Almost every business will run into the same problem at some point during its life – the deadline comes around to pay your self assessment tax bill and you realise you don’t have the funds available to pay.
It can be a cause of panic and a lot of stress but there are options available to you and ways to help ease the burden of paying your self assessment tax bill. Here are a few ideas to help you find a way through this difficult situation.
Use every tax relief available
Tax reliefs are there to be used and there’s no reason why every business owner or sole trader shouldn’t use them. They are an entitlement granted by the government but can often be forgotten about, not known about or not taken in full. The most well known of these is the personal allowance – the amount of money you can make before you have to pay tax. This is currently set at £11,000 but it does tend to increase a little either every year or two years. This means you don’t pay tax until you have earned more than £11,000, although national insurance payment requirements has a lower threshold.
Then take a look at your outgoing expenses relating to your business. Something that is used partially in relation to the business can be claimed against tax by that amount – lets say for example that you use your mobile phone 50% for business calls and 50% for personal use. Then that 50% for business calls can be put down as a business expense and used as a relief against your tax bill.
Don’t ignore it, offer a payment proposal
Once you have checked that every possible relief you can use has been taken into account and you still can’t pay the bill, then don’t ignore it! Every day that you leave a bill, HMRC adds interest and will add fines to the account, making the problem even worse.
If you cannot pay the bill right away, then the best bet is to approach HMRC with a payment proposal. You will need to have income and expenditure details to show what you can pay and HMRC is legally obliged to consider the proposal – but not to always accept it if you are offering too low an amount. They may ask about savings or other assets that could be utilised to pay the bill.
Quite often the reason why you cannot pay straight away is because of cash flow problems due to late payments from customers or clients. If you are expecting payments to start arriving in the near future, then explain this to HMRC and they may grant you extra time to pay your bill.
If you do come to an agreement with the tax department about a repayment plan, make sure you keep up the payments or get in touch with them immediately if you think there is a problem. Otherwise, they are within their rights to start legal proceedings against you to recover the money, which could put your business at risk of closure.
Paying by account
Once you have a handle on the problem, the best way to ensure that you don’t have a repeat situation is to set up a system where you pay on account. This means that your tax bill is split into two payments – one is due on January 31st and the other is due on July 31st. Each will be for 50% of your tax bill for that year.
The one word of caution about choosing this system is that the payment will be based on your previous year’s earnings. So, if you end up earning more in the following year, be aware that you may have an extra payment to make the following January when you submit your accounts. But at least this will be far less than having to pay the whole amount all in one go. You can simply put some money away each month until the six monthly bill is ready plus a little extra if it looks like you will earn more than you did in the previous year.
Some people have taken this plan and kept payments low but beware of this – if HMRC decide that you artificially lowered the payment, they can charge you interest on the difference between what you said you would earn and what you actually did earn in that time.
