The 50% Payment on Account Dilemma

It’s normal for some people to make tax payments on account every 6 months

If you’re self employed, or have lots of income from rent, dividends or investments, you may have become used to the pattern of making tax payments every 6 months.

However, the way the rules are structured, it normally comes as a bit of a surprise the first time you encounter the the “payments on account” regime. PoA for short. If most of your tax is paid under PAYE you won’t need to worry about this. The rule is twofold:

  • If your PAYE tax deduction (and any sundry tax deduction) is more than 80% of your total tax bill, then PoA do not apply.
  • If your total tax payment for the year comes to less than £1,000 then PoA do not apply.

In all other cases, individuals (but not companies) will have to pay an instalment of tax every 6 months, on 31 January and on 31 July. And that normally applies to people who are self employed or have lots of income from rent, dividends or investments. The best way to explain this is to give you an illustration, based around the chart below. Let’s say that. . .

  • your taxable income first arose in the tax year 2015/16
  • your 50% payments on account are based on the previous year’s tax bill
  • as the previous year’s tax bill (2014/15) was NIL, you made no PoA on 31 Jan 16 and 31 Jul 16
  • when your tax return was finalised, your 2015/16 tax bill came to £999 and you paid that on the normal due date of 31 Jan 2017
  • that amount was below the £1,000 limit and so your PoA for 31 Jan 17 and 31 Jul 17 were also set at NIL
  • and then you go and have a really good year in 2016/17

  • so good, that your 2016/17 tax bill comes to £8,888
  • now you’re caught
  • not only do you have to pay the 8,888 on the normal due date of 31 Jan 2018, but the PoA kick in at the same time
  • the first instalment of 4,444 for 2017/18 is due on the same day – 31 Jan 2018 – in this illustration that’s going to lead to a single payment of £13,332
  • and another £4,444 is going to be due on 31 Jul 2018
  • if the payments on account of £4,444 and£ 4,444 are not precisely right for 2017/18 then a TBA adjustment is made on 31 Jan 2019
  • that could mean more tax to pay, or a tax repayment
  • and the next 50% instalment will also be due on 31 Jan 2019, and so on

It sometimes looks like you have to pay 2 years worth of tax in the space of 6 months. It has often been said that “if you’re self employed you don’t pay tax for two years”. That’s sort of true, but then it all catches up with you and you end up paying two years worth of tax in the space of 6 months.

We know what you’re thinking and we’ve heard the message before. You can contact your MP here (use the search labelled “Find an MP by postcode”). We simply have to follow the rules!

The only way to keep things under control is to regularly put aside a tax reserve and to do your accounts and tax return soon after 5 April every year. Then there should be no nasty surprises.

Income Tax & Corporation Tax Payments

There are four methods for paying a tax bill

We recommend making payments by bank transfer as this is the best way to prove that the amount was paid and was paid on that date!

Method 1 – Internet Banking

If HMRC sent you a payslip it will state whether you need to pay Shipley or Cumbernauld.

If you have no payslip then the default position is to make personal tax payments to Shipley and company tax payments to Cumbernauld. There are a lot of cases which do not follow this pattern, but don’t worry about it. HMRC sometimes moves cases around to even out the workload.

Depending on your bank, they may already have HMRC Shipley or HMRC Cumbernauld set up on their system. If the bank does not have the precise account details already, then you will need to specify one of these two:

account name HMRC Shipley
sort code 08-32-10
account no. 12001020
ref – your unique taxpayer reference number (the UTR)

account name HMRC Cumbernauld
sort code 08-32-10
account no. 12001039
ref – your unique taxpayer reference number (the UTR)

These bank accounts do not work with the modern “faster payments” system which we are all now used to. It normally takes at least 24 hours for a payment to arrive. Do not pay on the last possible date, it will not arrive until the next banking day and that will make your payment late!

If it’s a personal tax payment add a capital letter K to the end of your 10 digit UTR.

12345 67890 K

If it’s a company tax payment, the 10 digit UTR needs to be followed by the “accounting period”. Please try to follow this format as HMRC is prone to getting payments, putting them in the wrong place, and then claiming that they didn’t receive it in the first place! Replace the letters NN here with the numbers which we provide in our email.

12345 67890 A001 NN A

If your tax liability is more than £10,000 you may find that you will exceed your bank’s limit on internet transfers. Two smaller amounts paid on two separate days should enable you to work around that problem.

Method 2 – Traditional Cheque and Payslip

Companies are compelled to pay corporation tax electronically with effect from 1 April 2011. You can still use cheques to pay personal taxes.

If you have a recent reminder, payslip and prepaid envelope, please use that when making your payment. Write out a cheque for “H M Revenue & Customs” and put your unique taxpayer reference number on the front and on the back! Post it in good time so that it arrives by the due date! Thanks.

Method 3 – Debit Card

Use a debit card and pay by phone. Call the Collector of Taxes on 0845 305 1000 and quote your 10 digit unique taxpayer reference number. Then ask for a payment reference number or authorisation code for this payment.

Method 4 – Covering Letter and Cheque

Companies are compelled to pay corporation tax electronically with effect from 1 April 2011. You can still use cheques to pay other taxes.

If you cannot use any of the above methods, please use the dialogue below as the basis for a covering letter (using your normal business letter headed paper) and send it with a cheque, to the Collector. Write out a cheque for “H M Revenue & Customs” and put your unique taxpayer reference number on the front and on the back!

The Collector of Taxes
Accounts Office B
Shipley
W Yorkshire
BD98 8AADear SirsI enclose a cheque in the sum of AMOUNT which represents tax due on DATE for the period ended YEAREND, under your ref REFNO.

Yours faithfully

 

Issuing more shares

Diluting your shareholding?

There may be good reasons for issuing more shares in your UK limited company, but you may unwittingly be running the risk of a capital gains tax bill. Read on . . .

The typical situation is a small company headed by Fred Flintstone and Barney Rubble who each own 50 Ordinary shares. Fred and Barney then decide to admit Mr Stone as a third director to Dinosaur Ltd and want to give him a small share of the company. The aim is to split the shares in a 40:40:20 ratio. There are two ways to do this:

  • The simplest thing would be for Fred and Barney to sell or transfer 10 shares each.
  • Or, Dinosaur Ltd could issue a further 25 Ordinary shares from the unissued share capital.

In either case the desired ratio of 40:40:20 is achieved, and in either case a potential gain arises in the hands of Fred and Barney. This happens whether or not money (or other consideration) changes hands. The gain arises, because Fred and Barney have given up a chargeable asset. Whichever way you look at it, they have surrendered 10% each of Dinosaur Ltd to Mr Stone.

The capital gains tax calculation depends on many factors, particularly in the case of small, close companies (and you should take professional advice)! In it’s simplest form, look at it this way . . .

Let’s say that Dinosaur Ltd is worth £1M. That was the value of the company on the balance sheet when last year’s accounts were done. Let’s also assume that the year end was yesterday and that the accounts were completed this morning, and so that figure is a valid current market value. Let’s also assume that Mr Stone paid nothing for the shares and was given them only on account of his important status.

Fred put in £50 on day one of the company and has just given away shares which originally cost him just £10. Because Dinosaur Ltd is now worth £1M he has made a disposal to the value of £100,000. His capital gain is £99,990 and he has and annual exemption of (say) £9,990. That leaves £90,000 chargeable to tax at the prevailing rate.

  • In 2009/10 the CGT rate is 18%
  • So 90,000 x 18% = 16,200

Amazing isn’t it? Fred has to pay a tax bill of £16,200 even though he received nothing but Mr Stone’s important status in exchange for a 10% share of Dinosaur Ltd. Ditto Barney! There are narrow, specialised rules which may allow some form of tax relief from that gain. However, does this story have implications for any share transactions you are considering? If your proposed arrangement means that your percentage holding in a company is going to change then you should seek professional advice.

And even if your holding is going up, there are implications for (a) your next share transaction and for (b) whoever has a diluted share in the company as a result.

Statutory Maternity Pay

The rules on SMP are subject to change every year and this article sets out only the general principles. The timing of notifications and claims is critical. For a precise overview of the current rules and rates, please refer to the HMRC Guide.

Generally, in order to qualify for SMP an employee must have been with the employer for at least 26 weeks and have been paid a minimum level of salary during that time – that’s usually at the threshold for tax or NI, so it’s not particularly high.

The claim for SMP can only be prepared after a form MAT B1 is received, and the GP is not permitted to issue that until week 20 of a pregnancy.

An SMP claim to HMRC must be submitted no later than 6 weeks before the expected due date.

Do not wait for week 20, notify us as soon as you are aware of a pregnancy. There are planning opportunities that can only be implemented in the period spanning week 4 to week 16 of a pregnancy. Talk to us about this at the earliest opportunity.

Once an employer has a copy of the form MAT B1, and is satisfied that the conditions have been met, SMP can be paid. The full amounts of SMP and a degree of compensation can be recovered from the Government. Normally this is done by restricting the monthly PAYE remittance of all income tax and NI arising from the other employees. Where there are no other employees, then this recovery has to be made by a funding application to HMRC.

If you are a small employer and need the funding up front, we can complete the relevant claim for you, for a small fee. That’s normally £350 plus VAT. A separate fee may also be charged if week 4/16 planning can be implemented. The SMP compensation paid to an employer is usually enough to cover the professional fees charged by Proactive, and sometimes it’s much more.

Tax Returns and IR Marks

These days, both personal tax returns and corporation tax returns are generated by us using software which has been approved by HMRC. The process includes the creation of a unique IR Mark which is established by applying a formula to the data in the return. This means that every tax return has a totally unique IR Mark.

We ask clients to check tax returns carefully to ensure that all income has been declared and that all allowances have been claimed. When you are satisfied that the return is correct and complete, HM Revenue & Customs will accept authorisation electronically.

We are permitted to file electronic tax returns only when we are satisfied that the IR Mark on our digital file is the same as the one on the document that you have approved. If any amendment is required to a tax return, then a fresh document needs to be prepared and sent out again for approval. That’s because the IR Mark changes after even the most elementary revision.

The Self Assessment tax return deadline normally falls ten months after the tax year ended, and you need to ensure it is submitted by 31 Jan. Please remember that in law, the responsibility for filing a tax return on time and for paying tax lies with you the taxpayer.

There are automatic penalties for late tax returns, so we encourage clients to approve them as soon as possible. Once submitted, we can provide details of the electronic proof of receipt.