Welcome to the Christmas 2020 newsletter from Chamberlains
Firstly, HAPPY CHRISTMAS to everyone, and let’s hope for a better New Year!
Christmas? What Christmas, you may well ask. Times of uncertainty for us all, both in the effect of leaving the EU and in terms of Covid-19. Guidance and rules are being changed almost daily and it’s hard to keep up. As I write, most of Surrey has gone into the tougher Tier 3, but our part (healthy Waverley) is still in Tier 2. Various of the financial pointers in my last newsletter have been revised, notably the extension of the Furlough scheme until March 2021 and the cancellation of the £1,000 that was going to be paid in January for each furloughed employee kept on as employed.
I’m not going to attempt any sort of review – it would probably be out of date by tomorrow – so I’ll keep this brief and just talk about tax returns and income tax payments.
These need to be submitted by the end of January. There’s been hope of a possible extension, but it seems unlikely. We still have quite a lot to do, so if you’d like us to help and you haven’t already sent the information, please get in touch as soon as possible. If HMRC has asked for a tax return, there’s an automatic fine of £100 if you miss the deadline of 31 January, and this increases as time goes on.
INCOME TAX PAYMENTS – NORMAL
For most people, these are done via their salary or pension. HMRC estimates the tax due and issues a PAYE (Pay As You Earn) code to say how much tax should be deducted each month. Unless you have untaxed income, for example rental income, this may be sufficient and HMRC will not normally ask for a tax return.
However, once you’ve sent in the tax return (“submitted” it to HMRC as we tend to say rather formally) the system works out the tax liability for the year and whether there’s more to pay or a refund due. If there’s a refund, it should come within a month or so. If there’s more to pay, this normally needs to be paid by 31 January after the end of the tax year, and there may also need to be a Payment on Account (“POA”) towards the next year’s bill.
The Payments on Account are normally 50% of the last annual tax bill, due in January and July. For example, if John has underpaid tax by £2,000 for the year ended 5 April 2020, he’ll need to pay £2,000 + £1,000 by 31 January 2021 and another £1,000 by 31 July 2021, assuming he hasn’t made POAs towards the initial £2,000. These POAs go towards the tax bill for 2020/21.
But perhaps these POAs aren’t necessary. If the £2,000 is less than 80% of the tax already deducted via PAYE etc in the year ended 5 April 2020, HMRC don’t need POAs. And it’s also possible to ask for the POAs to be reduced if the taxpayer or his ever-vigilant accountant think that this would overpay the tax for the next year. I have more than one client, for example, whose rental income for 2020/21 is going to be much lower than previously – so it would be wrong from them to make the “normal” POAs.
There are two other main cases when the POAs may not apply. If the balance of tax due before POAs made in the year is less than £1,000, there’s no need. And the same applies if the underpayment of tax is due to a capital gain.
There’s one other increasingly common time when tax is payable – capital gains tax within 30 days of the sale of a residential property where you can’t claim full relief for having lived there. The calculation’s rather complicated, based mainly on how long you’ve owned it and how long you’ve lived there. There’s a special online tax return to complete, with which we can help.
INCOME TAX PAYMENTS – COVID-19 CONCESSIONS
As part of the concessions, HMRC allowed people to defer the POA that was due 31 July 2020 to 31 January 2021, without payment of interest. They confused everyone by sending out automatic statements still asking for the money – some people paid, others didn’t. Later statements were issued showing the second POA as due 31 January 2021 – and just a few people were given a smidgeon of interest for paying early. As a result, the payment demanded can be hard to agree to what the poor taxpayer’s expecting.
Theoretically, this poor taxpayer might have to pay three lots of tax on 31 January 2021 – the POA from 31 July 2020, the balance due for 2019/20, and the first POA for 2020/21. Painful!
For example, if Jane’s tax liability for 2019/20 is £7,000 and she was due to make POAs of £3,000, she’ll have £4,000 left to pay plus a £3,500 POA (50% of the £7,000, unless we have reasonable grounds to reduce it) towards 2020/21 – a rather daunting £7,500. The £4,000 is simply the full £7,000 minus the first POA paid last January, but you could also think of it as the second POA originally due in July 2020 plus the remaining £1,000 that would have been due if both POAs had been paid.
HMRC have realized that this may be difficult for people to pay all at once, so there’s another concession to be able to spread it over the next 12 months. Once the tax return has been submitted, taxpayers can apply online for “Time to Pay” provided the tax is no more than £30,000. You can see more details here: https://www.gov.uk/government/news/self-assessment-customers-to-benefit-from-enhanced-payment-plans.
Time to Pay arrangements previously only applied up to £10,000, so this counts as a concession – even though interest is payable on the staggered payments. Interest is only at 2.6% per annum, so it’s comparatively cheap. If £10,000 is spread over a year, interest would only be about £130. The tax can be spread over 12 months by this simple process, but it’s be possible to contact HMRC to ask for a longer period if necessary.
The arrangement can be made any time up to 60 days after the tax was due. Normally, if the balance due for the previous tax year isn’t paid by 28 February, there’s a surcharge of 5% of the tax due in addition to the interest on late payment, but only interest is normally charged on the unpaid POA. If the Time to Pay arrangement is in place by 28 February, the surcharge won’t apply. It’s unclear what happens if the Time to Pay is activated later than this – the 5% surcharge may still be demanded.
In other words, as normal, it’s best to think about tax in good time so that you can be ready to pay or to make appropriate arrangements.
Please note that, like most businesses, our office will be closed from 24 December to 1 January.