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