A true tale of woe from yesterday's City AM:
I am very much a spreadsheet girl. I keep meticulous records of income and expenses, and treat deadlines as sacrosanct. Yet every year, some disaster strikes, and I am left crying on my living room floor, surrounded by invoices and receipts.
This year, I filled out the return (thank you spreadsheet), only to be confronted with the shock of a tax bill that was 50 per cent higher than I had planned — and budgeted — for.
Why? Because of HMRC's "payment on account" system. On 31 January, those filing returns are required not only to pay any tax due on the previous tax year (in this case, 2018–19), but half their projected tax bill for the current year (2019–20).
HMRC essentially looks at your total tax bill, assumes next year's will be broadly similar, and demands half of it upfront before the tax year is even over.
1. That rule has been in place since Self-Assessment started for the 1996-97 tax year. It is not a new rule.
2. If you get your return a bit earlier and the liability is less than £3,000, HMRC will collect last year's tax liability via your PAYE code for the next year and by definition there are no payments on account. Which is a pretty sweet deal - you pay the tax for the year ended 5 April 2019 in twelve instalments between April 2020 and March 2021.
You have to pay approx. half the income tax "before the tax year is even over"? So what?
3. As the writer herself says "I can, the HMRC website tells me, reduce my payment on account. But if I get it wrong and underestimate what I am likely to owe, I will be charged interest — at 3.25 per cent. (If I overestimate, HMRC will eventually return the additional tax, without interest.)"
4. Employess will have paid 10/12 of their total liability by this stage in the tax year, so the self-employed are at an advantage, not a disadvantage.
Friday, 31 January 2020
"I confronted our bureaucratic tax system — and lost"
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11 comments:
"HMRC will eventually return the additional tax, without interest.)"
I must be getting old, I actually remember when there was such a thing as "interest".
Of course what's really galling about this is that no HMRC employee is a 'tax payer'.
And I heartily object to the HMRC calling me a 'customer'. I am not a customer. I do not have a voluntary relationship with HMRC - I can't take my custom elsewhere. I am (unlike any of them) a 'tax payer'. (I think it was under Blair that we became 'customers' of the HMRC. I s'pect he'd read Nineteen Eighty-Four and thought it was a manual, not a caution.)
Employess will have paid 10/12 of their total liability by this stage in the tax year, so the self-employed are at an advantage, not a disadvantage. That's not strictly true. Employees know their salary at the beginning of the tax year, so you can distribute the tax evenly across the year. Whereas the self employed do not know their profits until after the year end.
Under MTD, it seems to me, that the HMRC are trying to tax businesses before they know their annual profits. Doubling down on this issue. Possibly, like you observed once before, the HMRC are working toward having one class of taxpayer - workers - rather than two classes - employed and self employed.
"Of course what's really galling about this is that no HMRC employee is a 'tax payer'."
I wouldn't be too certain about that. It would not be surprising to find out the government departments have to account for the income tax on their civil service employees' salaries just like any other employer.
@MW I tried explaining this to my irate mother a couple years ago. Lol!
B. Yes of course they do. But it's just money going round in circles. There is only one source of tax, and that is the surpluses of production; the profits of private business. Think about it. The people on both sides of the desk in the benefits office are on benefits.
L: "Whereas the self employed do not know their profits until after the year end."
Assuming you use a 31/3 year end, by 31/1 you will know your profits for the first ten months, and you are paying tax on six months' worth, so no biggie. If the last two months are catastrophically bad, you can ask to reduce your payments on account to nil, get your return in early and get your money back.
And if you really can't know your profits until after the year end, choose a 31/12 year end.
"Under MTD, it seems to me, that the HMRC are trying to tax businesses before they know their annual profits. Doubling down on this issue."
MTD is of course taking it far too far. IMHO, this wasn't driven by HMRC, it was driven by companies like Sage or Xero who can quadruple their software sales. I hear the sound of revolving doors.
"Possibly, like you observed once before, the HMRC are working toward having one class of taxpayer - workers - rather than two classes - employed and self employed."
That's different, HMRC prefer employees to the self-employed because they generate more than twice as much NIC and a bit more income tax, and it's easier to monitor.
If all different types of income were taxed at the same rate, this would not be such an issue. Even better, there'd be a personal allowance of £50,000 or something so only a tenth of people would need to bother (those who can afford an accountant).
"But it's just money going round in circles."
It's not even money any more, just credit, figures on a computer screen.
MW
1. Fair enough
2. Agreed about Sage and Xero and MTD
3. Agreed with 'monitoring' ambition of HMRC. The Holy Grail of all bureaucrats is 100% 'monitoring'.
4. That works for me. And maximum rate of 10% should cut - after we have released millions of bureaucrats to find more worthwhile wealth creating jobs in private business.
Well you can take your business elsewhere, it just involves leaving the UK, cutting all ties and never visiting for more than 16 days per tax year during which you only buy items which are VAT-free/zero-rated or for which you are certain the VAT incidence falls upon the merchant.
"Whereas the self employed do not know their profits until after the year end."
OK, but even if your year end is 31/3, that still gives you until the end of the following January to do your tax return and find out how much tax you owe. The writer makes a big thing of how organised she is, but, in that case, why is she waiting until January to file her return?
Could she not pay her income tax during the tax year she earned the income, in regular instalments, she would know how much she had to pay and when she had to pay it? If she did that, only the adjustment when she filed her return would be unknown and, if she got the amounts she paid right, that adjustment would be a credit to her.
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