The Government acted on Friday (20 March 2020) when the Chancellor issued further cashflow assistance to taxpayers to help them through the Coronavirus crisis and reinstall some confidence in the UK economy which had been in crisis throughout the week.
This offer is available to the self employed and is automatic with no applications required. The deferral will work to allow the 31 July payment on account to be pushed back to 31 January 2021 when the final payment would fall due if the January and July payments would not be sufficient to cover the year’s tax bill.
The Chancellor is allowing employees who have no work to have contributions towards their salary costs. The self employed only pay tax twice a year and don’t have a salary that is acknowledged in the tax system. Because of this the Chancellor is allowing half a year’s tax payment to be deferred so that the self employed don’t get worried about this large payment.
Self employed tax is calculated by reference to the annual accounts produced by the business. Many self employed have a year end of 31 March and so for this year may have 10 months of normal profits followed by the last two months which may have been disrupted by the onset of the Coronavirus crisis. It would follow that the annual tax bill, once calculated for inclusion on the April 2020 tax return will show a slightly lower sum.
The upcoming payment in July is an estimate based on the prior year and if we think the accounts to March 2020 will be slightly lower prove to be excessive. The January estimate would have been too much and so by paying nothing in July will mean that something like 60-65% (instead of approximately 50%) of the years liability will have been paid. Deferring the July payment to 31 January enables everyone to put in their tax return and then pay the correct payment to settle the year.
The estimates for next year, paid in January and July 2021, are based upon half of the year finishing in the current tax year. It may follow that next year will be lower if a lockdown takes place or the Coronavirus crisis continues through the summer. That would mean that we could reduce the next January payment too based upon how the annual accounts are progressing.
So this year’s tax return process for the accounts will be twofold. Firstly calculating the liability as usual to ensure your tax payment for the year is settled and then predicting what your profits might be for the following year to calculate a reasonable payment on account.
The Self Employed also pay tax on other income such as rents and dividends when they make their tax payments. With £2,000 of dividend income free of tax it is likely to just be rental income. We are unsure as to whether the deferment only relates to the self employed income or if it includes other income. It may be that a payment will be required for any rental income received.
This may also apply to those who are in employment. At this stage we believe that there will be payments on account for those in receipt of rent and dividends if they are employed. Although these payments are income tax because they don’t flow from self employed income and the scheme is open to the self employed only we think tax will still need to be paid.
This may not be the Government’s intention and may be amended as time passes but on the other hand the tax payments relating to rent and dividends are only part of the final liability if the money has been received.
Payments on account for these items are calculated by reference to the previous year and so if dividends in particular have changed – specifically reduced – then getting an early tax return done and filed will reduce the tax to the correct figure. If the dividends have increased the payment on account will not increase as the balance is always paid in the following January.
So we have a contribution to the cashflow of the self employed which will be welcome for them in the current circumstances but like all of the other measures announced our understanding from reading the limited guidance notes may not be interpreting the schemes as the Government intends. We will continue to monitor all of the announcements made and bring to you any amendments or guidance as it is released so that we are all clear on the proposals at the earliest possible time.
In the meantime if you wish to discuss this in more detail please do not hesitate to contact your local Lambert Chapman contact.
(Important Notice – Details correct at time of publication. It is recommended that you check the GOV.UK website for the very latest information)
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.