sole trader tax

Directors not compelled to file returns

HMRC guidance changed at last

Section 7(1) of the Taxes Management Act 1970 states that a person who is chargeable to Income Tax or Capital Gains Tax (CGT) in a tax year must notify HMRC within six months from the end of the relevant tax year and effectively register for Self-Assessment (SA). Logic dictates therefore that a director who is a non-taxpayer should not be compelled to register for SA and file annual tax returns unless they receive a notice to do so from HMRC. However, for too long, the Revenue have been putting out contrary advice to limited company directors but that has finally been corrected.

There have been a number of tax tribunal cases over recent years concerning this very issue. Last year in particular, in Symes v HMRC, the judge took HMRC to task over its rationale that every company director has a statutory obligation to complete a tax return. The only statutory obligation here was that every person must notify HMRC if they are chargeable to Income Tax and Capital Gains on their income.

Directors earnings fall within the scope of PAYE and being a director per se does not entitle that person to dividends, so it cannot be assumed that being a company director will automatically mean they will be remunerated and therefore required to file a tax return.

Following a number of enquiries about the law on the obligation to notify chargeability to tax, HMRC have now updated their guidance on SA tax returns to clarify that company directors whose income is taxed at source and have no further tax to pay do not need to complete a tax return.

Anyone chargeable to Income Tax or CGT must tell HMRC they are chargeable to tax if they have:

  • not received a notice to file a return; or
  • received a notice to file a return and HMRC have agreed to withdraw the notice

Information on how to do this can be found here.

There are some exclusions which include:

  • individuals in receipt of a Simple Assessment (unless they are chargeable on anything that is not included in the assessment)
  • individuals whose income has been taxed at source
  • individuals not liable to the high income child benefit charge.

Many company directors are taxed under PAYE and so will not need to give notice of liability to tax, provided they have no other untaxed income.

HMRC can choose to issue a notice to file an SA return, under section 8 Taxes Management Act 1970, to any individual. Anyone receiving a notice to file a tax return must do so by the required deadline, otherwise they may be liable to a late filing and/or a late payment penalty.

If a person has received a notice to file and has no other taxable income to report, they can ask for the notice to file to be withdrawn. However, HMRC may decide that they still require a return and if so, the return must be submitted, otherwise penalties may be incurred.

The guidance on running a limited company has also been updated to reflect the above by removing reference to completing a personal tax return.

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