Old Mill Updates

COVID-19: Update on the 31 July 2020 self-assessment tax payment deferral announcement

There have been a number of announcements over recent weeks in an attempt to support individuals and businesses in what is a constantly evolving situation.  Decisions are being taken quickly to try to alleviate the pressure that we are all feeling, but it’s taking time for the implementation and the detail to catch up.

One such recent announcement, on Friday 20 March, was the deferral of self-assessment tax payments due on 31 July 2020, to 31 January 2021.

26th March 2020

As with the VAT payment deferral, the government’s guidance explains ‘This is an automatic offer with no applications required.  No penalties or interest for late payment will be charged if you defer payment until January 2021.’

Update: The guidance initially released suggested that ‘if you are self-employed you are eligible’ which was not sufficiently clear as it left uncertainty for those who also have a payment due on 31 July but who are not self-employed.  We are pleased to see that this has since been updated to confirm that ‘you do not need to be self-employed to be eligible for the deferment’, however it does also go on to say that ‘the deferment is optional.  If you are still able to pay your second payment on account on 31 July you should do so’.

Why are tax payments made on 31 July?

The payments due on 31 July each year are part of the Payments on Account system.  If your tax payable for a tax year exceeds £1,000 and less than 80% of your tax liability has been collected from your income at source, you’re required to make payments in advance towards the following year’s tax liability; these payments are made in two instalments in January and July.

For example, if you had tax due of £3,000 for the 2018-19 tax year (and you also met the other part of the criteria) this would have been due for payment on 31 January 2020.  Along with this payment you would also need to pay a £1,500 Payment on Account towards the 2019-20 tax year.  Another payment of £1,500 would ordinarily be due on 31 July 2020.

These payments in advance are estimates and assume that your income, and therefore your tax liability, will be consistent with the previous year.

What is the effect of deferring the payment due on 31 July?

The effect of deferring the payment due on 31 July to 31 January is of course a short-term cash flow advantage, but do bear in mind that this could result in a higher payment than normal due in January 2021, as you’ll also be due to pay any balance of tax for the year and the first payment on account instalment for the following year.

What action should you take as a result of the announcement?

We would suggest that the best thing that you can do is to be prepared.  Here are five key points to consider:

  1. If you have a direct debit set up with HMRC for your self assessment payments, as was our advice regarding VAT payments, you should cancel this so that the payment is not automatically collected in July.
  2. Get your 2019-20 tax return prepared nice and early after 5 April, so that you’re aware of your tax position and the upcoming payments due from 31 January 2021 as soon as possible. This will give you plenty of time to consider how you’ll meet this liability.
  3. If your income has already been effected for the current year and is significantly lower than last year, you may actually find that you’re due a repayment of tax, if the payment in advance you’ve already made in January was too high. Even more reason to get that tax return in early.
  4. If you expect that your income for the following year may be impacted by current events and is likely to be lower, a claim can be made to reduce the payments on account which are automatically calculated based on the previous year.
  5. Once you know the amount that will be due in January, if you feel that you will have difficulty in making the payment, you can get on the front foot with HMRC and make contact with their Time to Pay Service to discuss your position with them and agree a payment plan.

We are here to help and support you and we’ll work to prepare tax returns as soon as we can if you are able to provide your information to us.

‘This is an automatic offer with no applications required.  No penalties or interest for late payment will be charged if you defer payment until January 2021.’