Finalising clients’ tax returns

Before you finalise your clients’ tax position,  it is well worth taking a quick step back and reviewing the information on the returns for completeness. To help with this we are setting out an ‘aide memoire’ containing some of the common and quirky issues/errors/omissions that we come across. They might seem obvious but have you dealt with all of them where relevant? 

These toolkits provide guidance on errors that HMRC frequently sees in returns and sets out steps to reduce these. They are designed to: 

• ensure that returns are completed correctly, minimising errors
• focus on the areas of possible error that HMRC consider key
• demonstrate reasonable care.

There are toolkits for all of the main areas of the return such as capital gains, what expenses can be claimed and rental income. 

Sounds very obvious but to file the return online a unique tax reference (UTR) is needed – which is fine if the client has come from another accountant. But if the client is a start up and has not registered as self-employed, HMRC’s quoted delivery for the UTR of 10 working days can be delayed around this time of year due to demand. So make sure that this simple procedure is requested in good time. 

Where a client has income over £50,000 there is a specific tax charge (basically a repayment of the benefit), including where: 

• the client or their partner get child benefit
• someone else gets child benefit for a child living with them and they contribute at least an equal amount towards the child’s upkeep
• it doesn’t matter if the child is living with the client or in fact is not their own child.

The relevant income is the total taxable income before any personal allowances and less things like Gift Aid. 

Some tax software includes a ‘nudge’ warning where the income entered exceeds the above but always make sure you confirm the situation where the issue may be relevant. Remember that some clients may need to specifically register for a tax return simply to pay the charge even if they are not self-employed or ordinarily need to fill in a tax return. 

Many clients use the annual tax return to get a tax refund – or make a payment of tax liabilities – because they have multiple sources of income and the tax codes issued do not properly address the correct tax.

Admittedly HMRC is using the information from pension schemes etc much more efficiently these days but where a code is incorrect it may be better to advise your client to get it corrected directly and not wait for the return to be submitted. The accountant can do this for them using this online form. 

Alternatively the client might wish to set up their own personal tax account.

Many members have clients with one or more rental properties. The rules regarding what can/can’t be claimed are changing fast so here’s a quick re-cap to make sure your client has got things right. 

Back to basics: the expenses must be wholly and exclusively for the purposes of renting out the property. However, generally where a definite part or proportion of an expense is incurred wholly and exclusively for the purposes of the property business, you can deduct that part or proportion. 

Common types of expenses that can be deducted (if paid by the client) are: 

• water rates, council tax, gas and electricity
• insurance – landlords’ policies for buildings, contents and public liability
• interest on a mortgage to buy the property
• costs of services, including the wages of gardeners and cleaners
• letting agent fees and management fees
• legal fees for lets of a year or less, or for renewing a lease for less than 50 years
• accountants’ fees
• rents (if you’re sub-letting), ground rents and service charges
• direct costs such as phone calls, stationery and advertising for new tenants
• vehicle running costs (only the proportion used for your rental business) 

• general maintenance and repairs to the property, but not improvements:
  examples of typical maintenance and repair costs.
  
  If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.
  
  If the property you let out is fully furnished, you can elect to claim a wear and tear allowance. A fully furnished property is one let with enough furniture, furnishings and equipment for normal residential use. (BUT in terms of advice to the client, remember that from 6 April 2016 these rules are changing and the client may instead be able to claim Replacement Domestic Item relief).

Remember that the full amount of the mortgage payment cannot be claimed – only the interest element of the payment can be offset so make sure the client has given you the correct figures. 

If your client has increased their mortgage on the buy-to-let property they can also treat interest on the additional loan as a revenue expense but only up to the capital value of the property when it was brought into the letting business. Interest on any additional borrowing above the capital value of the property when it was brought into the letting business is not tax deductible: example of increasing the mortgage. 

Use of reliefs
One area that you need to be very careful about is ensuring that the client is aware of/has claimed relevant capital gains tax reliefs. There have been a number of changes recently so it’s important to refresh your knowledge on the main reliefs available both for the 2015/16 tax return and for future years. Some of them have some devil in the detail so please use the following links to the full guidance:  

Business asset rollover relief

Chattels

Trusts

Gift hold-over relief

Principal private residence relief

Entrepreneurs' relief

Incorporation relief

Allowances and losses
Remember to ensure that the CGT allowance is utilised and also losses brought forward are claimed where applicable. 

Disclosures
Remember that the capital gains pages need to be completed merely because the client sold or disposed of chargeable assets which were worth more than £44,400. 

Where a client has self-employed income as well as taxed salary income, the student loans repayment is based on both (subject to thresholds). Clients may think that because deductions are taken from their salary this is all that needs to be done. So be careful that the student loans box is completed on the tax return and that the calculations include all relevant income. 

Clients that make charitable donations may be unaware of the tax relief and simply might not inform you of their donations. The main tax advantage is for higher rate taxpayers. They can claim the difference between the rate paid and basic rate on the donation, either: 

• through the self assessment tax return
• by asking HMRC to amend the tax code.

Remember that for Gift Aid, the client can also claim tax relief on donations made in the current tax year (up to the date of sending the return) if they either: 

• want tax relief sooner than waiting for the end of the tax year
• won’t pay higher rate tax in the current year, but did in the previous year.

These can be easily left off the tax return as clients assume that because their code has been altered then their disclosure responsibilities are complied with. Make sure salaried clients (especially directors) are aware that P11D benefits need to be included on the tax return in most cases.

Although not strictly a tax return issue, this is a good opportunity to enquire about the income of your client’s spouse or civil partner. They can transfer £1,190 of their personal allowance to the husband, wife or civil partner. This can reduce their tax by up to £238 every tax year.

To benefit as a couple, the transferor needs to earn less than their partner and have an income of £11,850 or less. HMRC currently has a media campaign highlighting this so you may well be asked about it.