Product Manager - Tax Products Thomson Reuters (Digita)
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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? 

23rd Jul 2020
Product Manager - Tax Products Thomson Reuters (Digita)
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Tax payment via laptop
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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?

Replies (20)

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By Open all hours
23rd Jul 2020 19:41

Is this the same HMRC who can’t cope with taking PAYE by DD ? Can we get them to walk before making any more attempts at running?

Monthly MTD VAT returns to be combined for a quarterly MTD IT return?

Personal Allowance to be allocated on a quarterly basis?

MTD tail wagging the HMRC dog?

Thanks (1)
Replying to Open all hours:
By ireallyshouldknowthisbut
24th Jul 2020 10:42

shhs dont tell 'em tax is computed annually. They don't understand that as on their payslips it all comes out every month.

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By AWeb72
23rd Jul 2020 20:57

I did plenty of planning when MTD was first announced. Not making that mistake again.

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Stepurhan
By stepurhan
24th Jul 2020 09:16

I have a PAYE situation where HMRC are showing an amount due for a month, no payment made and a credit balance. How HMRC's computer is turning a liability into a refund with no intervening steps is beyond me.

Until HMRC can get their existing systems working properly, they should not even consider adding anything new.

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By ireallyshouldknowthisbut
24th Jul 2020 10:44

Remind me what is the POINT of doing this?

Spewing low quality data into HMRC systems (ie whatever falls out of your accountant package) will not help compute your annual tax bill until its been properly cleaned up.

Think of the data like sewage. HMRC currently get (largely) a nice delivery of a clean bottle of water once a year from each client, as sived filtered and cleaned by accountants, and apon the volume of that they are taxed. They are asking for clients to essentially defecate directly into HMRC's systems, and some how from this mass of raw sewage devine how much clean water there is from each random plop and exertion.

Whilst software people seem to think their software is a brilliant sewage works (and sell that to government over and over and over) , it just mashes the turds up a bit into a different shape.

Software people are understandably over the moon about all the extra software they can hope to sell, but the project is never going to deliver on its core promises. Just as MTDfVAT has utterly failed to raise tax revenue.

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Replying to ireallyshouldknowthisbut:
Morph
By kevinringer
24th Jul 2020 13:41

You have a great way with words.

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By johnjenkins
24th Jul 2020 11:02

Mark, your past obviously dictates your thought processes. I don't think you really understand how business works. Some business will not be affected by quarterly updates and payments, I agree. However most will, simply because business think on a yearly or even longer basis. they plan, discuss and ask questions. Quarterly vat payments are totally different to quarterly accounts on which to pay tax. To change the way business works, HMRC will find their coffers empty rather than full.
It is my contention and always has been that it is HMRC's intention to destroy the small business (in whatever guise). We all know the reason why.

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Replying to johnjenkins:
Me
By Mark Purdue
24th Jul 2020 12:32

johnjenkins wrote:

your past obviously dictates your thought processes.

Not at all John - you'll be amazed what I've learnt in the outside world in the last 20 or so years.

The approach I was taking with this was as follows - accepting that quarterly reporting is coming (and I'm not saying here I agree or otherwise), but accepting that - is six month payments on account, based on data over a year out of date the most efficient way to manage payments on account? Would it make more sense to base payments on account on more up to date data?

I'm not suggesting " quarterly accounts" = "quarterly tax", but revisiting what payments on account should (or could) be.

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Replying to MarkP:
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By johnjenkins
24th Jul 2020 12:52

I don't think quarterly accounts will come. You can already pay your tax whenever you want prior to due dates. It's a choice that shouldn't be taken away.
You are talking like HMRC when you say RTI should be applied to business. That is what makes me think you have no idea (and I'm not being detrimental) of how business actually works.
Let me ask you a question, Mark. Why do you really think HMRC want quarterly updates from business?

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By kdbr
24th Jul 2020 13:24

Let's assume that the client isn't VAT registered, say a driving instructor or a landlord, and then let's ask about the costs of the exercise as against current compliance costs, both in terms of time and outlays. Let's assume further that his adviser may not have time in his or her diary for the increased workload across all clients affected, even if we suppose that his client could afford to pay for it...

Pretty sure the professional bodies will be on the case. Oh wait...

Thanks (2)
Morph
By kevinringer
24th Jul 2020 13:39

I have no problem with quarterly payments (but HMRC might - just look at the 31 July 2020 SA shambles and HMRC's inability to have DDs for SA, PAYE, CIS, CT etc). It is the digitisation of transactions which is the problem. It is no point software types such as Mark saying how easy it is: you need to work with our small business clients who are so pushed for time they can't take on any additional work. Don't say it is going to save time in the long term. In anticipation of MTD we moved several hundred clients onto QBO and Sage and I can confirm it takes us much more time in support to help the clients than it did when we did the accounts from scratch. And so many clients are truly digitally excluded. HMRC has granted me MTD exemption to 25% of my mandated MTD for VAT clients. If MTD for VAT is extended to all VAT businesses I recon I will get exemption for at least half of them, possibly all of them. And what MTD for income tax. I recon at least half overall. So the majority of my VAT clients and half my income tax clients will still be as they are. But hold on: aren't the existing Tax Returns and VAT returns digital? I've been 100% efiling SA since 1998 (ELS and now FBI). Are these digital or analogue? Digital. the key difference between the status quo and MTD is digitisation of transactions and that is the problem.

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Morph
By kevinringer
24th Jul 2020 13:46

If MTD was as wonderful as HMRC and the software industry claim, wouldn't we all be in the pilot?

How many are in the pilot?

I switched to 100% digital tax returns way back in 1998 because I saw a benefit for my business. I had the time/knowledge to invest in the switch because I knew I could figure out problems on the way (I used to be a programmer in a former life). Over the years I've tried to teach my clients to be more IT literate but I've discovered I'm wasting my time and their time. Only a tiny fraction (5%) of my clients have enough IT-nouse to be able to digitise their transactions without having to be constantly on the phone to me. I know 95% are incapable of MTD for income tax unless they pay me a lot of money for my help. Why? Because despite advances in technology tax software is still not intelligent enough to be used by the typical small business owner, even if that small business owner had the time or resources to use it.

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Morph
By kevinringer
24th Jul 2020 13:48

Why is MTD called Making Tax Digital? SA has been digital since 1996. Surely MTD is Making TRANSACTIONS Digital?

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By Crouchy
24th Jul 2020 15:19

if HMRC wanted quarterly payments, it would be quite easy to change the current payment on account structure and leave everything else well alone.

those tax payers who don't / won't follow the current rules, will be even less inclined to do so under MTD, there will be even more people 'outside' of the system and not paying tax correctly.

MTD is somewhat a tax for those tax payers thats are already trying their best to do things right

in MTD, HMRC have assumed that the job of accountants / bookkeepers and tax professionals is easy and that anyone with an app on their phone can do it. There is a complete lack of respect / understanding that there is still a level of training and skill required to use software / apps correctly, and that a significant number of tax payers won't have that skill

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By grecianwebb
24th Jul 2020 20:13

Or just let the client, who is aware the turnover is currently dropping, have the ability to reduce those payments on account which is the current process.

Otherwise, why stop at quarterly, why not go with eight payments or 16 etc etc. Why not make the accounting software work in real time and allow tax to be taken out instantly at source and added back as expenses are inputted. Nothing could go wrong.

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By SXGuy
25th Jul 2020 06:47

Let's take this scenario. A client has seasonal income. Earns most of their income Jan to June. And nothing July to Dec. But still has running costs.

Client then pays 2 quarters of tax based on income from Jan to June. Then has to rely on hmrc issuing refunds July to Dec.

Client overpaid tax for 6 months, now waiting for refunds to enable cash flow.

I'm not saying current system with poa is the answer, but at least you have the ability to reduce poa for July should in appear that income has gone down.

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By adam.arca
25th Jul 2020 09:05

Couple of thoughts:

Not mentioned so far (I think) will be the one-off pain in transitioning from half yearly to quarterly payments: an acceleration of 3 months for half the tax and 6 months for the other half. That would undoubtedly prompt a transitional implementation and therefore more complexity but, ultimately, businesses will be out-of-pocket.

Secondly, the OP asks what is wrong with quarterly payments. In a word, the answer has to be “certainty” or the lack of it. Many replies have already pointed out why the accuracy of quarterly submissions using MTD software will be, shall we say, unreliable and basically unusable as a means of calculating profits and therefore tax. I don’t think that the POA system we currently have is great and it tends to magnify swings but it will still be the dog’s b*llocks compared to what is proposed both in terms of being in the ball park and also in giving the taxpayer a known figure to work towards.

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RLI
By lionofludesch
25th Jul 2020 10:29

HMRC and, indeed, software producers have a touching confidence in taxpayers' ability to deal with technology.

I don't have any clients who can deal with their own MTD for VAT.

People need to get real.

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Chris M
By mr. mischief
27th Jul 2020 18:26

A few requirements first:

1. Sort out RTI properly. So for example the 2 staff members on my payrolls who are still being taxed over £1000 a year for company cars because HMRC are incapable of finding anyone other than the village idiot to answer my letters - a process which kicked off over 6 months ago - need sorted, along with all the other stuff HMRC just can't be arzzed to properly resource on RTI.

2. Sort out MTD. So for example the 2 clients where the MTD system has totally screwed up so their sign-up links don't work need properly fixed. Again I have only had the village idiots dealing with my letters, these cases date back to October 2019.

3. Change the tax year-end to 31 December in line with 95% of the globe. It's not good enough to still be using 5 April because of a calendar change in 1752 and a decision made by a Pope in the 1500s.

4. Change the law on how self-assessment is taxed, removing the preceding year rules which only HMRC and accountants understand.

5. Properly explain the changes and properly consult. If the people you are consulting with tell you what you are doing is daft, effing listen instead of just full steam ahead like you did on MTD.

And those are just the 5 starting conditions off the top of my head.

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By Paul Crowley
29th Jul 2020 18:49

Everything
Client software does not do tax and capital allowances are not quarterly.

Have you been mislead by software sellers? They make estate agents look like real honest fellows.

I may be wrong of course, but if so the accountancy profession would need to double in numbers

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