Hello
I have had a call from a sole trader today very angry because they say I did not explain payments on account. I filed their return and there was no tax to pay. I did mention there could be tax due next year and to put some money aside, ideally monthly. They said they would have paid something now if they had known, I tried to explain how it works but they would not listen and now want to go to someone else. Chances are this persons profit this tax year would not even generate much of a tax bill anyway, but there you go.
Anyone else had any problems with this sort of thing ?? I know it is sometimes a shock for people in first year of trading who have a tax liability and also have to make a payment on account!
Replies (39)
Please login or register to join the discussion.
Yes, always the same problem. Easy answer. Put it in a letter advising that there would be a liability the following year and the whole payments on account shbang. They can't say you didn't warn them. Having said that, I always put payments on account detail in the letter with the return and when they get the bill they say you never told me, and you mention the letter and they say, oh, we don't read that!!
Yes common problem
Whenever we take on self employed people, or any others liable to POAs, our initial proposals & notes set out the rules, with simple examples.
The classic is where a client doesn't earn enough one year to make POAs only to have a good year next time resulting in a full year's tax plus half again, the following 31 January. So again we always warn them up front that this might be the case.
It does sound though as though this particular client is over reacting, so probably better off without them?
All valid points
If the profit for the year was exceptionally high, why not claim to reduce the payment on account when completing the tax return, easy to do and hopefully you'll have some headline/estimated figures to use?
.
Remember of course you create all the tax laws in the country and the method of administration of them is your responsibility. Moreover if the final tax bill is higher than the amount that any client thought in their head or their mate down the pub said they would have to pay, its all your fault.
So long as you remember those basic facts of life you will be fine.
Wave goodbye, hold the door open nicely and if the new accountant is rubbish they might be back in a year or two, if you want them of course.
How right you are
Every year, every client, every time - if they have a bill it's your fault and you should change the tax laws to suit. What do you mean you can't include all those expenses - my last accountant said......my friend who runs their own company.....but I thought....blah blah!
If they get a rebate though - that is of course due to them, nothing to do with the great tax advice you gave them during the year.....
O the joys of self-assesment (and to be quite honest, corporation tax quite often as well).
@ireallyshould... you have it spot on
Don't take it personal. If you explained it a million times there are always some who would choose not to hear!
Laugh it off and direct them to a competitor so they get the headache in future.
We all get an occasional joker. My favourite was the sole trader (ex-client) who shouted at me and said 'I owe tax??? I only draw £700.00 per week'.
Hands up all those who have a £35K tax free personal allowance :)
Earlier Returns Would Help
We try to encourage all clients to get their tax return done as early as possible in the tax year so that any unpleasant surprises can be addressed in good time. Needless to say it makes little difference but it does allow us a bit of 'I told you so!' when the time comes.
Point them at
THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable
I always recommend putting aside atleast 20% (if not 30%) of profits every month. Discuss it face-to-face and then I'd confirm it in writing.
Noooo!
THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable
I've worked all of the figures through in this PDF. Sad, I know, but it was relevant to something I was doing at work. And it DOES NOT take into account POAs becoming due.
HMRC just never get it quite right do they?
@joannenockels84
THIS pdf from HMRC. If followed it should mean they have enough put aside by the time the tax becomes payable
I've worked all of the figures through in this PDF. Sad, I know, but it was relevant to something I was doing at work. And it DOES NOT take into account POAs becoming due.
HMRC just never get it quite right do they?
I initially thought that, but actually if you think about it, it does.
If they religiously put money aside based on the PDF, then by the time the tax becomes due on 31 Jan following the tax year they will have retained in the tax year, plus retained between 5 April and following 31 Jan when they actually need to pay the money over, so there should be enough put by for both the tax & the PoA
Will that not mean the tax year is historic in comparison to the 'savings period' though? So if you had fluctuations in profitability, your savings might be too much or too little?
And would that not mean that the client were 'chasing his tail' a bit?
Yes possibly
I think it's only to help as a guide for setting money aside, and it does give a reasonable approximation by the time tax becomes due.Will that not mean the tax year is historic in comparison to the 'savings period' though? So if you had fluctuations in profitability, your savings might be too much or too little?
And would that not mean that the client were 'chasing his tail' a bit?
It's not meant to be an exact to the penny set aside, and I suppose if there wasn't enough at the balancing payment date that might be an indication that a claim to reduce payments would be relevant.
If a trader follows it and puts the money aside in a savings account at least it is there to pay the tax.
Earlier returns would help nonsense
The only reason accountants want returns earlier is so they get paid earlier. You should only pay for last years accounts when you need the next years. If the accountant is any good he should know your tax position with out accounts and tell you how to reduce your liability or if he is really good you should never have a liability. In fact at times I wonder why I bother with an accountant at all as I could simply make up the figures.
Paying the accountant in January means he has money to pay his tax. If he was paid earlier he would only spend the money. Payments on account mean your accountant hasnt done his job properly.
On a seperate note have the Revenue gone on strike? 2 hours spent trying to get through to 3 different departments with out any success. I'm going to the pub for lunch (might get some good advice there)
'
Yes - see On a seperate note have the Revenue gone on strike? 2 hours spent trying to get through to 3 different departments with out any success. I'm going to the pub for lunch (might get some good advice there)HERE
As for the rest
The pub
You might meet our client who was so delighted that he didn't have to pay tax on a bad debt that he asked, in all seriousness, whether he'd be better off if he never got paid.
Earlier accounts & tax preparation definitely better for client
Experienced accountants know that their clients income can vary enormously year on year, therefore so can their tax liabilities.
Some taxpayers think their accountants have a crystal ball and know how much profit is being made before the accounts are drawn up! ( I suppose plausible with some definitely "never varies" income level trades, but in my 37 years practical experience these are rare ).
Here's an actual current example where earlier accounts preparation is strongly advised:
y/e 31 March 2010 : Profits made £65,000
y/e 31 March 2011 : Profits made £84,000 - a partnership of three, tax liability approx £17,000 (incl Payments on a/c). When I told them last week about this £17,000 to pay I was told that they only had £5,000 in the bank! Now, had the books come to me in June, I could have told them in July about this month's £17,000 tax bill and they'd have had 6 months to save up towards it. As it happens the books came to me just before Christmas so they've got just 3 weeks notice of their tax bill. Maybe they'll at last learn the lesson that books should come in much sooner than December, or I wonder if they like Edward33's advice [see below] instead?
As for accountants wanting early books to get paid early this has NEVER occurred to me and is to me irrelevant - most important issue is providing a useful service to the client - much easier in July than in January as in the quoted example. As for having an accountant who shows you Edward33 how to pay no tax by making up figures then perhaps such an accountant is one who's just been jailed:
========================>> here's Edward33's views (I hope he was joking!):
" Earlier returns would help nonsense edward33 PM | Tue, 17/01/2012 - 12:23 | Permalink
The only reason accountants want returns earlier is so they get paid earlier. You should only pay for last years accounts when you need the next years. If the accountant is any good he should know your tax position with out accounts and tell you how to reduce your liability or if he is really good you should never have a liability. In fact at times I wonder why I bother with an accountant at all as I could simply make up the figures.
Paying the accountant in January means he has money to pay his tax. If he was paid earlier he would only spend the money. Payments on account mean your accountant hasnt done his job properly."
Ouch(ish)
edward, sound like you've not met the right accountant yet or maybe it's a case of going back to bed, leaving it 10 mins and getting out the other side? Anyway, just in case you were serious, read on.
Given that my clients, who I think are pretty representative, have profits & income that go up & down like yo-yos, it is in their interests to get their numbers crunched asap in order to plan their tax bills and to know whether the POAs are right or not. It is also in my interest because with 98% of my Ltd company clients having 31 March year ends 75% of the client work this office churns out revolves around 31 December & 31 January deadlines and I refuse to work all hours at that time of year because clients can't be bothered.
The last two tax returns I did showed personal income from untaxed income of over £200K and I defy any accountant to help them avoid POAs unless of course they are prepared to cover client's interest and penalties.
Like normal folk I have a mortgage to pay and so need payment as I provide the services, consequently all my clients pay monthly throughout the year, whether they have provided me with the information or not, no complaints yet.
If that's all waffle & water off a duck's back then I would agree with you, you are better off making up your own numbers.
On the HMRC strike subject, yes, go to the home page to find out why.
haha ... you have been well and truly 'had'
edward33 is an accountant (according to previous posts) so I think he is just 'avin a larf', and maybe quoting the excuses he gets from his clients. ;)
Fair dos
I did wonder but needed to vent so no harm done. I'll expect something even better from Ed on 1 April.
Flash was right
You have to be up early to get one over Shirley or even the alto ego Shirely. Sorry Paul we vent in different ways will think about 1 April.
No advice given or received in pub but jfords comment got me thinking what with 50% tax and 2%NIc and poa there may be something in that one:)
DMGbus hope you didnt go to all that effort for me sorry again....only have 2 more to go and then on to proper work.
Limited
I have found that one of the selling points of moving a client over to LTD status is the disappearance of the dreaded POA.
Corporation Tax is so much simpler for the little dears to grasp.
"Disappearance of the dreaded POA"
Just for the benefit of any non-accountants reading this strand, please don't imagine your POAs will disappear if you switch to a limited company. If you go down the usual route of low salary and high dividends, you will have to pay 25% tax on all money extracted from the company over and above the higher rate threshold (unless you treat some of it as a loan which has other tax implications).
So you may very well have POAs to pay during the year. Don't rely on corporation tax to discharge your whole tax liability.
I always advise clients who are higher rate taxpayers (or likely to be) to save 25% of their dividends towards tax. That covers their liability and usually leaves cash over to spend as they wish, which always pleases them and avoids nasty surprises.
And if there is a high goodwill figure on incorporation, there will probably be a capital gains tax bill which is it best to pay up front via POAs.
Of course, Sherman in perfectly correct in the great many cases where profit before tax is around the £50k mark - or even more where husband and wife share dividends.
Chris
@sherman
You are absolutely right and Corp Tax is payable 9 months (and 1 day) after the year end. It is a shame that a self-employed income is not given the same payment options. There is a great cashflow advantage of "converting" to Ltd company but for those living hand to mouth S419 can negate any benefit.
can be extreme
Not being an accountant but a software supplier, I still thought I would contribute as I saw an extreme case a couple of years ago.
Despite a large "balance of tax due" each year of £120,000 (from investments) - no payments on account had been due for several years as a smidgen over 80% of tax had always been paid at source - mainly due to a very substantial (£1m+) PAYE income. One year, a slight increase in investment income of only a few hundred pounds pushed it under the 80% and so POA were then due.
An extra £60K+£60K of POA to find on top of the £120K balance of tax. When did this come to light -- Jan 27th. Ouch.
This thread
Made me smile for many many reasons. Ed - brilliant but it was a bit too far out there to be a client....
Sherman, I agree on one front, but if they don't understand the words "IT'S NOT YOUR MONEY" (Client response - "What do you mean it's not mine - I earned it") stay far far away - applies to a few of mine.
Loved Dave's example.
Ok back to work!
Now try explain this one
An underpayment caused partly by an in year PAYE refund pushing the amount into payment on account territory. The refund of PAYE was caused by HMRC telling pension provider to include a previous employment that never existed. All HMRC error but they have run away and left me to explain.
or
huge bill and payments on account caused by HMRC assisting to reduce last years payments on account to £nil (hello) ? I can see I am going to have fun (not) when or if the penalties are issued....hopefully there are non due if HMRC did not advise correctly.
Clients usually shout at you if you have overcooked this (on their insistence after health warning issued) and there is some interest to pay.
Thinking about it is this the way to deal with these matters.....get client to phone HMRC get them to advise of reduction of payment on account....hey presto....not us gov......No penalties perhaps ?
@the black knight
"payments on account caused by HMRC assisting to reduce last years payments on account to £nil " --- how does this affect the POA payable in Jan ? Huge bill yes, but POA ?
why ?
Would you quote part of a sentence ? But you are right, my grandma could have been better.
Client does now have the bill (shock) that should have already have been paid + next years payment on account (which was due anyway) which effectively doubles the shock factor !
The icing on the cake is now that it was done once "can't I do it again."
and as we did not make the claim to reduce has taken a bit of figuring out where the payments on account disappeared to.
No body gets payments on account normal fashion let alone when there are added complications...........one thing for sure is that you and I will be first to receive the outpouring of grief caused by the emotive issues of not having enough money to pay the tax bill.
sorry I misunderstood
I thought you were saying the last year's POA affected this years. I quoted the bit of the sentence I did not understand. I was concerned I had missed something sinister !
I agree POAs are a nightmare, particularly for the beginning self-employed.
Start ups
When advising a start up business, I lean on them very hard to come to me at Easter in the first year so that I can get a fix on thier profit and tax payment for the following January. I try to repeat the pressure the following April so that once profits come on stream I can set out tax liabilities for them.
One thing I have found effective is to make out flourescent post its one for each payment date showing date due and amount. I stick these on the front of the package for signature and go through it with them. Some chuck em away, but some stick em on calendar / in diary; reduces the stress levels in Jan. Somewhere along the line of course they slip back to January and we have this wonderful frantic time.
same culprits every year
Begged, pleaded sold my soul to the devil....none of it worked !
and if you notice they also have missing records, poor memories and think a picture is better than a number.......
oh and it's only a small job.............being the only client of course.
or maybe I am Mad !
An employee has to pay the tax at the time they get the income..
Explain to them that an employee has to pay the tax at the time they get the income, but as a sole trader they are being given a lot longer to pay by the government.
However the government does not wish to wait until 18 months after the sole trader has been paid before getting some tax. So the HMRC uses the past complete set of account to get some ideal what profit will be made over the current year and expects half to be paid something like 6 months after the trader has got the money.
Once I understood the above, I did not see payment on account as being as unfair.
(They go into details after they have understood the why)
Juggling
Small business often has to juggle all of its payments to survive, especially since the banks stopped lending....
payments on account just take away cashflow for business growth.....
government seem to have missed the point that that is what the economy needs as they have been preoccupied with building buildings that no one needs or were not wanted by the time they were finished etc etc etc.
But all good parents teach their children that they have to set aside money to pay what they own to other people, then only use the remaining money for themselves. Using someone else’s money for “cashflow” then complaining when it has to be paid over just does not make sense.
That is no different than claiming you can’t pay the rent as you spend the money on the children’s presents and that the landlord is just messing up your cashflow by wanting the payment on time.
then
just get a job...preferably for the government.....they really know how to milk it
No need to risk your house of have the hassle of employing anyone.
The advantages set out in the legislation for the self employed were presumably to stimulate business...and in recognition of the risk entrepreneurs took........but as these advantages are no longer necessary as small business is not wanted.....Unless you are a delinquent baby factory as the child tax credits industry is the one to be in at the moment.
It is about time small business was entitled to credit easing, instead of the banks....but I guess the banks needed paying for taking the blame for the government crashing the economy.