Payments on account, the basics.

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Tax returns can be hard work but sometime, especially in today’s business climate it’s finding the cash to pay the tax that can be the biggest problem.

I get many questions about payments on account (POA); why some of us have to make payments on account and others don’t, how it’s calculated and if it can be avoided.So here are the basics:

Who makes payments on account?

Payments on account are where HMRC ask you to pay towards your next tax bill based on your last tax bill. They ask anyone who has a tax liability of over £1,000 where 80% or less of the assessed tax is met my tax deducted at source to do this.
So what does that mean? Usually the people who are required to make payments on account will be people who have self employed income, letting income, or other income where tax is not being paid at source.

How is it calculated?

HMRC calculate the POA due by assuming that your last tax bill will be the same as the next so someone who meets the criteria with a £3,000 tax liability for 2011/12 would have £1,500 to pay on 31 January 2013 and another £1,500 to pay on 31 July.
The obvious issue with this assumption is that very few of us have such even earnings and often move from a bad year to a good one or vice versa. If your earnings have fallen significantly in the last year then your POA maybe higher than it should be as it is based on last years results. Equally, if you are having an amazing year your POA may be too low and you will find a much larger payment due at the end of the year when your actual tax is calculated.
The later scenario is less of an issue – as long as you are setting aside cash to pay the larger portion of tax at a later date. However, the first situation can cause business a lot of headache as they may not have enough funds to make the payment.

What should you do if you can’t make your payment on account?
If you cannot make a due payment on account the first thing to do is to consider whether your income has dropped in the year you are making payments towards. If so it is possible to reduce the payments to match the tax liability you think you will have. So taking the above example, if the taxpayer thinks he will actually have a tax liability of £2,000 during 2012/13 then he could reduce his January and July payments to £1,000.
If you already know that your profit for the next year will be lower whilst completing a tax return you can include this claim in boxes 10 and 11 of page TC1. You also need to include an explanation for the reduction in box 19 of TR7.
Otherwise the procedure for reducing the due payments is to fill in a form SA303 – ‘Self Assessment claim to reduce payments on account’. An electronic version of this form can also be found online for anyone who uses the HMRC Online Services.
Although the actual claim involves reducing each payment on account equally if you have already made a full January payment you can compensate by lowering the July payment. Again using the above example the July payment would therefore be £500 if the taxpayer had reduced his payments to £2,000 but already paid £1,500.
If you think that your income has not decreased but still don’t think you can make one or both of your payments on account then unfortunately there is no way to stop the payments being due. You will not be able to make a claim to reduce the payments as the claim relies on you being honest that your income has dropped.

What happens if you don’t pay?
The only real consequences of not making the payments on account will be interest charged from the due dates and a few reminder letters from HMRC. The interest rate is currently charged at 3% p.a.

Other options
If you want to stave off reminder letters from HMRC the remaining option is to enter into a Budget payment plan with them, however this does not avoid interest being charged. Budget payment plans have to be paid by direct debits, they must be agreed by HMRC in advance and are dealt with on an individual case basis.
Look at : www.hmrc.gov.uk/payinghmrc/problems/cantpay.htm

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