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Coronavirus – Planning Self Assessment Payments

by | Apr 14, 2020 | Covid-19

HMRC has announced a deferral of Self Assessment payments due in July 2020.  The amount can, instead, be paid in January 2021.

However is important to understand how Self Assessment will be impacted by Coronavirus, as its not straight forward.

 

Application

This applies to Sole Traders, Partners, Landlords and Company Shareholders in receipt of dividends.  However Shareholders can plan / defer liabilities to a degree by managing profit extraction, and the effect on Landlords will depend on the nature of properties and whether rental income is being impacted – none the less the principles are the same regardless of income source.  For simplicity we will  refer to everyone as Sole Traders in this article.

 

HMRC Deferral July 2020 Self Assessment Payment

The guidance from Government is a little contorted.

  • Originally it was said that the Self Employed would be able to defer their July 2020 Self Assessment payment
  • HMRC then extended this to all July 2020 Self Assessment payments – thats to say as well as Self Employed, it was available to Landlords, Shareholders. etc.  This is what they have said:”You are eligible if you are due to pay your second self-assessment payment on account on 31 July. You do not need to be self-employed to be eligible for the deferment.  The deferment is optional. If you are still able to pay your second payment on account on 31 July you should do so. This is an automatic offer with no applications required. No penalties or interest for late payment will be charged if you defer payment until 31 January 2021.”
  • As of today (14 April 2020) that guidance has disappeared from the Government website – this seems to be a mistake rather than conspiracy – under the Governments master document for support to business, the Self Assessment deferral section redirects to HMRCs Self Assessment guidance, and that in turn redirects you back to the Government guidance – its a loop.  Doubtless this is because the Government website information is being updated rapidly – by tomorrow it may have changed again.

There is nothing to suggest the policy in the second bullet point has changed.

 

Understanding the Cash Flow (1) – the Mechanics of Payments on Account

Here is where it gets a bit more complicated as the July 2020 payment is a payment on account for 2019/20 tax year, based on 2018/19 final Self Assessment figures.

Payments on account are not easy to follow at the best of times, and the situation is now confused with the Coronavirus disruption spanning two tax years, and various grants which represent taxable income and offset the loss of profits from Coronavirus.  Lets try and pick this apart.

If Coronavirus hadn’t happened, this is how payments on account (POA) would have looked:

  • Final 2018/19 Self Assessment submitted by 31 January 2020
  • 31 January 2020 pay any balance for 2018/19 (less 2018/19 POA).  First POA for 2019/20 due if required based on 2018/19 profits
  • 31 July 2020 second POA 2019/20 if required
  • Final 2019/20 Self Assessment submitted by 31 January 2021
  • 31 January 2021 pay any balance for 2019/20 (less 2019/20 POA).  First POA for 2020/21 due if required based on 2019/20 profits
  • 31 July 2021 second POA 2020/21 if required
  • Final 2020/21 Self Assessment submitted by 31 January 2022
  • 31 January 2022 pay any balance for 2020/21 (less 2020/21 POA).  First POA for 2021/22 due if required based on 2020/21 profits
  • 31 July 2022 second POA 2021/22 if required
  • Final 2021/22 Self Assessment submitted by 31 January 2023
  • Etc

What does “if required” mean for Payments on Account.  Well, alas they are not optional.  Lets look at the mechanics.  A POA is required if:

  • The Self Assessment bill for the previous year was more than £1,000; unless more than 80% of your tax was paid at source
  • Taken together, most Self Employed and landlords are making twice yearly POAs.  The 80% rule means that someone who pays most of their tax via PAYE may not have to make a POA even if their balance was more than £1,000.  Eg:
    • If you are Self Employed and your 2018/19 Self Assessment came to £1,900 then your 2019/20 POAs are £950 each in January and July 2020 – these are offset in January 2021 and any extra tax due or any excess POA refunded
    • If you are Self Employed and your 2018/19 Self Assessment came to £900, then no 2019/20 POAs are due.  You pay your 2019/20 Self Assessment in January 2021
    • If you are Self Employed and Employed and your 2018/19 Self Assessment came to £9,900, but you had paid £8,000 of tax via PAYE leaving £1,900 payable in January 2020 when the return was submitted, then no POA is due for 2019/20 as more than 80% of the 2018/19 tax was paid at source

A couple of extra things to be aware of:

  • If your POAs are more than the actual liability for the year then the overpayment is offset or repaid, you don’t lose it
  • If you know that next years profits will be lower than last years, then you can apply to reduce the POAs.  Eg:
    • Your 2018/19 Self Assessment came to £1,900, making 2019/20 POAs of £950 each
    • You expect your 2019/20 liability to only be £1,500 as you’ve earned less – you can apply to reduce the POAs to £750 each
    • There is a penalty interest rate charged if you over estimate the reduction, to deter POAs being reduced inappropriately
  • If you know that next years profits will be higher than last years, then you don’t need to increase POAs
  • The POA process is automatic as outlined above – sometimes our clients think we estimate the figures – we don’t.

 

Understanding the Cash Flow (2) – How Coronavirus Affects Profits and Taxes

It will be seen the POA process isn’t easy to follow at the best of times.

So how will Coronavirus change things?  Well, we don’t know fully as there is no clear indication of when and how lockdown and social distancing will be released, however:

  • Most of the disruption to POA’s thus far is coming into 2021/22 not 2020/21
    • This means the amount of tax due on 31 January 2021 won’t change a great deal
    • There is probably little scope to apply to reduce 2019/20 POAs (due 31 January and 31 July 2020) due to Coronavirus (the January 2020 POA should already have been paid anyway)
    • The second POA due 31 July 2020 can be deferred at the expense of increasing the amount due in January 2021
    • The POA point only applies to those mandated to make POAs
  • It is reasonable to expect 2020/21 profits to be lower, which ordinarily reflects in a reduced amount due on 31 January 2022
    • The 2020/21 POAs based on 2019/20 profits may be too high – these would be due in January and July 2021
    • In December 2020 / January 2021 it ought to be possible to consider an estimate for the remainder of 2020/21 and hence estimate the 2020/21 tax bill for January 2022, which should educate what can be done about the 2020/21 POAs
  • However Government support is all taxable – taxable profits will be increased by:
    • Any grant under Self Employed Income Support Scheme
    • Any grants under the Business Rate schemes
    • Any amounts received under the Job Retention Scheme (although they offset wages paid out)
    • Business Rates holidays will increase profits
  • The interplay of the various Government support schemes versus loss of profits means some people will see a dip in tax bills, others increased.

 

Advice

What’s the best advice we can give Self Assessment payers?

  • Get 2019/20 tax returns done early
    • it will help clarify (a) the January 2021 tax payments and (b) what funds you need to have saved / can release
  • in December 2020/January 2021 estimate the 2020/21 tax year – adjust the 2020/21 1st Payment on Account (due 31 January 2021)
    • this will ensure you don’t overpay the POAs for 2020/21

 

Case Studies

Lets look at some figures.  We’ve included four case studies below, based on a Sole Trader (or business Partner) normally paying £2,000 a year under Self Assessment

  • Scenario 1 – the base position if Coronavirus hadn’t happened and tax bills were stable
    Here its seen that the payments are stable at £1,000 per six months
  • Scenario 2 – Small Profit dip 2019/20, larger dip 2020/21, then recover to previous levels – no deferral of July 2020 payment, or reduction of 2020/21 POAs
    The point to note here is that there is a refund in January 2022 whilst the January 2021 and July 2022 payments dip, but there is a large catch up in January 2023, before payments stabilise – if you were not prepared the July 2023 payment would be shock
  • Scenario 3 – Small Profit dip 2019/20, larger dip 2020/21, then recover to previous levels  – deferral of July 2020 payment, reduction of 2020/21 POAs based on estimated profits
    The profit figures are the same as scenario 2 but by using deferral and adjustment in payments on account, the payments in 2021 and 2022 are smoothed, but there is still a large catch up in January 2023.  Note the quantum of tax is the same as the previous scenario.
  • Scenario 4 – Small Profit dip 2019/20, then recover to previous levels – indicative of someone where the Government support has neutralised loss of profits in 2020/21
    Here the tax payments dip reflecting one years dip in profits and then stabilise.

There would be countless permutations to consider, but these scenarios give some typical options – the fluctuations in the tax bills can be seen, and the need for careful planning is shown to anticipate fluctuations in payments.  If you are interested in more detail, there is an expanded case study here on the same topics.

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