Tax returns – so easy with software what can go wrong?

Tax software has developed significantly over the years but has needed to because of the complexities of the tax system. Once the data has been entered, the tax calculation is now very easy – just click the calculate button and it is all done in seconds!

That is where the challenge starts. For those working in tax for many years, this is like the proverbial falling off a log, but what about those staff members just entering the profession or starting to make entries onto tax software for the first time?

It is always possible to make incorrect entries – transposition errors for instance – but there are also some more basic errors that can occur. Some of this is down to training and guidance but working on “live data” is often the best way of actually learning.

As the tax system changes, the underlying software has to change too – but it might be that care is needed in choosing the correct data entry fields.

An example – in reviewing a tax return this week, someone had picked up interest received from a building society statement - £240 - and entered it on the software – as net of tax, so it was grossed up to £300 with tax paid £60. Yes, the net interest is still applicable in some circumstances e.g. tax deducted on director’s loan interest paid by the taxpayer’s company, but bank and building society interest is now paid without tax.  Therefore, the software does need to allow for this entry type.

The second problem was the state pension – a mistake often replicated by clients when supplying information to the agent. They had taken the amounts banked in the tax year, but this would have included a certain number of weeks at the previous year’s rate, so it would be understated. Another common mistake is to take the figure banked in one month and multiply by 12 – as it was assumed monthly, but it is in fact paid 4-weekly.

This information is sometimes available on the HMRC website for that client – but not always, and sometimes it is included in the PAYE coding notice, so there are other places to look, but again this is a training issue.

When entering accounts information, this is often fired across by direct link to accounts software. The total capital expenditure on which capital allowances are claimed is often entered, and the tax software assumes 100% allowances. However, the tax calculation then needs running – are any of these allowances being wasted and should some be disclaimed? Has a loss been created and if so, can this be offset against other income of the year?

The latter is an example where tax knowledge is required – the others are examples of getting the figures right and in the correct places – and there is often an overlap.

Are there other areas on the tax return where you find figures incorrectly entered?

How do you train and educate entry level staff on tax software?