Self Assessment

Choosing the right time

Mike Parkes asks whether you should defer a client’s second payment on account.

Mike Parkes Technical director, GoSimpleTax

For those that are 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 annual frustration and can actually harm your client’s cash flow if they’re caught unawares.

That’s why, in response to the Covid-19 pandemic, HMRC announced that it would allow taxpayers to defer their second payment on account (that would have normally been due on 31 July 2020). It is hoped that this gives taxpayers the chance to prepare. But is that the right course of action?

What is a payment on account?

Payments on account are advance payments towards your client’s next tax bill. They’re calculated based on the amount that your client paid the previous year.

HMRC splits this amount into two, and places the deadlines for payment six months apart from one another. For the 2019/20 tax year, the first was due by midnight on 31 January 2020, and the second would normally be made by midnight on 31 July 2020.

This latter payment is what can now be deferred, as long as it is eventually paid by 31 January 2021.

If your client had a £5,000 tax bill for the 2018/19 tax year, for instance, they would need to make two £2,500 payments on account towards their 2019/20 tax bill. But if their 2018/19 Self Assessment bill was less than £1,000 or if over 80% was deducted at source (such as employment), then they will not need to make a payment on account. They would simply need to pay any outstanding tax by 31 January.

Author bio Mike Parkes has a detailed understanding of personal and small business taxation, bringing depth of knowledge to the product development process.

What are your client’s options?

If your client is required to make payments on account, they will still need to pay their second one. However, as HMRC has offered taxpayers the opportunity to delay this, your client can choose to make their second payment as late as 31 January 2021, alongside the submission of their Self Assessment tax return.

HMRC will not charge any interest or penalties should your client choose to do this. However, by delaying their second payment to January, they do run the risk of having to fulfil all their tax responsibilities at once. This could result in your client having insufficient funds in place to cover all their tax liabilities. Your client therefore has three options.

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If your client can afford to pay their tax bill as they would normally do, they should do.”

Option 1: Pay in accordance with the original July deadline

If your client can afford to pay their tax bill as they would do normally, they should do. If anything, it creates a sense of “business as usual” in an otherwise tumultuous time.

I appreciate that, for many, paying in July will harm their cash flow. However, it is my view that clearing debt where possible is more sustainable and allows January to mark the start of a new financial year – and a fresh start.

Option 2: Reassess and reduce liability

If you’re doubtful that your client can afford a second payment on account right now, calculate their 2019/20 tax liability before 31 July 2020. This will confirm the actual amount to be paid in July 2020, January 2021 and July 2021, and give clarity to your client. To do this, you need to file their 2019/20 Self Assessment tax return early.

Filing early won’t mean that they have to pay their tax bill early, after all – but it does allow you to determine what their total tax bill will be ahead of time. From here, you can consider two key points: 1. Does the July 2020 payment on account need to be deferred? 2. 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?

Option 3: Defer to later in the year

Of course, there will be some clients that are unable or unwilling to pay anything towards their tax bill in July now that they can defer. In this instance, it’s important that you remind them of the Self Assessment late penalties should they wish to push this all the way back to 31 January and be unable to make payment at that time.

Yes, they will have your support in ensuring that they file and pay before any deadline. But deferring could have an impact on their cash flow in 2020/21. If your client is also VAT registered and has deferred their VAT payment, then it is worth noting that this also needs to be paid by 31 March 2021.

Ultimately, it falls to your client to make the decision that best suits them. However, it is my view that, by giving your client oversight and helping them plan their 2021/22 payments now, your client will be in a much safer position. ●