Sarah Bradford explores the options available for those struggling to pay their tax bills.
The Covid-19 pandemic has caused financial hardship for many businesses and individuals. In recognition of this, the government has put in place various measures to allow taxpayers to delay tax payments. In setting out his Winter Economy Plan in late September 2020, the Chancellor outlined further measures to give taxpayers the option to defer payment of VAT and tax due under self-assessment in instalments.
Self-assessment liabilities
Under self-assessment, tax is normally due by 31 January after the end of the tax year to which it relates. Where the tax bill (including Class 4 National Insurance contributions (NICs), but not Class 2 NICs) is at least £1,000, the taxpayer must make payments on account of their liability, unless at least 80% of their overall tax liability is collected at source (e.g. under PAYE).
Each payment on account is 50% of the previous year’s liability, with any outstanding payment due by the normal due date of 31 January after the end of the tax year.
Delaying July 2020 payment on account
To help taxpayers struggling financially as a result of the Covid-19 pandemic, taxpayers who were due to make the second payment on account for 2019/20 by 31 July 2020 could choose to defer that payment and instead pay it at any time up to 31 January 2021. As long as payment is made by 31 January 2021, there is no interest to pay; nor are any late payment penalties charged.
It should be noted that taxpayers who delayed their July 2020 payment on account may receive a self-assessment statement before 31 January 2021 showing this amount as being due and payable. The statement may also show interest as accruing on payments on account. Taxpayers receiving such a statement should not worry – HMRC has confirmed that despite what is shown on the statement, interest will not be charged on the delayed July payment as long as it is paid by 31 January 2021.
Taxpayers who deferred their July 2020 payment on account could potentially face a large bill, as they would have to make the following payments on or before 31 January 2021:
- the second payment on account for 2019/20, delayed from July 2020;
- any balancing payment for 2019/20; and
- the first payment on account for 2020/21.
Taxpayers who are continuing to struggle financially may have trouble meeting a larger-than-normal January tax bill.
Fortunately, as a result of new measures announced by the Chancellor in his Winter Economy Plan, self-assessment taxpayers can take advantage of enhanced time-to-pay arrangements to pay their tax in instalments.
Enhanced time-to-pay
Self-assessment taxpayers who wish to set up a plan to pay tax that they owe in instalments, rather than in full by the due date, can use HMRC’s online payment plan service to set up a repayment plan without the need to call HMRC. Prior to 1 October 2020, the online service could only be for paying tax liabilities up to £10,000.
However, the limit was increased to £30,000 from 1 October 2020 to allow self-assessment taxpayers to use the service to set up an instalment plan for their July 2020 payment on account, any balance payment for 2019/20 and the first payment on account for 2020/21, paying what they owe in 12 monthly instalments rather than in a single payment. Taking this option will not only make it easier to budget for the repayments, but will also give the taxpayer a further year (i.e. until 31 January 2022) to clear the total amount. Interest will be charged on amounts paid after 31 January 2021.
To set up their own self-serve time-to-pay arrangements, taxpayers must meet the following requirements:
- they must have no outstanding tax returns, no other tax debts and must not have any other HMRC payment plans set up;
- the amount that they owe must be between £32 and £30,000;
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the payment plan must be set up no later than 60 days after the due date.
Thus, for tax due to be paid by 31 January 2021, the time-to-pay arrangement must be set up by 1 April 2021 at the latest.
It should be remembered other liabilities will fall due within the instalment period, including the second payment on account for 2020/21 (due by 31 July 2021), and any balancing payment for 2020/21 plus the first payment on account for 2021/22 (by 31 January 2022). The taxpayer will need to budget for these too, as well as paying the monthly instalments.
If the taxpayer owes more than £30,000, all is not lost. While they cannot set up a self-serve time-to-pay agreement, they can contact HMRC to discuss setting up a time-to-pay arrangement in the usual way by calling the self-assessment payment helpline on 0300 200 3822. Taxpayers needing longer than 12 months to pay their 31 January 2021 liability may also be able to agree a longer repayment period with HMRC.
Review 2020/21 payments on account
Payments on account for 2020/21 are based on liabilities for 2019/20, so will not reflect the impact of the Covid-19 pandemic. Where income has been reduced as a result of the pandemic such that the estimated tax liability for 2020/21 will be below that for 2019/20, taxpayers should look to reduce their 2020/21 payments on account.
When working out their likely liability for 2020/21, it should be remembered that money received under the various Covid-19 support schemes, such as the self-employment income support scheme and the Coronavirus job retention scheme is taxable, as are grants received from local authorities.
Furthermore, if payments on account are reduced too much, interest will be charged on the difference between what should have been paid and what was actually due, from the due date until the date of payment.
VAT liabilities
Early in the pandemic, VAT-registered businesses were given the option to delay payments of VAT that fell due between 20 March 2020 and 30 June 2020. For businesses that account for VAT quarterly, this is the VAT for the quarters to 29 February 2020, 31 March 2020 and 30 April 2020. The VAT returns for these quarters had to be filed on time as usual, even if the option to delay payment of the associated VAT was taken.
The option to delay VAT payments was restricted to this window, and VAT falling due on or after 1 July 2020 (i.e. for the quarter to 31 May 2020 and subsequent VAT quarters) is due on time as normal.
Under the original proposals, businesses that took the option to delay payment of VAT were expected to have paid it by 31 March 2021, along with VAT for subsequent quarters as it fell due.
However, there is now more help at hand for businesses who may be struggling to pay the delayed VAT by 31 March 2021. The new payment scheme for VAT was unveiled by the Chancellor in his Winter Economy Plan. The scheme will allow VAT-registered businesses who still owe delayed VAT, to pay that VAT in 11 equal instalments over the 2021/22 tax year, rather than having to pay it in full by 31 March 2021. Taking advantage of the instalment option will give businesses an additional year to pay the delayed VAT. A further benefit is that the instalment option is interest-free.
To take advantage of the new payment scheme, VAT-registered traders will need to opt in. It is important that this not overlooked – a failure to opt into the scheme will mean that the VAT remains due by 31 March 2021. HMRC is to publish details of how to opt in over the coming months.
Other taxes
While there are no specific initiatives to help taxpayers struggling to pay other taxes, the usual avenues of help remain available.
It may be possible to set up a time-to-pay agreement to spread the bill over a longer time period. Where a demand has already been received, contact the HMRC Office that sent the letter to discuss payment options. If a demand has not been received, contact HMRC’s payment support service on 0300 200 3835 to find out whether it is possible to agree a time-to-pay option.
Practical tip
Plan ahead for your tax payments and if it looks likely that you will struggle to pay your tax liabilities on time and in full, consider setting up a plan allowing tax to be paid in instalments.
