helps you understand them much better, for example, as you say, understanding the effect of marginal changes.

I am too lazy to do it, and the effect is evident, even to me!

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to chatman
21st Aug 2017 18:12

chatman wrote:

This is a really good thing to do.

Yeah. I know.

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By chatman
to lionofludesch
21st Aug 2017 18:21

lionofludesch wrote:

chatman wrote:

This is a really good thing to do.

Yeah. I know.

Yeah, the comment wasn't really directed at you.

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to chatman
21st Aug 2017 18:33

My apologies.

It was the "by chatman to lionofludesch" tag which fooled me.

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By chatman
to lionofludesch
21st Aug 2017 18:45

Oldest trick in the book, that one.

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19th Aug 2017 09:37

why bother submitting a hand written tax return just wait for the update or use other software or are practitioners using this an excuse to charge more . im obviously one of those who is over reliant on software which i am extremely relaxed about

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to carnmores
21st Aug 2017 11:21

carnmores wrote:

why bother submitting a hand written tax return just wait for the update or use other software or are practitioners using this an excuse to charge more . im obviously one of those who is over reliant on software which i am extremely relaxed about

I too am over reliant as I see no benefit in paying for a tax software subscription costing say £250 for me to then do it manually.

A bit like getting a dog and then barking yourself.

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to richardterhorst
21st Aug 2017 13:02

richardterhorst wrote:

A bit like getting a dog and then barking yourself.

Fingers crossed that the dog can bark, though. A recent AW thread has revealed a circumstance in which two well-known packages disagreed.

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to carnmores
23rd Aug 2017 10:42

3rd party software is unable to submit online until the changes are made at the HMRC end.

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By Eric T
19th Aug 2017 10:39

I pay a fortune for my software SPECIFICALLY so I don't have to go through the drudgery of calculating everything manually. Indeed, if I had to do this for every return, I would have to get rid of around 50% of my clients as it would take too long.

It is an utter disgrace that HMRC has devised such a complex and unworkable tax system that even THEY are unable to design software to cope.

How did we allow this to happen?

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to Eric T
19th Aug 2017 16:04

We weren't allowed much of a role.

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19th Aug 2017 15:27

As evidenced by the quality of the questions posed on Any Answers, a large number of so-called accountants would have no hope of manually completing a tax computation, because they quite simply don't understand the rules.

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to Tim Vane
19th Aug 2017 15:34

Which is caused by relying on software.

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to Tim Vane
19th Aug 2017 16:55

That's a little bit unfair :-)

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to carnmores
21st Aug 2017 10:23

But it is so - as, as Tim says, evidenced by some of the howlers appearing on Any Answers.

Earlier, you suggested that returns that, today, require a paper return should be held back to October, then submitted electronically as the exclusions will have been resolved by then. Do you really think that an organisation that has already tried and failed 20 times to get it right will get it right - and on time - the next time?

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to emanresu
21st Aug 2017 10:42

I think this is ridiculous and concur with Mo below. Of course there are people totally unqualified to complete this sort of work but that's a slightly different matter. Qualified people incl those with years of experience should be able to spot software errors easily

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to carnmores
21st Aug 2017 12:58

"this"? Please elaborate.

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By Moo
21st Aug 2017 10:37

"For those tax agents who are overly dependent on their tax software, and who aren’t confident of calculating the tax manually, the tax calculation summary notes (SA150 notes 2017) may help you to do this."
Really - 'overly dependent on their software' - a very judgy pants comment if I may say so Ms Hudson.
There are many of us out here who legitimately use software as an aid to productivity rather than a substitute for knowing how to produce manual calculations. In the small firm I work for 2 people produce 1,200 SA returns, we are both perfectly capable of manual calculations but to actually calculate all the tax manually would mean at least a 100% increase in staff with associated fee increase.
In an age where HMRC are putting pressure on taxpayers and practitioners to increasingly depend on IT it is a disgrace that HMRC should have produced such a situation and implied criticism of practitioners who may struggle to cope with the consequences is really not helpful.

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to Moo
23rd Aug 2017 11:08

Thank you for your comment. To clarify, I am a sole practitioner running my own business with a small team.

Whilst we also rely on our software for our productivity (all tax returns submitted by 8 Jan) we still need the technical ability to spot when things go wrong (usually input error). Accountancy is about more than just form filling and it's good to hear that you still retain the expertise to calculate manually if required.

As stated in the article HMRC are taking the unprecedented action of a mid-year update and there are various options available to us. Whilst this will affect productivity (and profitability as we operate on fixed fees) HMRC are taking action.

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to HudsonCo
23rd Aug 2017 12:28

HudsonCo wrote:

As stated in the article HMRC are taking the unprecedented action of a mid-year update ...


Paper returns submitted some months ago and indicated as being due a reply by mid-August are, today, reported on by HMRC as not even started upon. I can't get HMRC to give a statement, but have you come across any suggestion that HMRC themselves are just ignoring Paper returns until the next update?

It strikes me that, if this is so, HMRC's strategy is even higher-risk than one previously thought. They're taking one heck of a gamble that this update will work.

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21st Aug 2017 11:33

My suggestion would be to ask your tax software supplier whether they have yet updated their algorithms to ensure that the personal allowances are allocated in the most tax-efficient manner (rather than in the traditional order, which did not generate these tax inefficiencies prior to 2017).

If they claim to have updated their systems, you can check that it is correct by creating a dummy SA 2017 return with earned income of £40,000 and dividends of £9,000. If the tax calculation results in a liability of £7,100, then it has not been updated to reflect the reduction in tax that can be achieved by allocating only £8,000 of the PA to the earned income and £3,000 to the dividend income, which produces a tax liability of only £6,725.

If your software is correct, you can try to file it with HMRC and you will likely get it rejected. Once HMRC have updated their systems, it will be accepted. I would simply make a diary note for early December to try to re-file all SA 2017 returns that were rejected for this reason and, if they are still rejected, only then need you worry about submitting a paper version (assuming you don't want to wait until the last minute over Christmas or January).

My attention was first drawn to this anomaly by Tim Good of Absolute Tax last December and their software correctly dealt with it back then. I currently use Taxfiler and it also now correctly allocates the personal allowance.

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to charliecarne
21st Aug 2017 11:44

Spot on Charlie simples

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to carnmores
21st Aug 2017 12:01

Thank you, carnmores. I wouldn't, however, call it "simples". Any Chancellor who can design a tax system that makes it hard to calculate the tax liability in one's head when the only income is £40k earned plus £9k divis is not one who is trying to make tax simple! Not that I believe that he was purposely trying to make it hard. I think that, like most tax policy, it got changed around so many times just prior to the budget that no one who understood the implications had time to run the numbers before the policy was announced at the despatch box. Perhaps Spreadsheet Phil can simplify it in the next budget? Mind you, they'd probably just c-ck something else up at the same time!

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to charliecarne
21st Aug 2017 12:05

All the Chancellor had to do was make a rule that the personal allowance was allocated to the bottom slice of income first. If these off-piste allocations weren't allowed, there'd be no problem.

Chancellor makes up the rules - if they don't work, it's the Chancellor's fault.

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to lionofludesch
21st Aug 2017 12:23

True, but the recently introduced concept of allowances that don't reduce the amount of income that falls into the tax comp but, instead, only removes a slice of income once all other allowances and bands have been calculated is unnecessarily complex. Added to the (probably not anticipated when first introduced) creation of an interim 60% tax band above £100k and all of the other little anomalies, and we have far too many complexities that were caused for political, and not fiscal, reasons.

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to charliecarne
21st Aug 2017 12:47

Sure - not to mention the HICB charge - which is a variable marginal rate band depending on the number of kids you have.

Absolutely ridiculous. Clearly drafted by a half-wit.

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to lionofludesch
21st Aug 2017 18:06

the brightest and best of the Civil Service

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to charliecarne
22nd Aug 2017 21:08

charliecarne wrote:

If they claim to have updated their systems, you can check that it is correct by creating a dummy SA 2017 return with earned income of £40,000 and dividends of £9,000.

This won't do. A single test case doesn't validate a process.

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By MJShone
21st Aug 2017 15:38

OK - people may rely on the software to do the calculation, and there's no point in redoing it. But what about checking that the bottom line is what you expect? Does it make sense? Eg client has employment income - was the code "correct"? If not, what under/overpayment would we expect? etc etc etc

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to MJShone
21st Aug 2017 20:24

With - still - such a ragged design specification from HMRC, who can be sure of the definition of "make sense"? I'm quite surprised just how well the commercial software producers have coped - but none of them can be sure that they're right whilst the spec. is so fluid.

And this is not just speculation. A recent AW thread has been all about two respected commercial software providers' packages disagreeing as to the tax liability.

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By cfield
22nd Aug 2017 20:28

So we have to wait until October to find out if the online tax calculations have been corrected. What if they aren't? Do we have to re-visit each one and then file on paper if they're still wrong?

And when exactly in October are they going to change the algorithm? The 30th 0r 31st probably. Doesn't leave much time for filing all the fouled-up cases. We might end up having to file paper tax returns post October for the ones they still foul up on, even after the change, and send covering letters.

Incidentally, it's not just the section 25 cases that are causing grief. I had a tax return the other day with no need to juggle the order of income and they still got it wrong. For some reason, their systems insisted on taxing part of his investment income as earned income, thus depriving my client of a substantial chunk of his nil rate savings band (even though his earned income was less than his PA, his investment income was less than the NRB and his dividends were all within the BRB). Without doing the calculations beforehand as a check, I may not have spotted that.

I know the tax system now is ludicrously complex, but most of the software houses have managed to cope with it without fouling up like this. Why not HMRC? Is it really too much to expect our national tax authority to get its sums right?

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