Tracy Ewen, Managing Director, IGF Invoice Finance
For any individuals who are self-employed or work on a freelance basis, a tax return must be filed each January for a proportionate amount of tax to be paid according to their income. The deadline for submitting a tax return to HMRC passed at 11:59pm on 31st January 2016, leaving some individuals who have yet to register for a unique code or file their tax return liable to heavy fines.
Those who are self-employed often push tax returns to the bottom of the pile in favour of more urgent business priorities. By preparing ahead of time and registering before the deadline closes, individuals can avoid problems such as websites crashing and other online woes on the day itself, in addition to saving themselves from potential penalties.
Last month, HSBC customers trying to to file a tax return before the deadline had to deal with a cyber attack on the bank’s online system, meaning that anyone who needed information about their HSBC bank accounts were left without access. In cases like these, HMRC will normally accept an estimate in order for self-assessment tax forms to be filed on time, although this is a clear indication that individuals needing to file should have their information on hand far earlier than planned.
Fines, fines, fines
Those who have previously paid a tax return will have been given a Unique Taxpayer Reference (UTR), allowing them to submit their tax return ahead of the deadline. For new self-assessed taxpayers, registering before the deadline and filing the return as soon as a code has been provided is fundamental to avoiding these fines.
Individuals who miss the cut-off point will automatically incur a penalty of £100. If a return is three months late, individuals will be looking at a usual fine of around £10 per day once the 31st April deadline has passed. This could amount to hundreds of pounds in additional payments if delayed for three months or more, as further fines are added for every quarter that the tax return is not filed.
If information within the tax form is incorrect, there are potential penalties depending on HMRC’s view of the form. If HMRC believes the individual to have been careless or misleading, these penalties are payable in addition to the tax owed. Carelessness can result in a penalty up to 30% of the extra tax owing, and can increase significantly if the amount has been deliberately underestimated.
Negligence can also lead to an increase in the amount owed to HMRC. By ensuring that a tax return is as correct as possible, freelancers and those who are self-employed can avoid having to pay an extra penalty fee. If certain financial documents are confusing or difficult to understand, it is best to outsource these to a professional who can decipher the information clearly ahead of filing the form.
In addition to this, there are penalties for not paying the tax bill on time. If the tax bill has not been paid by February 28th, then a five per cent penalty could be incurred, which will increase as time progresses and the bill remains unpaid.
After paying their tax bill, many freelancers and self-employed individuals may find the large disruption in cashflow difficult to deal with, as it can often result in a large sum of money suddenly being absent from their bank account. This is especially true if an individual has been exposed to a heavy fine for not registering promptly.
Preparing a realistic cashflow projection ahead of filing a tax return will alert an individual to any potential issues with funds and allow the situation to be addressed before it becomes a problem. If paying a tax return does create problems with cashflow, there are many resources that offer financial support and advice to those who are struggling.
It is important for those paying a tax return to familiarise themselves with the full spectrum of options available. Many professional finance specialists now offer free tried and tested advice when it comes to managing finances, which is crucial when individuals are struggling with limited funds. Smaller, alternative providers are also now on the rise, and can offer a strong option as an alternative to a bank loan.
By ensuring all their information is in order, and following the deadlines set by HMRC for filing and paying their tax return, self-employed and freelance workers will save themselves from penalty fees and only have to pay what is owed. Making use of financial advice at any early stage in this process will save these individuals both time and money, allowing those who are self-employed to thrive as the year continues.