Small companies could soon be required to calculate and pay tax quarterly, or even monthly, under proposals from Her Majesty’s Revenue & Customs. HMRC’s consultation “Call for evidence: timely payment” explores whether self-assessment and corporation tax payments could be made closer to real time. Emma Rawson looks at the details.
Currently, the self-employed have until 31 January following the end of the tax year to file their return and settle their tax bill, with many also making payments on account (based on the previous year’s tax bill) in January and July. Smaller companies have nine months and one day to pay their corporation tax bill.
HMRC is concerned that the time lag between income arising and tax being due can make it difficult to budget for tax payments. It believes that paying tax closer to the point the income arises could help taxpayers manage their cashflow, provide greater certainty and reduce the risk of receiving an unexpectedly high tax bill. There would, of course, also be benefits to the Exchequer. As well as bringing in tax revenues earlier, it could reduce the amount of tax that remains unpaid. Currently, income tax self-assessment and corporation tax make up around 34 per cent of all outstanding debts to HMRC.
The consultation explores the possibility of increasing the frequency and accelerating the timing of tax payments for both self-assessment and corporation tax. HMRC is keen to stress that there are no formal proposals; this is an early stage consultation to look at possible options and the issues that could arise.
HMRC already offers a Budget Payment Plan for income tax self-assessment taxpayers who are up to date with payments and wish to make regular weekly or monthly payments towards their next tax bill. However, this is not easy to find, set up or manage and take-up to date has been low. HMRC wants to make the Plan more visible, and it is interested in going beyond this.
HMRC believes that in order to be beneficial to businesses, tax payments should be frequent and based on an up-to-date view of the taxpayer’s current position. The preference therefore appears to be to move away from the current payment on account system to in-year estimates instead.
The consultation proposes that this could result in the self-employed and companies calculating and paying tax on a quarterly, or even monthly basis. Any such move would bring a number of challenges. One of the biggest is that income tax and corporation tax are charged on a yearly basis, and therefore do not naturally lend themselves to more frequent calculation and payment. While VAT is generally paid (or accounted for) quarterly, it is a transactional tax that operates and is calculated in a very different way.
Paying tax closer to real time could also reduce the funds and working capital available in-year and result in cashflow problems
Similarly, while employees have had tax deducted in real time under PAYE for many years, the position is more complicated for businesses, which often have expenses to consider, as well as tax and accounting adjustments. Paying tax closer to real time could also reduce the funds and working capital available in-year and result in cashflow problems, as it’s not uncommon for businesses to dip into any cash set aside to pay their taxes.
More frequent in-year tax payments could also lead to under or overpayments arising – for example, when income fluctuates or estimates have to be adjusted post year end, which could mean a further impact on cashflow. Last, but not least, there would be administrative burdens associated with calculating tax and making reports and payments to HMRC on a more regular basis.
HMRC thinks the introduction of Making Tax Digital (MTD) for income tax self-assessment from April 2023 could go some way to addressing these issues. Under MTD, the self-employed will have to keep digital records and submit quarterly returns of income and expenditure to HMRC. Similar rules will be extended to corporation tax from April 2026.
The consultation explores whether MTD quarterly updates could be used as a basis for calculating more frequent tax payments. However, while this may limit the extra administration, it is unlikely to address other challenges. In particular, MTD quarterly updates for income tax, unlike VAT, will not need to include tax or accounting adjustments or any tax calculations – only raw data, so careful consideration would need to be given to how, and to what extent, these could be used to estimate a taxpayer’s final tax liability.
The Government is keen to stress that the proposals are still at an early stage, and any changes to payment timings would be introduced gradually, and not within this Parliament. HMRC is keen to work collaboratively with stakeholders, including representative groups and trade bodies, in exploring the options.
The consultation is open until 13 July; more details can be found on www.gov.uk. Those with concerns should make their feelings known before they are left to cope with whatever system is implemented.