COM30001 - Background: company taxation overview: introduction
This subject is presented as follows:
General
Revenue Assessment
Self Assessment
General
This section of the COTAX Manual (COM) is not a technical description of Company Taxation, but is rather a brief narrative of how the current system of Company Taxation has come about.
Complete technical instructions are obtainable in the appropriate CT instruction manuals.
Revenue Assessment
In the UK the direct taxation of individuals and companies prior to the introduction of self assessment traditionally entailed two separate activities
- Establishing the right amount of income, and the corresponding amount of tax due - ‘assessment’
And
- Payment of the tax due into the Exchequer - ‘collection’
Companies have always had an obligation to ‘notify chargeability’.
This obligation means that companies are required to identify themselves to HM Revenue & Customs (HMRC), if for example, for any chargeable period, they have income that is not taxed in full by deduction of tax at source (for example, by the deduction of tax from investment income.
Historically, the ‘assessment’ of any additional tax due was the responsibility of HMRC. Once a potential liability had been identified, the first step would be for the Inspector to
- Issue a Notice requiring the taxpayer to make and deliver a return of information for a chargeable period, a ‘tax return’
When the taxpayer returned the completed tax return form, the Inspector would review the information in it.
If the Inspector was satisfied with the return, an assessment (or assessments) would be made accordingly. An estimated assessment would be made to the best of the Inspector’s judgement, if the return
- Did not meet its delivery obligation
Or
- Was sent back in the time allowed for completion
It was then up to the taxpayer to appeal against the assessment if he wished to displace the Inspector’s estimated assessment by a more accurate figure of the tax due.
The process of Revenue assessment was central to the way in which HMRC carried out any compliance work (for example, checking the completeness and accuracy of a return). An Inspector did not have an explicit right to enquire into a return to make sure it was correct. If an Inspector was not satisfied with a return, the requirement that he or she should make an assessment 'to the best of his (or her) judgement' could be used as the basis for asking questions of a taxpayer, to inform that judgement.
There were no statutory powers regulating the making of enquiries.
Self Assessment
Changes announced by the Chancellor of the Exchequer in March 1993 heralded the introduction of a fundamental revision of the direct tax system
- Income Tax Self Assessment (ITSA)
The 1994 Finance Act introduced the main body of legislation and involved a fundamental re - write of the Taxes Management Act rules. The changes swept away reliance on a Revenue assessment as the basis for bringing tax into charge, and as the focus for compliance activity.
Instead, the taxpayer’s own return and self assessment of the tax due would form the basis for bringing tax into charge, and explicit enquiry and information powers would provide the means of checking the return.
Although the SA Legislation in the 1994, and subsequent, Finance Acts was primarily concerned with Income Tax, the rules also provided the basic framework
- For a Corporation Tax Self Assessment (CTSA) system
- Based upon the then existing Corporation Tax Pay And File (CTPF) system
Under ITSA, the assessment of any additional tax due from individuals is achieved by means of self assessment.
There is still an obligation on the taxpayer to notify chargeability and a completed tax return form is still required from the taxpayer, with details of the taxpayer’s total income and chargeable gains for the year (net of any allowances and reliefs claimed or due).
However, in the SA regime, the onus is on the taxpayer to create a legal charge to tax, by also including a self assessment of the tax due in the completed return.
Once the return and self assessment have reached HMRC, the new regime can be characterised as ‘process now - check later’.
In the first instance, HMRC simply process a completed tax return, by
- Transfer of the information in the taxpayer’s tax return form on to COTAX
HMRC has the right to correct obvious mistakes in the return (for example, arithmetic errors). Apart from these corrections, HMRC process the figures in the taxpayer’s return as received, and tax is due, or repaid, accordingly.
After processing, each return is checked. HMRC has an explicit right to enquire into the completeness and accuracy of any tax return. Some returns are selected, on a random basis, for enquiry. Others are selected for enquiry on the basis of
- The possibility that the return may be
- Incorrect
- Or
- Unsatisfactory
- The amount of tax at risk
The right to enquire covers all enquiries, from straightforward requests for more information on individual items through to full reviews of the whole of a taxpayer’s business.
From 1 July 1999, Corporation Tax assessing has been dealt with in a similar way to ITSA, but with certain specific differences, highlighted in this section of the COTAX Manual (COM)
