Making Tax Digital: Pay as you go
In the third of a series of articles on the Making Tax Digital consultations, Philip McNeill looks at the proposals for voluntary pay as you go tax payments (PAYG).
Voluntary pay as you go will be an option for landlords and the self-employed who fall within the new quarterly reporting regime. The aim is for PAYG to cover income tax, National Insurance and capital gains tax from the start of April 2018. It would be extended to VAT from April 2019.
There is a further extension planned, which would see companies in the scheme by 2020.
Statutory payment dates remain. We already have payments on account, and budget payment plans, so what is new here?
Under voluntary PAYG, payments will be made digitally, and need not be regular or planned. They will normally be allocated to tax liabilities on a first in first out basis. One option is for taxpayers to be prompted to make a payment at the time quarterly updates are made.
Alternatively, ad hoc payments are envisaged as an option.
The aim is for voluntary payments to be based on the information in quarterly updates. This could result in overpayments, for instance if early quarters show profits that are reduced by events in later quarters, such as bad debts, or purchase of machinery or equipment.
The system therefore needs to be capable of refunding amounts voluntarily paid. This functionality will be built in, but it is unclear exactly how it will work.
Payments on account
Payments on account could continue, as under current rules, or be replaced by mandatory payments based on quarterly updates.
HMRC is looking at an option for taxpayers to choose to hold refunds in their digital tax accounts as ‘voluntary credits’, rather than receive a refund via the bank.
From April 2019, the intention is for VAT to be included. Amounts due to HMRC would still be taken from amounts paid voluntarily via the digital tax account. This potentially could cause confusion if amounts set aside by the taxpayer for, say, an income tax liability, were used to cover a current VAT bill.
Paying for the partnership
Consideration is being given to allowing partnerships to make voluntary tax payments on behalf of the individual partners.
More widely, consideration is being given to the possibility of permitting ‘third party’ voluntary payments - such as by one member of a couple on behalf of the other.
Incentives to use PAYG and possibility of earlier repayment
HMRC is looking at possible incentives to encourage PAYG. These could include interest on in-hand balances to streamline repayments. The possibility of earlier or more frequent Research and Development tax credit is suggested.
Tax bills can be confusing. The concepts behind payments on account are not always clear to the self-employed. Budgeting for tax bills can be difficult, especially for start-up businesses.
There is the potential for voluntary PAYG to positively impact the situation here, but it needs practical insight. Despite the welcome possibility of earlier certainty about tax liabilities, the complexity of the system, coupled with the uncertainties of business, mean that there may be few for whom this becomes a reality.
It is likely that for the majority, an accurate estimate of the income tax and class 4 NIC liability will only be available after the year-end update.
This has very significant impact for the design of the system. Mandatory payments based on quarterly updates could produce a new world with alarming and unrealistic fluctuations in tax liability – with very significant cash flow implications.
A payment cycle which treats tax as a normal ‘running cost’ of the business, and one to be included in the usual commercial payment cycle is to be welcomed. It would help to avoid the potentially destabilising, initial tax bill for the self employed start up: the big bang with a slow fuse.
Balanced against this is the possibility of unrealistic voluntary payments potentially damaging business liquidity.
The heading of the consultation is ‘voluntary pay as you go’, but by paragraph 3.4, the phrase ‘if payments on account were mandatorily based on the quarterly updates submitted so far’, means we enter a very different world.
Confusion or simplification
VAT is government money collected by business. Income tax, and other direct taxes, are payments out of the business owner’s profit. There is no hint in the consultation of ever adding in employers’ PAYE contributions to this mix.
But is this ‘spaghetti mix’ of saving for tax going to make it easier for businesses to plan their payments? What’s your view?
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