Taxpayers must make a decision now so they don’t fall foul of the revenue rules

Covid-19 | Covid-19 Advice | Economy & Politics | Legal

Taxpayers need to think now about their likely income this year so that they can warn HMRC if they need time to pay, say tax and advisory firm Blick Rothenberg.

Fiona Fernie, a Tax Dispute Resolution partner at the firm said: It is important for taxpayers to think now about the likely level of their income this year and what the tax is they are going to have to fund in January and if they conclude that they will not be pay because of lack of income due to Covid19 they should let HMRC know immediately.

She added: “HMRC have said that July tax payments for anyone who pays be self-assessment can be delayed until January but if they have the money, I would urge them to pay now so that they are not faced with a double bill.
Many will still be worried that even if they pay now, they may not be able to pay what they owe in January. If they alert HMRC then they will be able to get a pay arrangement. HMRC will sympathetic to what has happened to people’s finances but the earlier they are told the better it will be for both parties.

Fiona Fernie said: “understandably most people are primarily thinking about how to pay the mortgage and put food on the table, but it is important to remember that the postponement of the 31 July 2020 payment on account merely delays the liability; it does not wipe it out. Taxpayers will still have the problem of how they fund their tax bills in January 2021, potentially before they have seen a full recovery of their business.
“It is vital that they think now about how they will cope so that if necessary, they can approach HMRC for a Time to Pay (TTP) arrangement before they face an imminent deadline.

Fiona added: “If they do not do this it could be difficult in January and HMRC will not be so sympathetic and could launch inquiries which will be time consuming for HMRC and stressful for the taxpayer. All that is required is a sensible piece of housekeeping.

She said: “ Self-employed taxpayers normally make payments on account of their tax liability on 31 January during a tax year and 31 July following the end of a tax year with a final balancing payment if necessary, on 31 January following the end of the tax year (at or after submission of their tax returns)

“The first and second payments on account are based on the income of the previous tax year UNLESS in submitting the previous year’s tax return an application is made to reduce the payments on account because the taxpayer has some reason for anticipating that earnings will be less in the following tax year.”

She added: “Normally on 31 July 2020 self-employed taxpayers would have to make their second payment on account for tax year 2019/20 but due to Covid 19 the Government has announced that that payment can be postponed until 31 January 2021 and paid at the same time as the balancing payment for 2019/20. Whilst this may seem very attractive at the moment – particularly to those whose income has been decimated by the pandemic – there are some potential pitfalls to just delaying the payment without thinking it through.

“The payment in January 2021 will now consist of 3 parts: the delayed payment, the normal balancing payment and the first payment on account for the 2020/21 tax year.

“The first 2 of those payments are in respect of a period which was completed prior to the vast majority of the impact of Covid 19 the tax year ends on 5 April and lockdown started on 24 March – therefore most people were earning at their anticipated levels for all but 2 weeks of the tax year) – these 2 payments alone could therefore be considerable when having to be made after a considerable period of reduced income.

“The payments on account for 2020/21 will be based on last year’s (much higher) level of income unless when making this year’s return a claim is made to reduce payments on account because of anticipated reduced income.”

Fiona said: “It is therefore important for taxpayers to think NOW about the likely level of their income this year and what the tax is they are going to have to fund in January so that:

“They can gauge whether their available finance is going to be sufficient to cover the tax due in January and discuss a TTP arrangement with HMRC early if it is not – TTP arrangements are always easier to negotiate if done in advance of payments being due rather than at or after the deadline. In addition, the analysis of the taxpayer’s financial position which is carried out to assess the affordability of the January payments will assist in negotiating TTP.

“The level of payment due in January does not come as a nasty shock – and if finances allow money can be put aside each month towards that payment. Depending on the individual circumstances it might be sensible to make the July payment as normal but even if taxpayers would rather retain a “buffer” in their own bank account in case finances become even tighter, setting aside the money now if at all possible (but retaining it rather than paying HMRC) is a sensible approach.

“Reviewing on a regular basis how the pandemic is affecting income during the current tax year will allow an appropriate claim for reducing payments on account to be made when filing 2019/20’s tax return (in respect of what will be due in January and July 2021).”

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