For those new to the self assessment tax return process, payments on account are one of the most common stumbling blocks. Despite being introduced as an initiative to help taxpayers spread their tax payments, it often results in frustration and can actually harm your cash flow if you're caught unaware.
In response to the COVID-19 pandemic, HMRC announced that taxpayers could defer their second payment on account (normally due on 31 July 2020). But was it the right course of action? We've brought in Mike Parkes from GoSimpleTax to set the record straight.
What is a payment on account?
Payments on account are advance payments towards your next tax bill. They're calculated based on the amount that you paid the previous year.
HMRC splits this amount in two and places the payment deadlines six months apart. So, for the 2019/20 tax year the first was due by midnight on 31 January 2020 and the second was due by midnight on the 31 July 2020.
It is this second payment that can now be deferred, providing it is paid by the 31 January 2021.
For example, if your tax bill for 2018/19 was £5,000, you would need to make two payments of £2,500 on account towards your 2019/20 tax bill.
But if your 2018/19 tax bill was less than £1,000 or if over 80% was deducted at source (such as employment), then you will not need to make a payment on account – you would simply need to pay any outstanding tax by the 31 January 2021.
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What are your options?
If you are required to make payments on account, you will still need to pay the second instalment. HMRC has offered taxpayers the opportunity to delay this payment. So, you can choose to make your second payment as late as the 31 January 2021, alongside the submission of your self assessment tax return.
HMRC will not charge any interest or penalties should you choose to delay the payment. However, by doing so, you run the risk of having to fulfil all your tax responsibilities at once. This could result in you having insufficient funds in place to cover all your tax liabilities.
This leaves you with three options:
Pay in accordance with the original July deadline
If you can afford to pay your tax bill as normal, you should do so. If anything, it creates a sense of 'business as usual' in an otherwise tumultuous time.
I appreciate that, for many, paying in July could harm their cash flow. However, it is my opinion that clearing debt where possible is more sustainable in the long term. It also means January marks the start of a new financial year – and a fresh start.
Reassess and reduce liability
If you're doubtful that you can afford your second payment on account right now, calculate your 2019/20 tax liability before the 31 July 2020. This will confirm the actual amount to be paid in July 2020, January 2021 and July 2021 giving you clarity on your liability. To do this, you need to file your 2019/20 self assessment tax return.
Filing early doesn’t mean you will have to pay your tax bill early too. What is does do is allow you to determine what your total tax bill will be ahead of time. From here, you can consider two key points:
- Does the July 2020 payment on account need to be deferred?
- Do the January 2021 and July 2021 payments on account (for the 2020/21 tax year) need reducing to reflect the impact that COVID-19 has had on them?
Defer to later in the year
Of course, there will be some businesses that are unable or unwilling to pay anything towards their tax bill if they can defer the payment. In this instance, it's important to be aware of the self assessment late penalties should they find that having deferred the payment they are then unable to pay what is due in January.
Deferring could have an impact on cash flow for the remainder of 2020/21. If you are VAT-registered and have deferred your VAT payment, then it is worth noting that this also needs to be paid by 31st March 2021.
Ultimately, it falls to you to make the decision that is right for you and your business. However, it is my opinion that, by planning your 2021/22 payments now, you will be in a much safer financial position in the future.
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