Preparing a tax return is an unfortunate fact of life that many of us put off for as long as possible. This year, however, filing a self-assessment return early could generate some important cashflow advantages.
Payments on account of 2019/20 tax liabilities are due for settlement on 31 July. Normally, making these payments is a routine part of the tax cycle, but by working from actual income figures rather than estimates, it may be possible to manage your tax payments much more effectively.
Payments on account are calculated based on your tax bill for the previous year (excluding capital gains tax). For example, if your income tax liability for 2018/19 was £50,000, the payment on account due on 31 July 2020 would be £25,000.
If your income reduces year on year, this system can result in you paying too much tax. The legislation deals with this possibility by allowing you to reduce payments on account if you think that your tax liability is likely to fall. There are anti-avoidance provisions to stop this facility being abused, but provided you make a sensible estimate of what your total liability will be, you will not be penalised for getting it wrong – although late payments attract interest.
This year, as a one-off, it is possible to defer your July payment on account regardless of what you expect your final tax liability to be, if you are ‘finding it difficult to make your second payment on account by 31 July 2020 due to the impact of coronavirus’. This concession potentially applies to all individuals, and covers all sources of income, not just trading income. HMRC will not charge interest or penalties if you skip your 31 July 2020 payment, provided that the whole balance of tax due is settled by 31 January 2021.
Reducing 31 July payments will no doubt provide some welcome breathing space for anyone struggling with cashflow. However, it only represents a six-month deferral of liabilities. Anyone choosing to delay payment will need to think very carefully about how to fund the additional tax that will fall due next January.
For many people, the best approach would be to work out your actual tax liability for the year as soon as possible. This will allow you to budget with confidence and decide on the best payment plan. Completing your tax return early will tell you how much you need to pay in total by 31 January. You could then either make payments to HMRC piecemeal over the period, as funds permit, or build towards a single January payment with certainty about what this will be.
We have talked before in Tax Voice about the possible benefits of changing your accounting date to help improve cashflows. Preparing your tax return provides the perfect opportunity to look at what would happen if you did this, and in some cases can defer tax liabilities well beyond the payment on account concession.
Preparing your tax return early may mean being a bit more organised than normal, but it will get one of life’s more tedious tasks out of the way. Acting now can also help you avoid nasty later surprises affecting cashflow and could even provide opportunities to defer the date tax becomes due.
For more information please get in touch with Andrew Robins, or your usual RSM contact.