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Reduced payment on account now too low

Client applied for reduced payment on account but now knows he will underpay tax as a result

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I have a client who is a director paying a minimal salary and dividends of around 200k. When completing his last tax return (20/21) he planned to pay out a lower dividend in 21/22 so we reduced his payments on account accordingly. He has now decided to pay out a higher dividend this tax year before the new 1.25% levy on dividends comes into force in April 22. This means he will have underpaid his payments on account by around 16k (compared to not claiming a reduction). HMRC say that interest may be payable on this underpayment. I don't think there is any question that the reduction was applied for in good faith at the time, but he is worried about any investigation/hassle from HMRC if they question it, and wants to know if he is better off paying the original payments on account amounts rather the reduced ones.

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By The Dullard
09th Jan 2022 16:52

Why doesn't he just amend or withdraw the application to reduce the POAs and pay the smaller of the POAs based on 20/21 and the 21/22 estimate? He's still got three weeks!

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Replying to The Dullard:
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By Catherine Newman
09th Jan 2022 18:48

Agreed. I have a note on my phone to review POAS this week. Why did you do it any earlier? I am still sceptical about doing it as the year end is 5 April 2022 and it is only 9 January, Who knows what could happen between now and 5 April?

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By Matrix
09th Jan 2022 19:37

Yes of course he should pay the original amounts if he wants to avoid interest.

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By Paul D Utherone
09th Jan 2022 22:07

1 - What were the max POA's in the 20-21 return?
2 - What did you reduce them to?
3 - what do you now estimate half the 21-22 liability will be with the new increased div being paid?

If 3 is more than 1 then amend the POA's online back to the max based on the 20-21 TR

If 3 is more than 2, but less than 1 then amend the POA's online upwards to the value of 3

The first POA isn't due until the end of the month so if you make the change and he pays the increased POA there will be no interest. If you make the change now in light of new information (the additional dividends being paid now & not anticipated when POA's originally reduced) there should be absolutely no chance of any penalty as you/he have been proactive.

If you do nothing and leave POA's as reduced there will be interest. There could also be a penalty, but I have never seen one in all the years of SA.

When adjusting POA's I always warn of an interest charge (definitely if final liability is higher) and possibility of a penalty (extremely unlikely in my experience - never seen or heard of one being issued).

There should be no likelihood of an enquiry as a result. Adjustments to POA's are anticipated by legislation and HMRC have recourse to interest, and maybe even penalties, if you get it wrong.

I suspect that penalties would likely only be thrown as a last resort against a 'customer' extracting the urine and reducing POA's to nil year after year when there is always a substantial liability once the return is submitted.

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Replying to Paul D Utherone:
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By Tax Dragon
09th Jan 2022 22:32

Paul D Utherone wrote:

If you do nothing and leave POA's as reduced there will be interest.

Can be avoided as Matrix says.

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Replying to Tax Dragon:
By Paul D Utherone
10th Jan 2022 13:43

Well quite, hence the suggested options to update POA's. That was only there as what will happen if you do nothing

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Replying to Paul D Utherone:
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By Tax Dragon
10th Jan 2022 14:00

Interest is based on tax paid - or not paid. Paying tax stops interest. See also rmillaree.

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Replying to Tax Dragon:
By Paul D Utherone
10th Jan 2022 17:29

Of course. Maybe I wasn't being clear enough (well clearly I wasn't)

I said:
- if the 21-22 estimated liability is more than the 20-21 liability then put payments on account back to the overriding maximum POA's set by the 20-21 now and pay accordingly (anything more will be the balancing payment in Jan 23)
- if the 21-22 estimated liability is still less than the 20-21 liability, but more than the reduced POA's previously set, then put payments on account up to half the estimated 21-22 liability (probably a bit more to give some leeway for any other unknowns popping up for the year)

For the latter I would also:
- get the client to review the 21-22 estimated computation and estimates used to confirm them as reasonable,
- warn that if POA's are reduced, but the actual liability proves to be more then HMRC will charge interest from POA due dates so suggest a small leeway be built in; and
- suggest we review again after 5/4/22 & before 31/7/22 and update POA's in light of actual figures for the year

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By rmillaree
10th Jan 2022 09:00

Note not sure anyone has specifically mentioned as long as the correct tax is paid then any later adjustment to the payments on acccount will leave client with 100% clean record looking back historically once things are sorted - from the technical aspect of what shows up on the system. So practicably speaking as others have said concentrate on paying higher amounts pronto and then getting system back in line with hmrc after that when you can - i recently had nightmare job trying to increase payments on account that had been previously reduced - being over 50 cant remember why unfortunately - one would like to think phonecall to agent dedicated line would make that an easy task.

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Replying to rmillaree:
By Paul D Utherone
10th Jan 2022 17:55

It should be possible to amend the POA's through the agent account.

Go the the client record in your Agent account and select "Reduce Payments on account" from the submenu under "Your current client"

This works in most cases. The only time you cannot is if POA's are reduced to Nil in the tax return, when a call to the Agent line is required, because the Agent Account does not give the option to adjust.

Obviously if you are going to do that I would want the clients agreement to the adjusted POA's on file.

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By tony-b
10th Jan 2022 13:18

Thanks all - will advise him to withdraw the POA reduction as there is still time before 31 Jan. Good to know that otherwise interest would definitely apply but penalty very unlikely.

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