What's wrong with quarterly income tax payments anyway?
If we accept that under MTD there will be quarterly data submissions, isn't quarterly tax payments easier for everyone?
As we have all seen, mandation of MTD for businesses now has a start date. On the current timeframe, MTD for sole traders and property landlords will roll out in April 2023. For incorporated businesses, there will be a consultation starting in the autumn.
Part of the tax administration modernisation announcement included a commitment to review the timing and frequency of tax payments. Let’s call it what it is: moving from six-month payments on account under self assessment to quarterly payments in order to align with the MTD period. This has already started to generate comments and views in the profession.
I appreciate my stance here will cause disagreement, but here we go: what’s wrong with quarterly income tax payments anyway? I’ll even go one step further: if we accept that quarterly submission of data is coming, quarterly payments are needed and will make everyone’s lives (including hard-working accountants) better and less stressful.
To illustrate my point, I’ll run through a few scenarios. Let’s assume I have a client with a 31 March year-end. The accounts to 31 March 2020 form my liability for 2019/20, payable on 31 January 2021, and (until the 2021 tax return is submitted to HMRC), the payments on account for 2020/21 due on 31 January 2021 and 31 July 2021.
Focusing on that second payment for a moment, that is an estimate based on accounts that ended 15 months ago. If we now jump forward five years, and we have accounts to 31 March 2025 submitted quarterly and finalised, the tax for 2024/25 was paid on 31 January 2026, and you are now contacting the client to remind them to make their second payment on account for 2025/26, which is due on 31 July 2026.
Five quarters worth of data has been submitted to HMRC (maybe by you) since those accounts to 31 March 2025, and although the annual process for 2025/26 may not have been finalised (“crystallisation” in the new MTD lingo), your client will have a good idea whether they are making more or less profit than a year or so ago.
If they’ve had a bad couple of quarters, it’s going to be a tricky conversation to explain the logic why his payment is based on 15-month-old data. It’s worse if the accounts are 30 April year ends. Keep in mind if you are doing quarterly submissions for all your clients, it’s unlikely you’ll have the ‘luxury’ of doing a quick review of draft accounts to 31 March 2026 to determine if an SA303 is appropriate.
An alternative scenario
Instead of the above scenario, assume instead the client is submitting their own quarterly data, and they are now submitting for the quarter to 30 June 2026. There’s a further level of complexity to consider when MTD data is submitted to HMRC,
HMRC already provides a quarterly tax estimate. This has no place in legislation and is for information only. It is, however, a requirement for the software making the data submission, to request this quarterly estimate in return. The client will be making this submission of the data, and getting an estimate of tax due from HMRC in return. At about the same time, your e-mail arrives giving them a different (and probably larger) statutory payment due on 31 July 2026. This is going to cause confusion, and they’ll call you, not HMRC.
Let’s further assume the above client is VAT registered, and we have of course aligned the VAT periods with the accounting period, so the same (or very similar) data set can make the VAT and the income tax submission. The VAT payable is based on actual quarterly data, whereas the income tax payment isn’t, which adds a further level of confusion.
I appreciate my examples above are simplistic (I’ll say it before others do), but I hope they illustrate the point. If we accept that quarterly income submissions will be mandatory, why would we want to keep the current SA payment system?
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Mark has spent over 25 years working in tax, beginning his career as a Revenue Officer at HMRC, and then becoming Tax Senior for a UK stockbroker. Mark joined Thomson Reuters in 2006 and now holds the position of Tax Product Manager. Mark was named AccountingWEB’s 2017 Software Excellence Pioneer for his commitment to the accounting profession...