Tax Administration

Under self-assessment, individuals are responsible for reporting their own income and gains to HMRC, calculating (or having HMRC calculate) their tax liability, and paying the correct amount by the due date.

Who must file a self-assessment return?

• Self-employed individuals (sole traders and partners)
• Company directors
• Individuals with untaxed income above certain thresholds (rental income, investment income, foreign income)
• Higher-rate or additional-rate taxpayers with savings or investment income
• Anyone with capital gains above the annual exempt amount
• Anyone HMRC sends a tax return to (they must complete and file it even if no tax is owed)

Key Self-Assessment Deadlines

Payments on Account — Detailed Rules

Pay As You Earn (PAYE) is the system by which employers deduct income tax and employee NIC from employees' pay before paying them, and account for these deductions (plus employer NIC) to HMRC.

How PAYE works:

• HMRC issues a tax code to each employee (via the employer). The tax code reflects the employee's personal allowance and any adjustments (e.g., for BIKs, underpaid tax from prior years, state pension).
• The employer uses the tax code to calculate the correct deduction from each pay period's gross pay, using HMRC's tax tables or payroll software.
• PAYE operates on a cumulative basis — each pay period, the calculation takes into account the total pay and tax-free amount for the year to date, ensuring the correct total tax is deducted by the year end.

Employer obligations:

• Real Time Information (RTI): Employers must submit payroll information to HMRC on or before each payment date using a Full Payment Submission (FPS). This replaced the old end-of-year P35/P14 system.
• Payment to HMRC: Monthly payment of total PAYE deducted (income tax + employee NIC + employer NIC) by the 22nd of the following month (electronic) or 19th (cheque). Small employers (quarterly PAYE scheme): quarterly if average monthly PAYE < £1,500.
• P60: Issued to each employee by 31 May following the tax year — a summary of total pay and tax deducted for the year.
• P11D: Report of benefits in kind and expenses provided to employees, filed by 6 July following the tax year. The taxable BIK values are used to adjust the employee's tax code for the following year or included in their self-assessment return.
• Class 1A NIC: Employer pays Class 1A on BIKs by 19/22 July following the tax year.

Filing the CT600 return:

• Due within 12 months of the end of the accounting period
• Filed online (mandatory) with iXBRL-tagged accounts and computations
• The company must also submit its statutory accounts and tax computations with the return

Payment deadlines:

*Thresholds are divided by the number of associated companies (including the company itself).

Quarterly instalments (large companies):

Each instalment = 3 × CT liability for the current period ÷ 12 (i.e., 25% of the estimated annual liability). The instalments are based on the current year's estimated liability, not the prior year. If the estimate is incorrect, the final instalment is adjusted. Interest is charged on underpayments and paid on overpayments from the instalment due dates.

Late filing penalties (CT):

• Up to 3 months late: £100
• Over 3 months late: £200
• Over 6 months late: 10% of unpaid tax
• Over 12 months late: 20% of unpaid tax
• If the return is late for 3 consecutive periods: the £100/£200 penalties increase to £500/£1,000

HMRC has the power to check that taxpayers have paid the correct amount of tax through enquiries and discovery assessments.

Enquiry into a return:

• HMRC can open an enquiry into any self-assessment or CT return — it does not need to have a specific reason (can be random or risk-based)
• Time limit to open: Within 12 months of the actual filing date (or 12 months from the filing deadline if filed on time, or 12 months from the quarter day following the actual filing date if filed late)
• For a return filed on time by 31 January: the enquiry window closes on 31 January the following year
• HMRC can request documents, information, and explanations during the enquiry
• The enquiry is closed by HMRC issuing a closure notice, which states the conclusions and any amendments to the return

Discovery assessments:

If HMRC "discovers" that tax has been underpaid (and the normal enquiry window has closed), they can raise a discovery assessment — but only in specific circumstances:

Information and inspection powers: HMRC can issue formal notices requiring a taxpayer (or a third party, such as a bank or employer) to provide documents and information reasonably required to check the taxpayer's tax position. HMRC can also inspect business premises (with notice).

Penalties for late filing of self-assessment returns:

Penalties for late payment of tax (income tax):

Plus late payment interest from the due date until the date of payment.

Penalties for inaccuracies in returns:

The penalty is reduced for disclosure: unprompted disclosure (taxpayer tells HMRC before they discover the error) receives a larger reduction than prompted disclosure (taxpayer tells HMRC after being challenged).

Failure to keep records: Penalty of up to £3,000 per tax year/accounting period.

Taxpayers have the right to challenge HMRC decisions (assessments, penalty notices, amendments to returns).

The appeals process:

1. Appeal to HMRC: Within 30 days of the decision, the taxpayer writes to HMRC setting out the grounds of appeal. Most disputes are resolved at this stage through discussion and agreement.
2. Internal review: If not resolved, the taxpayer can request an internal review by a different HMRC officer who was not involved in the original decision. The review must be completed within 45 days (or an agreed longer period). This is optional — the taxpayer can go straight to the tribunal.
3. First-tier Tribunal (Tax Chamber): If still unresolved, the taxpayer appeals to the independent First-tier Tribunal. Hearings are relatively informal. The tribunal can confirm, vary, or cancel HMRC's decision. No costs are usually awarded.
4. Upper Tribunal (Tax and Chancery Chamber): Appeals on points of law from the First-tier Tribunal. More formal — legal representation is common.
5. Court of Appeal: Further appeals on points of law (with permission).
6. Supreme Court: Final court of appeal on the most important points of law (with permission). Decisions are binding on all lower courts and tribunals.

Postponement of tax: Pending the outcome of an appeal, the taxpayer can apply to postpone payment of the disputed tax. However, tax that is not disputed must still be paid by the normal due date. Interest runs on any tax that is eventually found to be due but was postponed.

Taxpayers are required to keep records sufficient to enable them to make a correct and complete tax return. Failure to keep adequate records is a penalty offence (up to £3,000).

Types of records to keep:

• Employed individuals: P60, P11D (or payslips showing the same information), details of other income (savings, dividends), records of capital disposals
• Self-employed: All business records — sales invoices, purchase invoices, bank statements, receipts, mileage logs, capital expenditure records, employment records for any staff, stock records
• Companies: Statutory accounting records (CA 2006), all transaction records, board minutes, share register, contracts, asset registers, PAYE records, VAT records

Making Tax Digital (MTD): Since April 2022, VAT-registered businesses must keep digital records and submit VAT returns using MTD-compatible software. MTD for Income Tax Self Assessment (MTD for ITSA) is being phased in for self-employed individuals and landlords with qualifying income above £50,000 (from April 2026) and above £30,000 (from April 2027). Under MTD for ITSA, quarterly updates of income and expenses must be submitted digitally.