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What is Payment on Account?

What is Payment on Account?

If your Income Tax and National Insurance (NI) liability is over £1,000 you are likely to find yourself making Payments on Account (POA). If unprepared, the first year this happens can be daunting. There is no denying that you will look at your Return and find it hard to believe that it is correct.

Payments on Account are based on HMRC’s belief that your profit next year will be similar or higher and require you to make payments towards the next years liability. HMRC calculate Payment on Account by taking your current liability and halving it, these payments are due in January and July following the tax year end.

Example

In John’s first year of trading his Tax Return ending 5th April 2022 shows a Tax and NI Liability of £3,000. This also means that he now has Payments on Account to make of £1,500 each. John’s payments are as follows:

• Due 31st January 2023 - £4,500 (£3,000 liability plus £1,500 first POA).

• Due 31st July 2023 - £,1500 (second POA)

In year two, John’s Tax Return ending 5th April 2023 shows a liability of £4,500. However, he has already paid £3,000 towards this amount (2 payments of £1,500). This means that his payments are as following:

• Due 31st January 2024 - £3,750 (£4,500 liability minus the POA already made £3,000, plus next year’s first POA £2,250)

• Due 31st July 2024 - £2,250 (second POA) Payments on Account are estimates and can be amended if you believe that your profit for the following year, will be lower than the current one.

This is one of the reasons to always keep your business income and expenses up to date, so you can quick and easily check how your profit for the year is looking.

If you have any questions on this or anything else please do contact us. You can all us on 03449844445 or email info@fbtc.co.uk 

Should I, shouldn't I - The 5th SEISS Grant

The rules for the 5th grants are surprisingly cumbersome. Here is a very brief breakdown of the grant application process, in two parts.

Firstly, you need to look at your profit for the period May 2021 to September 2021.

Compare May 2021 to September 2021 to the period May 2019 to September 2019. If your profit is “Significantly” lower because of Covid then you qualify for the grant. For driving instructors, the quickest and easiest way to confirm this is to look at your diary for those months and see how they compare, if your lessons are about the same then you will not qualify, if there are significantly less lessons being taught then you may qualify. For all other businesses, looking quickly at the cash sheets or software you used in 2019 will let you know how your profit compares.

HMRC knows that most trades have restarted, and which trades are booming. They will be surprised to see any applications from people operating these trades. It is therefore incredibly important to keep records showing that your profit is lower as HMRC may request your evidence to support your claim.

Secondly, there may be a completely justifiable reason why you will qualify.

You may have been made to isolate numerous times or you may even have had Covid for a significant period. If you have been affected and it has had a significant impact on your profit, we strongly suggest you keep the texts and emails you have received to confirm when you were unable to work and then you can show the impact this had on your profit, at that time.

If you believe you qualify then you will need to supply HMRC with your turnover figures for 2020/2021. The figure you need to use has to exclude any grants you may have received. 

HMRC have stated they will pursue people who should not have made claims. They are taking an incredibly long-time processing 2020/2021 Tax Returns as they are checking every return to see if taxpayers should have made the claims. To be clear, I am not saying do not make the claim, I am asking that you consider very carefully whether you honestly qualify. Especially as HMRC can insist you repay the grant with up to a 100% penalty if they believe you shouldn’t have claimed it.

What is the best way to change a Car?

Deciding whether to change your business car can be a difficult decision, as there can be significant tax implications. We are often asked what the best way to change a car is and of all the ways available it really comes down to two options, buying it or leasing it. Both effect your tax in very different ways, details of which are below.

Buying the car (Burst Tax Saving)

Driving Instructor cars are very unique in that, assuming Dual Controls are fitted, they are classed as Plant and Machinery rather than a Car. This distinction is incredibly important as it allows us to claim a one off 100% deduction in the year you buy the car. This means that if you buy a car before the 5th April 2022 you can claim up to 100% of the cost of the car and dual controls against your profit.

It is important to note two additional things:

1. If the full amount is claimed there is no additional tax relief on the car, and
2. When you sell or part exchange the car anything you receive for it is wholly taxable and will be added to your profit in the year you sell it.

If we do not claim the full amount in the year of purchase, then under the normal rules we can claim 18% of the remining balance over the life of the car.

This is the reason we refer to it as a Burst Tax Saving, you can have a massive tax saving in one year then your profit and tax will return to normal levels in following years.

How to pay for it.

From a tax point of view there are again only two real ways of acquiring the car, outright or on a Loan/HP/PCP agreement. By buying it outright there is no additional tax relief available, however when acquiring it on a Loan/HP/PCP agreement there is an additional tax relief. This is because you are being charged interest on the amount you borrow to acquire a business asset. This interest is therefore a business expense and is deducted from your turnover when calculating your profit. It is incredibly important to remember that you do not get tax relief on the repayment just on the interest charged. 

Leasing the Car (Regular Tax Saving)

Leasing the car, for example under a PCH agreement where you never have a right to ultimately own the vehicle, is completely different to the above as there is no Burst Tax Saving. However, in many ways it is much simpler as the amount you pay the lease company each year is an allowable business expense and is therefore deducted from your turnover when calculating profit. 

We refer to this as a Regular Tax Saving as you will always receive tax relief for 100% of each lease payment you make.

Manager’s thoughts

Normally when I am asked about tax relief and changing a car, I usually reply that there is no “one size fits all” approach to this kind of tax planning. Every person’s situation is different, and it really does come down to how you want to receive the tax relief. We have many clients who love the Burst Tax Saving and just as many who like the Regular Tax Saving, and that is absolutely great, you have to find whichever is best for you. 

This year however I might be moving ever so slightly closer to one over the other. Following conversation with Driving Instructors (DI’s) who are restarting their businesses and seeing just how many are working extra hours, I do think many DI’s will have significantly higher profits in 2021/22 than they normally would. Now this obviously cannot go on forever, and at some point, the market will return to its historic norm, but in the meantime many DI’s are going to see higher tax bills than they are used to. 

Buying a new car instead of leasing one could have a significant impact on your tax returns this year as you could see your profits pushed towards the higher rate band. So, buying a car could help bring your profits and tax in 2021/22 back down a level you are used to.

This is obviously incredibly speculative, no one truly knows what your profit will look like during the year, but you know the feel of your business and how full your diaries are.  It might be worth a quick five-minute check to see how your income might stack up this year and compare it to previous years and think about the merits of changing your car.

You must of course also consider the impact a car change can have on other things. Changing your car as discussed above, is highly likely to reduce your profits in the year of change and this could have an impact on things such as loan or mortgage renewals/applications which rely on reported annual taxable earnings. Finally, of course, as always when taking on any new debt you need to think carefully about whether you can afford it. 

Save your Valentine tax this year

Love is in the air, roses, wine and chocolates are everywhere and yet some of us are still thinking about tax. Although we would never give dating advice (trust me you really wouldn’t benefit), when it comes to tax, we really know our stuff. The Marriage Allowance is a little tax saving gift definitely worth having, a simple election could help you save around £238 in 2018/19, and while this may not seem like a lot, have you seen the price of roses, so every little helps.

I know we have made light of it here but please don’t read the above and think we are not serious, the days of huge tax savings are gone, so making as much of the little savings as you can is the best way to try and reduce you tax bill. If you or your partner aren’t making full use of your Personal Allowance, £11,850 in 2018/19, then this is something we would strongly recommend. The link below will take you to a HM Revenue and Customs website where you can make the election:

https://www.gov.uk/apply-marriage-allowance

If you are not sure about the election or would like to talk it over with someone please do call us, the team are here to help. 

Income Tax on Rental Properties

If you receive rental income from land or property, you will most likely have to pay tax on the profits made. Your profit is the amount left once you have added together your rental income from all sources in the tax year and deducted any allowable expenses or allowances. Tax relief on mortgage interest has changed significantly in recent years, the relief is moving from a deduction from profit to a general tax relief. The overall result should be the same for basic rate taxpayers, however, higher and additional rate taxpayers will see their tax increase. 

Rental income is the rent you receive from individuals, businesses, local authorities, national agency etc. It can also include lease premiums and the income element of leases granted, and this must be considered when granting a lease to anyone.

When preparing your return, income and expenditure from similar types of property are combined, the typical types are, residential, commercial, UK holiday let and overseas property. When calculating the tax, different tax laws may have to be followed.

A £1,000 allowance exists which means that if your rental income totals less than £1,000 per tax year you are now exempt from completing a Tax Return.  If you’re total rental income from UK property is less than £10,000 and your rental profit is less than £2,500 then you do not have to complete a tax return, however, you must notify HMRC of the profit figure every year so that the tax due can be calculated and collected through your PAYE code. Anything over this means you have to complete a tax return for as long as you own the property. 

The same tax rates apply; 0%, 20%, 40% or 45% dependent upon which band you fall into. Whether you have two business and a rental property, just one rental property or are thinking of buying your first property to rent the important element is to ensure you are compliant with HMRC, this is so that you avoid any unnecessarily penalties.

Having an accountant support you with your rental affairs is beneficial as they can advise on elements like carrying losses forward and if you come to sell the property, Capital Gains Tax. Watch out for our blog on Capital Gains Tax coming soon.

What about my tax?

By far, the most common question we get asked by new self-employed individuals is how much should I put aside for my tax bill. Unfortunately, this isn’t the easiest question to answer as every taxpayer is different and any answer must be very general. To try to give an answer is full of perils as we don’t want a client to put too much or worse, too little a side and get a very nasty shock in January. Years of experience tells us that between 15% - 20% of turnover should cover the Tax, National Insurance and a possible payment on account. However, it’s unusual for a first-year business to make an outright profit, initial set up costs can be high.

So, what is the best advice. The best advice anyone can give you is to get your accounts in early. The quicker we can prepare your accounts the sooner you find out what is due by the following 31^st January but putting aside 15% - 20% isn’t the worst idea either.

 What happens if I can’t pay?

The best thing to do is let HM Revenue and Customs know as soon as you realise you’re going to struggle to pay your tax. HMRC understand that sometimes businesses have up and down periods and will normally try to create a payment plan that’s works for both sides. You can contact HMRC’s payment support team on 0300 200 3835. 

If you have any concerns about your tax bill or paying HMRC please do contact us on 0344 984 4445.