Dawning of the DIY return

'People are going to be very confused when they get the new tax return'

IN A FEW weeks' time the Inland Revenue will implement fundamental changes to the way tax is assessed. A new system called self-assessment will apply to the 1996-97 tax year, starting on 6 April.

Self-assessment will be most sharply felt by a minority of taxpayers - the nine million or so who fill in a tax return each year. The full impact will not hit them until April 1997, when new-style tax returns for the 1996-97 tax year are sent out.

But all taxpayers, regardless of whether they fill in a tax return, should start thinking about self-assessment. New rules mean that you have to keep careful records along with the paperwork - bank statements, dividend vouchers, receipts and so on - of your income, gains and expenses. Failure to produce the necessary documents, when asked, could result in heavy penalties.

At the heart of the procedures is a move to an American-style tax system, where the onus is on taxpayers to provide all the information for assessing their liabilities and to work out their own tax bill.

"The theory is that self-assessment is going to make it easier for everybody," says Iain Ferrie of Wheawill & Sudworth, accountants. "Maybe in the long- term that will be the case but people are going to be very confused when they get the new tax return."

The new return will consist of one basic form for everyone and a series of "schedules" relevant to only some tax-payers. For example, there may be one schedule just for pension income, another for savings and investments and so on. The idea is that you only need to fill in those schedules that are relevant to you.

With little over 12 months to take-off, the Inland Revenue is still grappling with perfecting the forms. A pilot exercise, which tested the new forms on 1,000 taxpayers in 1994, showed a high error rate. Last April, 5,000 taxpayers in Leicester were drafted into the trials. A further 13,000 taxpayers in Southampton are due to join the existing guinea pigs.

"The whole idea of the trials is that you can learn where people are having difficulties. We can try and put things right by developing the form," says Joanne Kicinski of the Inland Revenue.

The Revenue is busy rectifying its early mistakes. At the last count the number of schedules had been reduced from 15 to seven. There have also been improvements to the layout of the form, with better use of colour and better signposting.

So is the system just about giving the same information on a different form? Not at all says, Ms Kicinski. "Until now, people have been able to write 'as per P60' or 'as per accounts'. In future they will have to put figures in the boxes, otherwise the return will be incomplete." And if you delay in filing a complete tax return, you run the risk of incurring a penalty.

But the really significant part of the plans is not self-assessment but self-calculation. You will have the chance to work out your own bill and send off a cheque with your return by 31 January each year.

Importantly, this key aspect is optional. You can still simply fill in the form and let the tax office do the sums. Provided you get the return back by 30 September each year, the Inland Revenue will guarantee to send you a statement of the tax you owe in time to meet the January payment date. But if you miss the September 30 date your statement could be delayed. You then risk penalties and interest.

Despite the ballyhoo about self-assessment (including a press and television advertising campaign), it may seem to involve little more than filling in a different form. That, however, may not last.

"The option to let the Inland Revenue work out your tax bill is a halfway house. I imagine it will be phased out fairly quickly after the introduction of self-assessment, probably within five years. In America you have to calculate your own bill," says Frank Akers-Douglas of Binder Hamlyn, accountants. "This is a fundamental change in the taxation system. It also gives the Inland Revenue far greater powers to inquire into taxpayers' affairs through the audit procedure."

If people are eventually to be forced to work out their own tax bills, simplification of the existing tax regime is paramount. The Inland Revenue has already started to change the rules. For example, the practice of taxing some kinds of income on a preceding year basis is currently being phased out. In future the tax due during the tax year will relate to income arising in that year. In the short-term that throws up new complexities through "transitional" arrangements. Another big change is to have standard dates when tax from different sources of income and gains is due. In future tax will be due in instalments, on 31 January and 31 July each year, compared with the current range of dates for the self-employed and people with more complicated tax affairs.

But despite some simplification many taxpayers may be as confused as ever. And that could lead to a big increase in the use of accountants. In effect, the savings the Government hopes to make in the cost of collecting taxes will partly be funded by those taxpayers who pay accountants to do the work.

"People who already use accountants will continue to use them. The danger will come with people who don't normally use an accountant. They will get the new tax return and panic," says Mr Ferrie.

Many taxpayers who have tax deducted through PAYE never see a tax return until they retire and start getting pensions from different sources. They can find tax returns almost unintelligible.

Mr Ferrie foresees some changes in the accountancy profession, with the introduction of tax shops on the high street dedicated solely to filling in tax returns. There could be new competition in low-cost services. But the rock-bottom price for the person with simple tax affairs could still be pounds 50 plus VAT, and pounds 100 to pounds 200 could well be a more common figure.