DIRECTORS’ TAX - 25.07.2011

Do you need to correct your tax code?

P11D link

Each year there are two main occasions when the Taxman overhauls code numbers. The first follows receipt of self-assessment tax returns and the second is linked to the submission of the annual benefits and expenses return Forms P11D. We’re prepared to stick our necks out and say that in the latter case the majority of the resulting amendments to tax codes will be wrong.

Why are so many wrong?

Last year the Taxman took a huge amount of flack in the press over the high percentage of incorrect code numbers he issued. Some of the errors were caused by his newly introduced computer system but many were simply part and parcel of the way the PAYE system works. Because the Taxman gets most of the information to calculate your tax code from your self-assessment tax return and Form P11D for the previous financial year, it’s out of date. The question is, should you bring him up to date so he can correct your code?

High or low risk?

Because directors receive benefits-in-kind (BiKs) they’re one of the groups of taxpayers likely to receive incorrect codes. For instance, a director whose company provides him with car, medical insurance and pays his home broadband bills might easily find himself in the following situation.

Example. For 2010/11 all the BiKs received by the director were worth £4,600. But in 2011/12 he’s given a more expensive company car, the medical insurance premium increases as does his broadband bill, making the total BiK £7,600. But, unless the director tells him, the earliest the Taxman will know about this is when the P11D for 2011/12 is submitted in July 2012. By then the tax year is over and so it’s too late to amend the director’s code. The £3,000 worth of extra benefits received will result in a tax bill of £1,200 (£3,000 x 40%).

Timing

Interestingly, had the director told the Taxman about the changes to his BiKs as they happened, his code would have been amended and the extra tax collected over each month up to March 2012. But by not telling the Taxman he doesn’t have to pay anything until January 2013 at the earliest.

Tip. As the tax owing is no more than £2,000, he can opt to defer payment for even longer, as it can be spread over the twelve months up to March 2014 (see The next step).

Penalty possible?

The Taxman has always said that deliberately paying tax late counts as avoidance, and he charges penalties accordingly. So if you know that your code should take account of higher BiKs etc., could you be fined for not notifying him? We’ve not heard of a single case of this happening. Having scoured the tax rules we can’t find, apart from the Taxman’s own guidance which doesn’t have the force of law, a rule that obliges you to inform him if he issues a tax code that’s too generous. It’s simply a matter to be decided between you and your conscience.

For information on deferring a tax bill, visit http://companydirector.indicator.co.uk(CD 12.20.03).