HMRC is basically forcing people to pay tax before they owe it. No, we’re not joking.
When working as a self-employed construction worker, you’ll have to fill in your return every year, including how much tax you’ll pay.
In a similar fashion to the VAT reverse charge, or the construction industry scheme (CIS) you may find that you’re being taken for a fool by HMRC.
This blog will give you some info about payment on account, what it is, how it works, and how we can help you avoid getting stung.
What is payment on account?
Payment on account applies to anyone who files a self assessment form each year. It’s a system that’s used for settling tax owed and is spread over two instalments during a year.
It’s calculated on the previous year’s tax bill and means you pay a tax advance payment based on your previous year’s tax bill.
So you’re paying for something that hasn’t happened yet. Bollocks.
Of course, if your business is on an upward trajectory, seeing the growth you want, and getting things done for your customers, this makes sense (to a degree) but what happens if you have a bad year? Something happened that was out of your control? You get shafted.
So how does it work?
Say you’ve had a solid 2020/21. You’ve made a fortune working hard for your clients, and you now need to pay £20,000 in tax.
This becomes your payment on account amount. HMRC wants you to pay this up front, ahead of the next tax year. This is done in two instalments – one on 31st of Jan, the other on the 31st of July.
But, say you do even better in this second year, you’ll have to pay the additional tax, in a balance payment. This needs to be paid by the 31st of July 2023. All relatively straightforward right?
Well, what if you have a bad year? You’re now left paying more tax than you need, with your funds and resources stretched. Sure, next year’s payment will be less, but that’s no good to you now.
HMRC can be negotiated with, and in some instances, the payment on account can be reduced, but like everything with them, the process is a right pain. And you may end up paying fees and insurance. Not ideal.
So what to do?
We’d advise setting up a payment plan – something we can help you with. It’ll give you a safety net should you have to pay more than you were expecting.
It’s not worth the risk. And whilst HMRC is clearly taking the piss here, sadly there isn’t any way around it.
Of course, if you need more guided support or just want to talk things through in more detail, get in touch.
We love talking to real businesses about the changes that will affect them and have a good old moan about the state of affairs in the UK tax system.