Covid-19: New guidance for Self-Assessment deferred payments on account

HMRC has published new guidance on choosing to delay making the second payment on account for the 2019/20 tax year

In April, the Government announced that Self-Assessment payments due 31 July 2020 could be deferred until 31 January 2021 – interest and penalty free.

‘Payments on account’ are advance payments towards an individual’s tax bill (including Class 4 National Insurance if they are self-employed).

An individual has to make two payments on account every year unless:

• their last Self-Assessment tax bill was less than £1,000;
• they’ve already paid more than 80% of all the tax they owe, for example through their tax code.

Note that whilst this mainly applies to the self-employed, it can apply to other taxpayers, such as landlords.

Each payment is half their previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July.

Payments on account do not include anything owed for capital gains, as that will be paid in the balancing payment.

HMRC’s new guidance says that an individual has the option to defer their second payment on account if they are:

• registered in the UK for Self-Assessment; and
• finding it difficult to make their second payment on account by 31 July 2020 due to the impact of coronavirus.

(HMRC adds that they can still make the payment by 31 July 2020 as normal if they are able to do so.)

HMRC will not charge interest or penalties on any amount of the deferred payment on account, provided it’s paid on or before 31 January 2021.

Those who choose to defer will not need to tell HMRC that they are deferring their payment on account.

However, HMRC provides an important reminder that deferring this payment could mean an individual has a particularly large amount to find on 31 January 2021. Other payments that will also be due by that date are:

• any balancing payment due for the 2019/20 tax year; and
• the first payment on account due for the 2020/21 tax year.

Claims to reduce payments on account

Businesses who know that their 2019/20 tax bill is going to be less than the previous year can also make a claim to reduce their 31 July 2020 payment on account.

Going forward it is likely that many businesses will also see a drop in profitability in the 2020/21 tax year. As the first income tax payment on account for 2020/21 will be due on 31 January 2021, businesses should monitor their position and make an appropriate claim if necessary.

However, bear in mind that the 2019/20 tax bill is normally based on the profits ending in the 2019/20 tax year, and the 2020/21 tax bill is based on the profits ending in the 2020/21 tax year. This means that some businesses, whose current profits are falling, may not see a drop in their tax bills for some time yet.

For example

Andy prepares his accounts to 30 April each year.

Andy’s tax bill for the 2018/19 tax year was £3,000. This is based on his profits for the accounting year ended 30 April 2018.

He paid his first payment on account of £1,500 (half his 2018/19 tax bill) towards his 2019/20 tax bill, on 31 January 2020.

His second payment on account of £1,500 is due on 31 July 2020, but as his business is now being impacted by the coronavirus, he defers this payment to 31 January 2021.

His tax bill for the 2019/20 tax year is £4,000. So, the total tax to pay by midnight on 31 January 2021 will be £4,500. This includes:

• the deferred second payment on account of £1,500 for the 2019/20 tax year;
• his balancing payment of £1,000 for the 2019/20 tax year (£4,000 minus £3,000);
• the first payment on account of £2,000 (half his 2019/20 tax bill) towards his 2020/21 tax bill.

Note that in this example, based on his accounts for the year ended 30 April 2020 Andy doesn’t expect his 2020/21 tax bill to be any lower than his 2019/20 tax bill – the coronavirus hadn’t hit his business fully before April 2020 – so Andy can’t elect to reduce his payments on account for the 2020/21 tax year.

This highlights the potential impact for a self-employed individual with a 30 April accounting year-end. The impact may differ for individuals with other year ends. In particular, a 31 March year-end would mean that the 31 March 2020 accounts form the basis of the 2019/20 tax bill, and the 31 March 2021 accounts form the basis of the 2020/21 tax bill, so for a business impacted by the coronavirus, a 31 March year-end is more likely to result in a lower 2019/20 tax bill as well as a lower 2020/21 tax bill, meaning a reduced second payment on account, and a reduced or nil balancing payment, for 2019/20, and a reduced first payment on account for 2020/21, on 31 January 2021.

Those unable to pay may well need to contact HMRC regarding a Time to Pay instalment arrangement.