Revenue heralds new tax era: Vivien Goldsmith looks at preparations for the change to voluntary self-assessment

The first DIY tax returns will be issued in April 1997, but accountants are already looking at ways to make the best of the new set-up, and existing businesses will move into a transition period this April.

This week after the publication of the Finance Bill, the Inland Revenue explained that the 9 million people who fill in a tax return each year will not be forced to work out their own tax. The Revenue expects that about half those who need to fill in returns - the self-employed, retired and those who have to pay capital gains tax - will choose to let the Revenue calculate the sum due from their figures, rather than completing the form themselves.

If you want the Revenue to do the arithmetic, tax forms will have to be returned by 30 September. But those who choose to do the sums themselves will get an extra four months to 31 January to return the forms.

If the form is late there is an automatic penalty of pounds 100, and if another six months elapse, a further pounds 100 fine. Taxpayers can appeal against these fines if they have a 'reasonable excuse'.

The Revenue can also apply for penalties of up to pounds 60 a day to be levied, and after a year the penalty can double the tax due.

After the form has been returned, the taxpayer can correct any errors and the Revenue can make a routine investigation of the information on the form. After a year, the taxpayer can assume that the calculation has been accepted.

But the Revenue can still reopen any self-assessed tax return if it believes that fraud or tax evasion has taken place.

Leonard Beighton, deputy chairman of the Inland Revenue, said: 'This will involve a culture change for everybody. The long-term objective is to move away from routine processing to offer better help for the taxpayer and more effective compliance, and reduce costs for businesses.'

George Rowing, one of the Revenue staff working on the project, said: 'We hope that it will be less confrontational.'

When the system is in place, taxpayers will complete one tax return, have one set of payment dates and one contact point within the Revenue, whether they do the computation themselves or not.

As part of the change, tax will be paid for the year in which it was incurred rather than the previous year.

The first returns under the new system will be due in September 1997 for Revenue calculation and January 1998 for DIY calculation. Taxpayers will pay half the estimated tax due for the year 1997/98 on 31 January 1998 and the second half on 31 July 1998. These payments will be based on the previous year's tax, and settled by a balancing payment or refund in the following January.

This pattern of payment on account will not apply where the tax liability is small - probably under pounds 500, or where at least 90 per cent of a taxpayer's income is paid under PAYE. Taxpayers will be able to pay less than in the previous year on account if they believe that the tax liability will be less.

There will be a transition period between the two systems, which will mean that existing businesses will pay tax on half the profits for the two-year accounting period ending in 1996/97. This will give businesses the incentive to bring forward any costs into the period before the two-year transition and to try to put as much income as possible into that slot.

Many businesses will be looking at changing their year- end to take advantage of the change-over. The Revenue had contemplated forcing businesses to make their accounting year match the tax year, but this was dropped after protests during the consultation period.

Robert Maas, tax partner at Blackstone Franks, said many businesses might now decide to switch their year-end to 31 March or 5 April to take advantage of the change-over.

Partnership accounting will be changed so that partners' share of the profits will be attributed to them individually, and the partnership itself will no longer be assessed on its profits.

Philip Davis, executive tax manager with the accountants Ernst & Young, said: 'The idea of self-assessment has great administrative advantages for the Revenue. The return form is going to be a daunting document, but most people will find a way to muddle through it.

'I can't see the logic of a 400-page Finance Bill and then the Revenue saying that the average man in the street can work it all out for themelves.'

Taxpayers will be under a legal obligation to keep records for five years after sending in the tax form.

Mr Maas said: 'The Revenue are going more and more away from routine compliance and into investigation. One of the big worries is that at the moment they have to give a reason for beginning an investigation, and if there has been a misunderstanding they can be thwarted, but under the new regime they don't have to give reasons.

'But on balance I welcome the change, even though compliance costs are being shifted on to the taxpayer.'