Tax Credit - having to estimate income and sorry for long post!

Living_proof

I have for many years been self-employed as a travel agent specialising in Cruise. These are generally booked well in advance, up to 2 years in some cases where a specific itinerary or accommodation type is required. I have been paid the full commission on my part of the agreed percentage, with 80% upfront and the remaining 20% withheld to cover cancellations, additions and mistakes on bookings. The balance payment has always been paid out in May and therefore I could accurately state my income for the previous tax year at that time for WTC and Income Tax purposes. The system has worked very well in the past, and I have never been in a position where I have had to repay commissions previously paid as the balance payment easily covered any changes. Then came Coronavirus and from 13th March cruise companies cancelled sailings, clients cancelled on health grounds and the Foreign Office advice has since precluded British clients travelling except for essential travel. Chaos has ensued with some operators protecting commissions payable but others offering vouchers or future travel credits and some of course may go out of business. The calculation normally done in May will be put off until September so hopefully a clearer picture will emerge at that time. I doubt any of the bookings for 2020 will succeed because travel insurers won't cover Covid claims and my elderly clientele cannot take health risks. I estimate pretty much everything I was paid in 2019/2020 will have to be repaid and I am under a contractual obligation to do this, probably in the Autumn. A couple of bookings I did in 2018/19 and paid on then are similarly unlikely to travel as they are for October this year so there will be retrospective adjustments for that year too. How do I go about explaining this to the Tax Credit office? I seem to remember that on the income tax self assessment form there is space to do this but not sure about WTC. Whilst I have indeed been paid the money I have to hold it back in a deposit account as I know it will need to be repaid. Any suggestions anyone please?

calcotti

Would it not be better to ring them and ask?

Living_proof

I assume their call centres will be furloughed or working from home. I just thought someone might have come across something like this before.

JessicaF_2

Living_proof said:

I have for many years been self-employed as a travel agent specialising in Cruise. These are generally booked well in advance, up to 2 years in some cases where a specific itinerary or accommodation type is required. I have been paid the full commission on my part of the agreed percentage, with 80% upfront and the remaining 20% withheld to cover cancellations, additions and mistakes on bookings. The balance payment has always been paid out in May and therefore I could accurately state my income for the previous tax year at that time for WTC and Income Tax purposes. The system has worked very well in the past, and I have never been in a position where I have had to repay commissions previously paid as the balance payment easily covered any changes. Then came Coronavirus and from 13th March cruise companies cancelled sailings, clients cancelled on health grounds and the Foreign Office advice has since precluded British clients travelling except for essential travel. Chaos has ensued with some operators protecting commissions payable but others offering vouchers or future travel credits and some of course may go out of business. The calculation normally done in May will be put off until September so hopefully a clearer picture will emerge at that time. I doubt any of the bookings for 2020 will succeed because travel insurers won't cover Covid claims and my elderly clientele cannot take health risks. I estimate pretty much everything I was paid in 2019/2020 will have to be repaid and I am under a contractual obligation to do this, probably in the Autumn. A couple of bookings I did in 2018/19 and paid on then are similarly unlikely to travel as they are for October this year so there will be retrospective adjustments for that year too. How do I go about explaining this to the Tax Credit office? I seem to remember that on the income tax self assessment form there is space to do this but not sure about WTC. Whilst I have indeed been paid the money I have to hold it back in a deposit account as I know it will need to be repaid. Any suggestions anyone please?

How do you deal with the adjustments on your tax return? Do you amend a previous tax return? Tax credits follow your taxable profits for tax. But once a year is finalised, like 2018/19, it can only be re-opened in certain circumstances. Do you use an accountant?
Jess

Living_proof

JessicaF_2 said:

How do you deal with the adjustments on your tax return? Do you amend a previous tax return? Tax credits follow your taxable profits for tax. But once a year is finalised, like 2018/19, it can only be re-opened in certain circumstances. Do you use an accountant?
Jess

In the past I haven't had to make adjustments on a tax return - all figures were available to me by the middle of May and that was that. This year they won't be available until September which is too late, although I could give an educated guess on my very low profit, or more probably loss. I just wonder how sympathetic HMRC will be in the circumstances. I don't use an accountant as it has always been so straightforward and the situation now is totally exceptional in the travel industry.

Icequeen1

Living_proof said:

JessicaF_2 said:

How do you deal with the adjustments on your tax return? Do you amend a previous tax return? Tax credits follow your taxable profits for tax. But once a year is finalised, like 2018/19, it can only be re-opened in certain circumstances. Do you use an accountant?
Jess

In the past I haven't had to make adjustments on a tax return - all figures were available to me by the middle of May and that was that. This year they won't be available until September which is too late, although I could give an educated guess on my very low profit, or more probably loss. I just wonder how sympathetic HMRC will be in the circumstances. I don't use an accountant as it has always been so straightforward and the situation now is totally exceptional in the travel industry.

So, when you get the balancing payment usually in may - which tax year do you declare that for tax purposes? (in other words do you use the acrruals basis or cash basis for accounting). You can give an estimated income to HMRC before july 31 deadline, and can amend up until following 31 January. I guess the key is to make sure that this is all going into the correct tax year and your accounting is good. Tax credits follow the tax rules, so whatever you declare on your tax return for the relevant year is what you declare to tax credits. If you haven't done your tax return, you need to estimate and then confirm actual when you have. 

Living_proof

Thanks for your response Icequeen. I would add the balancing payment in May 2020 to the 2019/20 tax year to which it refers. Only this year I won't know the balancing payment until September. You are worrying me now that I have done this incorrectly for all these years! I note expenses when they are paid (and they are very small in my case as I work from home) and monthly commission payments when they are paid, but add the balancing payment so that the tax year is calculated for the previous year by mid May at the latest. Should I change the way I work and if so is this going to upset the Revenue?

Icequeen1

Living_proof said:

Thanks for your response Icequeen. I would add the balancing payment in May 2020 to the 2019/20 tax year to which it refers. Only this year I won't know the balancing payment until September. You are worrying me now that I have done this incorrectly for all these years! I note expenses when they are paid (and they are very small in my case as I work from home) and monthly commission payments when they are paid, but add the balancing payment so that the tax year is calculated for the previous year by mid May at the latest. Should I change the way I work and if so is this going to upset the Revenue?

I would suggest you speak to an accountant. It sounds like from what you are saying you are mixing accruals accounting and cash basis (receipts). But that is a tax issue and not really what you asked. Re tax credits, you will need to just use your best guess and make sure you make it clear to HMRC that it is an estimate by 31 July. Then you have until 31 January 2021 to provide the actual 2019/20 figure. Obviously this may mean your payments are not accurate, but the system is designed like this for the self-employed and recognises they might not know their income for the tax year just ended by 31 July. (And apologies for the confusion, i was icequeen on the old forum, lost my login and used my other Jess login, but now have an Icequeen1 back again!) 

Living_proof

Icequeen1 said:

I would suggest you speak to an accountant. It sounds like from what you are saying you are mixing accruals accounting and cash basis (receipts). But that is a tax issue and not really what you asked. Re tax credits, you will need to just use your best guess and make sure you make it clear to HMRC that it is an estimate by 31 July. Then you have until 31 January 2021 to provide the actual 2019/20 figure. Obviously this may mean your payments are not accurate, but the system is designed like this for the self-employed and recognises they might not know their income for the tax year just ended by 31 July. (And apologies for the confusion, i was icequeen on the old forum, lost my login and used my other Jess login, but now have an Icequeen1 back again!) 

Thank you! I had forgotten that I had until 31 Jan to get my tax form in, but only 31 July for the tax credit. I have normally submitted both before the end of May, but incorrectly as it transpires. Dozens of other agents will be in the same position, people like Travel Counsellors and dozens of other homeworkers, so there will doubtless be some online discussion about how to proceed in the future. I am entitled to very little tax credit, but it does open doors to get the Warm Front discount and the government saving scheme, so worth the effort in completing the forms, etc.

Icequeen1

Living_proof said:

Icequeen1 said:

I would suggest you speak to an accountant. It sounds like from what you are saying you are mixing accruals accounting and cash basis (receipts). But that is a tax issue and not really what you asked. Re tax credits, you will need to just use your best guess and make sure you make it clear to HMRC that it is an estimate by 31 July. Then you have until 31 January 2021 to provide the actual 2019/20 figure. Obviously this may mean your payments are not accurate, but the system is designed like this for the self-employed and recognises they might not know their income for the tax year just ended by 31 July. (And apologies for the confusion, i was icequeen on the old forum, lost my login and used my other Jess login, but now have an Icequeen1 back again!) 

Thank you! I had forgotten that I had until 31 Jan to get my tax form in, but only 31 July for the tax credit. I have normally submitted both before the end of May, but incorrectly as it transpires. Dozens of other agents will be in the same position, people like Travel Counsellors and dozens of other homeworkers, so there will doubtless be some online discussion about how to proceed in the future. I am entitled to very little tax credit, but it does open doors to get the Warm Front discount and the government saving scheme, so worth the effort in completing the forms, etc.

The 31 July can be just an estimate, as long as you confirm actual by 31 January 2021