Self employed - do I need to make payment on account in these circumstances?

gabacabriel

So I'm putting my accounts to bed for 2009-10, and I have a tax bill for approx £5,000. Additionally, as I understand it, I have a bill of 50% for 2010-11 as a payment on account/in advance of half of the previous year's figure ie £2,500. (I didn't make the payment on account in the previous year as it was my first year as self employed and tax owed was less than £1,000).

BUT! In the 10/11 tax year I did some freelance work for a company who insisted on paying me through their payroll, and I was taxed on PAYE - I paid tax of approx £2,000.

Additionally, that same company later went into administration, meaning that I did not receive the final £2,800 for which I billed them - although I subsequently received some money back from the government in compensation (£760 minus tax of about £200 clawed back by the government).

So my point is - I've already paid more or less £2,500 in the 10/11 tax year, not to mention the bad debt of the company going bust.

Given these facts, do I really need to make the payment on account?

chrismac1

Note that payments on account are your best estimate of your bill for the 10-11 tax year. There is a recession on - I would say that for about 50% of my sole trader / partnership client base, I have amended the 10-11 payments on account DOWN because we can already see lower 10-11 profits than for 09-10. And for about 20% we have amended the PoA UP because those folks' businesses are beating the recession.

So if your estimated tax bill for 10-11 is NIL you are justified in putting in an amended payment of account of NIL.

Mikeyorks

gabacabriel wrote: »

So my point is - I've already paid more or less £2,500 in the 10/11 tax year, not to mention the bad debt of the company going bust.

Given these facts, do I really need to make the payment on account?

There are 2 distinct rules for not making POAs :

1) The tax due for the closing year is £1k or less and / or

2) 80% of the tax due was deducted at source (eg PAYE)

So ..... you still are required to make POAs?

zygurat789

The payment on account you are about to make is to satisfy your liability, when it is finally calculated in (say) Jan 2012 and to be paid by 31/1/12.
You always have the ability to reduce your POA but beware if it should transpire that you underpaid you will be charged interest on the difference between the calculated POA and your estimated POA.
Your calculated paymnts on account will be 2 X £2500 and you will already have paid £2,200 so you only need to pay 2 X £1,400.
You can reduce this further if you think your profits will be down but beware of underestimating as the interest is not allowable.

gabacabriel

zygurat789 wrote: »

The payment on account you are about to make is to satisfy your liability, when it is finally calculated in (say) Jan 2012 and to be paid by 31/1/12.
You always have the ability to reduce your POA but beware if it should transpire that you underpaid you will be charged interest on the difference between the calculated POA and your estimated POA.

Does anyone know what the interest rate levied happens to be in these circumstances? Thanks!

Mikeyorks

Currently 3%. But charged all the way back to the POA due dates.

If the base rate increases .... the 3% will follow.

gabacabriel

Mikeyorks wrote: »

Currently 3%. But charged all the way back to the POA due dates.

If the base rate increases .... the 3% will follow.

OK, so let's suppose I should make a POA at 31/1 of £2,500, but I elect to pay only £1,500 at that time (we've just had a baby and I took a couple of months out to change nappies, so there's a bit of a shortfall).

Does that mean that in addition to paying the £1000 next year that I should have paid this year (obviously), that I'd also have to paid a £30 penalty (£100O @ 3% for a full year)?

Mikeyorks

gabacabriel wrote: »

Does that mean that in addition to paying the £1000 next year that I should have paid this year (obviously), that I'd also have to paid a £30 penalty (£100O @ 3% for a full year)?

Yes. As POAs aren't subject to the 5% surcharge that kicks in 28 days after the due date .... you therefore 'get away' with just the interest.

HMRC will pursue if the £1k is left unpaid ... so you do need to formally reduce it (SA303 ..... but do it online) to avoid that. If you had a couple of months out ..... won't your reduced income fully justify the reduction?

jennifernil

zygurat789 wrote: »

The payment on account you are about to make is to satisfy your liability, when it is finally calculated in (say) Jan 2012 and to be paid by 31/1/12.
You always have the ability to reduce your POA but beware if it should transpire that you underpaid you will be charged interest on the difference between the calculated POA and your estimated POA.
Your calculated paymnts on account will be 2 X £2500 and you will already have paid £2,200 so you only need to pay 2 X £1,400.
You can reduce this further if you think your profits will be down but beware of underestimating as the interest is not allowable.

I think this is the way to go.

There are 3 payments you need to make this year.....

Your £5000 tax for 09/10 (due 31/01/11), and 2 payments on account for 10/11, the first also due 31/01/11, the second due 31/07/11.

Can you afford to pay the £5000 + the £1400 (as calculated above) now?

Then the second £1400 in July?

I was also wondering if the £2200 could come off the first £2500 POA?
Might be worth checking.

jennifernil

Mike posted while I was (very slowly)typing........I would agree that if you think your income will be lower in this current year, you should ask to reduce your POAs. Can you estimate your likely income to 5th April? Then just add a little.

Mikeyorks

jennifernil wrote: »

I was also wondering if the £2200 could come off the first £2500 POA?
Might be worth checking.

But the £2200 relates to 2010-11 PAYE? So it's sitting on a P45 / P14 somewhere. And it was deducted in accordance with the PAYE Regs. So I can't see any read across to the POAs due this coming year.

The £2200 only comes into play when amalgamated into the 10-11 SA Return in Jan 2012. At that point it both affects the overall liability under SA and also has potential influence (the 80% rule) on the POAs for the subsequent year.

But I can't see how it can possibly be regarded, in advance, as any sort of payment in advance. As it's 'ring fenced' as current year PAYE?