As part of the strategic response by Government to this pandemic, HMRC has given an option for taxpayers to defer tax dues ranging from VAT payments to second payments on account for the current tax year (2019/20) without interest or penalties as long as you as it’s paid before the 31st January 2021.
Payments on accounts are advance payments taxpayers pay toward the following year tax bill if their tax bills were more than £1,000 in the current tax year and have paid less than 80% of all the tax owed through tax code or other means during the year. There are 2 payments on accounts and each of these payments is half of the current tax year’s bill towards next year tax bills. Payments are usually due by midnight on 31 January and 31 July respectively.
I know this deferral of this second payment on account is given in good faith to help taxpayers survive this outbreak economically while protecting their liquidity status, but I reckon it could cause more harm than good to the taxpayer if not properly considered by causing more cash constraint on the 31st January 2021 when these payments are due.
For instance, if your tax bill for the year 2018/19 submitted was £4,000 and let’s assume no previous payment on accounts was made. The total tax payable by midnight on the 31st January 2020 will be £6,000 i.e. your actual tax bill of £4,000 and an advance payment of £2,000 (called first payment on account) toward your next year tax bill. On the 31st July, the second payment on accounts of £2,000 will be payable.
If you chose to defer the second payment to the 31st January 2021, it will be payable alongside with your balancing payment and another first payment on account. The sum of which could be significant and is likely to affect your cash flow. Let’s go back to the earlier example, Let’s assume your new tax bill for the year 2019/20 is circa £5,000. The total tax payable by midnight on the 31st January 2021 will be £5,500 (i.e. the balancing payment of £3,000 since you’ve deferred the second on payment due on the 31st July 2020 plus £2,500 the first payment on account).
Alternatively, if you have chosen not to defer the second payment on account of £2,000 as indicated earlier and the tax bill for the year 2019/20 remains circa £5,000. The total tax payable on the 31st January 2021 will be just £3,500 (i.e. £1,000 balancing payment plus £2,500 first payment on account).
The effect of the second on payment is quite evident considering your cash flow position in January 2021 when most businesses will just be bouncing back, as the additional £2,000 you have to pay in January 2021 could affect your cash flow significantly. You would not want to put yourself in this situation – if you can afford to pay the second on payment now.
My advice would be to properly consider your cash flow position before taking the deferral advantage. Although, there is an understandable confusion that the deferral is automatic but HMRC has stated clearly in their GOV.UK guidance that you can still make the payment by 31st July as normal if you’re able to do so.
Make your informed decision now!!!