Tax period blunder

joejtd

My stepdad died in may we filled out required forms. He was a sole trader and his accounting period was September to August. After several letters back and forth I rang revenue helpline and after much heated debate I realised an error had been made on his part. For many years when he filled his tax return he entered information for his accounting period ie the current year september to august in his tax return both personal and self employed not as the tax tech said for the preceding tax year. To my certain knowledge this has gone on for at least 10yrs if not more. Are we the only people to make this mistake?

The tax tech said to write to tax inspector explaining and he'll decide how to proceed should we be worried?

Hope this makes sense.

joejtd

Just to make clear on this years tax return, both self employed and personal, data entered was from accounts dated 1 september 2009 to 31 August 2010 and that was the way it was done for years.

jimmo

As nobody else has had a go, the way I read your post is that your step dad has, for a number of years, self-assessed on the profits which were correctly assessable for the following year.
Generally speaking the effect of inflation is that business profits usually increase each year so it is entirely possible that each year your step dad got it wrong he paid more tax than he should have. However, in years of stagnation or recession and possibly, if your step dad was easing down his business activities there could easily be years where he has underpaid tax.
The big question is how much is involved?
I am afraid the only certainty is that if your step dad has seriously underpaid tax the Inspector will have to come looking. If the underpayment isn't very much or if your step dad has overpaid the Inspector could easily decide to take no action.
I think we really need to appreciate whether there is an underpayment or an overpayment before giving you any real advice.
Sorry to add to any confusion, but anyone who uses an accounting date other than 5 April should have "overlap profits" brought forward which are converted to overlap relief in the final year of trading.
Do you understand that or does it point to how out of your depth you may be?
It really all comes down to numbers.
Give us the last 6 years worth of profits and we can start to piece this together.

joejtd

Just discovered the term "basis period" in IR notes on self employment and all has become much clearer. Don't know how I've missed it in the past.

The business sold in November 2009 before he died in May 2010. That is how the error came to light when we did what we thought were his final returns.

Profits in the last six years have been all over the place and have never been above £8000, latterly much lower resulting in money being refunded.

I haven't got the detailed figures here but will get them and post later.

Thanks for answering.

joejtd

Have found Profit and loss for previous 5 years that we sent to prospective buyer of the business. They're not as bad as I thought
Here goes:

September 1st 2004 to August 31st 2005 £19,043
September 1st 2005 to August 31st 2006 £17,102
September 1st 2006 to August 31st 2007 £24,846
September 1st 2007 to August 31st 2008 £ 8,315
September 1st 2008 to August 31st 2009 £11,589

The last year I don't have but that was much less as it ended in may and the figures were the ones we used this year.

Also there was annual other income such as his old age pension interest etc. personal stuff. of approximately £ 8000 which we entered on same basis as self employed which IR helpline tax tech. told me should have been done April to April.

Hope this helps.

jimmo

If I have read this correctly we have the following situation.
2004/05 self assessed profits £19,043. The correct figure assessable (profits to 31/8/04) is unknown.
2005/06 self assessed profits £17,102. The correct figure assessable is (y/e 31/8/05) £19,043.
2006/07 self assessed profits £24,846. The correct figure assessable is (y/e 31/8/06) £17,012.
2007/08 self assessed profits £8,315. The correct figure assessable is (y/e 31/8/07) £24,846.
2008/09 self assessed profits £11,589. The correct figure assessable is (y/e 31/8/08) £8,315.
Lets leave 2009/10 for the time being.
Assuming your step dad was liable at 20% each year the results are :
2004/05 unknown.
2005/06 underpaid ( [EMAIL="1941@20%"]1941@20%[/EMAIL]) £388.20.
2006/07 overpaid ([EMAIL="7834@20%"]7834@20%[/EMAIL]) £1,566.80.
2007/08 underpaid ([EMAIL="16531@20%"]16531@20%[/EMAIL]) £3,306.20
2008/09 overpaid ([EMAIL="3274@20%"]3274@20%[/EMAIL]) £654.80.
To be frank, that doesn't look too good does it? For the years that we can be confident of the net result is that there is tax outstanding and your step dad's estate could face an additional tax bill with interest.
Now time limits become terribly important. Having retired in 2006 I am not the most reliable authority on current day time limits but in my working days there was no way that HMRC could go invoke extended time limits in deceased cases and bringing this up to date, I believe that HMRC can review the last 4 years only.
If I am correct the £388.20 underpaid for 2005/06 is beyond the grabs of HMRC but there remains tax underpaid.
On the other hand the personal representatives of the deceased may be able to claim Error or Mistake Relief which, as far as I am aware still has a time limit of 6 years (actually 5 years and 10 months)
So HMRC can go back to 2006/07 but the personal representatives can go back to 2004/05 but only until 31/1/11.
On the basis of the information available that would not be a wise move unless it can be established that there was a serious overpayment in 2004/05.
Do you have the figure of profits for the y/e 31/8/2004?
The final accounts should go to November 2009 when the business was sold. I really dont understand why you have not got those figures. Can you throw any more light on that?

joejtd

I'm at home and all the data is on a laptop with accounts at my mums house. Like I said the figures used here were in an email to a prospective purchaser of the business who asked for previous five years profit and loss in september 09. I found a copy of it last night on my own computer. I can get the accounts off the laptop going back 7 years or more.

I'm trying to help my mum who is the executor of the estate. Irony is my mum tried to get my stepdad to retire 15 years ago at 65 before this quagmire was entered into.

Must admit it looks grim. As soon as I can get hold of more figures I'll post them.

Thanks for showing an interest much appreciated.

John_Pierpoint

Am I missing something here ?

A pensioner has been paying his self employment tax a year early.

Surely the major issue is proving to HMRC that the final year's tax for the year ending November 2009 is only three month's worth and that is what is outstanding?

Prior to April 2008 the standard rate of income tax was 22% ?

joejtd

jimmo Here are the figures for September 1st 2009 to August 31st 2010 which cover the sale of the business in November 2009 and are the accounts for the final period in business, they amount to a loss of £6,145.04

As soon as I receive 2003_04 profit and loss I'll post (my sister is trying to email them).

John I would love it to be as you say.

jimmo

John_Pierpoint wrote: »

Am I missing something here ?

I do believe so.
The step father has incorrectly completed his Self Assessment returns for an unspecified number of years. The OP knows this and so do HMRC. If there is tax unpaid HMRC have the opportunity, subject to time limits, to re-open earlier years and recover any unpaid tax plus interest.
If there is tax overpaid the Personal Representatives have the opportunity, subject to time limits, to re-open earlier years and seek repayment.
As regards the time limits, things have changed quite a lot since I retired in 2006 and whilst I am aware of the existence of the new 4 year time limit I cannot claim any working knowledge of it.
However, in my days at HMRC the normal time limit was 6 years (or 5 years and 10 months but 6 years will do in this case) and we couldn't invoke extended time limits or charge penalties in deceased cases simply because the "offender" was no longer with us.
I am therefore working on the assumption that, apart from the change of the time limit to 4 years, the other rules remain the same. No doubt if I am wrong somebody with current working knowledge will come in.
As it stands now, my figures in post #6 indicate net tax unpaid of a little over £1450 and whilst, in HMRC terms, that is not a lot of money, it nevertheless presents itself to somebody working on compliance as easy pickings, and, to use a hackneyed old example, I would far sooner sit at my desk doing a bit of number crunching than pop out and buy a bag of chips just to take them back to the office and count them. Actually I have never done that but I do know a few who have.
Anyway, back to the point. When I first contributed to this thread I was full of hope that I would be able to point the OP to a potential repayment because of his step father's mistakes. As it stands now that seems rather unlikely but it is not out of the question. There is also a very real possibility that HMRC will come looking for money and whilst that is hardly good news for the OP I think it is better for him to know it might happen, after all that is what he asked.
At the time I am writing this I am aware that the OP has given us a figure for August 2010 and, being a loss, that brings up a whole new set of things to consider.
In cases like this the basic principle that HMRC works to is to look at the whole situation to decide what is the correct amount assessable. Then they look at what is challengeable and decide whether to challenge or not.
In this case the final amount assessable for the year of cessation of business not only depends on the final accounts, it also depends on the amount of transitional relief and/or overlap relief which should have been brought forward.
I have not addressed those just yet because I am afraid that if I overload the OP with technical issues he may give up.
That is my opinion. Take it in little stages and maybe we can get somewhere.

joejtd

jimmo wrote: »

I have not addressed those just yet because I am afraid that if I overload the OP with technical issues he may give up.
That is my opinion. Take it in little stages and maybe we can get somewhere.

Don't worry I'll stick it out and if I'm struggling I'll let you know glad you want to keep at it.

Anyway here goes with year ending Aug 04 profit £19,460.