Estimating own taxes carries risks

THE RIGHT to estimate your own tax bill sounds like a dream come true and is exactly what the Chancellor promised in the Budget.

But accountants and small businesses foresee many difficulties, not least the likelihood that taxpayers will have to be much more meticulous in their bookkeeping.

The Chancellor announced plans to allow the self-employed and many other tax- payers to work out their own tax bills and send in a cheque along with their return. The aim is to simplify the current system, which requires the self-employed to pay tax on profits earned in the preceding year. The new method would ensure they pay tax on the current year's profits.

Other taxpayers who have bills to settle in addition to tax taken from them through the PAYE system will also be able to work out their own bills. At present, people with sources of income other than their employment may also have that assessed on a preceding year basis. They may also receive different bills for different sources of income.

The exact details of the new system are yet to be announced, and the Inland Revenue has promised consultation.

Two consultation papers have already been published on the subject, and accountants see a number of potential problems in the suggestions they contain.

Philip Davis, executive tax manager for personal tax at Ernst & Young, foresees unpalatable penalties for people who file returns based on incorrect profits.

The self-employed will be under pressure to keep their books up to date and in good order to ensure that their profits are correctly calculated.

He believes people should be entitled to tax relief on their accountancy fees in order to cope with the new system.

The system will apply from the 1996/97 tax year. Returns for that year will be issued in April 1997 and will be due at the beginning of 1998.