Apart from sunburn and hayfever, the warm days of summer have another sting in the tail – 31 July is the deadline for HMRC’s second payment on account (see our recent blog for more details). Designed to spread the payments in the self assessment tax process, the summer deadline can unfortunately result in financial worries and cash flow issues for some.
Back to basics: payments on account
The twice yearly payments on account system is calculated by looking at your previous year’s tax bill and is a way of paying off some of your tax bill in advance. The first installment is due on 31 January (the same day as your ‘balancing payment’, clearing your previous year’s tax bill), and the second installment is due on 31 July. The two installments should each normally be 50% of your previous tax bill.
Payments on Account doesn’t apply if your tax bill for the previous year was less than £1,000 after PAYE or other deductions at source and also, if 80% or more of your tax was deducted at source in the previous year.
Reducing your Payments on Account
With self-employed and other income fluctuating from year to year, it is possible to reduce your payments on account if your income for the next tax year will be lower than the previous. You need a reasonable estimate of the amount you owe and if you over-reduce, you could face interest charges, so seek professional advice – work with your accountant to be certain of your figures.
Also bear in mind that if your tax is going to be lower than the year before, if you file your return before 31st July, this will automatically reduce your required payments on account to the lower level.
Tax bill causing cash flow problems?
Unpaid or overdue tax bills are commonly the result of a temporary shortfall in cash flow. However, the worst thing you can do with a tax problem is to ignore it; the unpaid bill will grow and become more expensive if you don’t deal with it. If you know that paying your second payment on account will send you into a spiral of cash flow issues, there are things you can do:
- Increase income
- Improve profit margins
- Negotiate debt repayments to creditors
- Cash flow forecast/control
Despite your best efforts, if you’re not able to increase your income and you can’t afford to pay your debts, it is worth formulating a payment plan with your accountant to propose to your creditors and HMRC. You can also investigate borrowing options, tightening working capital control and delaying non-essential expenditure. You may need to consider taking insolvency advice if you are unable to pay debts as they fall due.
Making voluntary payments to HMRC via a budget payment plan can minimise your cash flow problems, or you might prefer to set up a tax savings account so that you won’t be surprised by your tax bill and you can also earn interest.
Eliminating nasty surprises around payments on account deadlines in January and July is a good reason to get your tax return completed as soon as possible after the end of the tax year. It also means that you will receive any refunds due and make plans for future payments.
If the Payments on Account system is creating cash flow issues for your business, don’t suffer in silence, speak to the friendly experts at CRM about alleviating strategies to avoid cash flow issues in the future. Give CRM a call on 01865 379272.