Taxpayers need to follow the time to pay arrangement guidelines to avoid double bill

Taxpayers need to think now about their likely cash flow this year so that they can warn HMRC if they need time to pay their tax bills, said leading tax and advisory firm Blick Rothenberg.

Fiona Fernie, a tax dispute resolution partner at the firm,said: ‘HMRC have said that July tax payments for anyone who pays by self-assessment will be deferred until January 2021, but if taxpayers 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 the July instalment, they may not be able to pay what they owe in January particularly in view of the fact that for those who have continued to operate their businesses will also have to pay the first instalment of their 2020–2021 tax bill in January 2021.

‘If they alert HMRC to the problem, then they should be able to obtain a time to pay (TTP) arrangement. HMRC will be sympathetic to what had happened to people’s finances but the earlier they are told the better it will be for both parties.’

She added: ‘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 31st 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, (which will be in respect of pre-COVID-19 income); potentially before they have seen a full recovery of their business; with the resulting impact on cash flow.

‘As I say, if the situation allows, it is probably sensible to make the July payment as normal, but even if taxpayers feel that circumstances are too uncertain to do that or they would rather retain a buffer in their own bank account in case finances become even tighter, if at all possible setting aside the money now (or over the course of the next few months), but retaining it rather than paying HMRC, is a sensible approach.

‘It is vital that taxpayers monitor their finances and think about how they will cope, so that if necessary, they can approach HMRC for a TTP arrangement before they face an imminent deadline.’

Fiona added: ‘If they do not do this it could be difficult in January and HMRC is understandably less likely to be sympathetic to those who only request TTP on the day they are due to make payment. Furthermore, if taxpayers just allow the payment deadline to pass, without taking steps to arrange TTP, HMRC may be more likely to open an enquiry, which would be time consuming and stressful for them – particularly at a time when the economic conditions are difficult and they are concentrating on rebuilding their businesses. 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 31st January during a tax year and 31st July following the end of a tax year with a final balancing payment if necessary, on 31st 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.’

Fiona added: ‘Normally on 31st July 2020 self-employed taxpayers would have to make their second payment on account for tax year 2019–2020 but due to COVID-19 the Government has announced that that payment can be postponed until 31st January 2021 and paid at the same time as the balancing payment for 2020–2021.

‘While 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 three parts: the delayed payment, the normal balancing payment and the first payment on account for the 2020–2021 tax year.
• The first two 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 5th April and lockdown started on 24th March, therefore most people were earning at their anticipated levels for all but two weeks of the tax year – these two payments alone could therefore be considerable when having to be made after a significant period of reduced income.
• The payments on account for 2020–2021 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 concluded that: ‘It is therefore important for taxpayers to start thinking now (and to continue to monitor the situation) 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.
• The level of payment due in January does not come as a nasty shock.
• 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 2020–2021’s tax return (in respect of what will be due in January and July 2021).’

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