Technical Lead and Senior Policy Adviser ICAEW
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Start talking about earlier payment of tax

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Ahead of the Budget on 27 October, Anita Monteith has suggestions around earlier payment of income tax. Perhaps we need different rules for larger and smaller self-employed businesses.

21st Oct 2021
Technical Lead and Senior Policy Adviser ICAEW
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Long-established tax rules determine when income tax is paid on business profits. These govern the time interval between earning a taxable profit on a sale and paying tax on that profit, often requiring a payment on account. We also have the basis period rules, unchanged since we moved from the preceding year basis to the current year basis around a quarter of a century ago.

A lot has changed in that time and technology has been a key driving force. I recall using DOS rather than Windows, achingly slow.

Questions to ask

Life has changed a lot since the mid 1990’s and now things happen much closer to real time. Clearly earlier payment of tax has been considered in some circles of government and perhaps that is not so unreasonable for many?

I have heard people theorise about something akin to PAYE for the self employed. Maybe that is worth exploring?

One size does not fit all - there is a world of difference between someone who works as a self employed writer and an international partnership with thousands of employees. Currently, the basis period and income tax payment rules are largely the same for all businesses in income tax self assessment (ITSA). Is it time to look again at whether this still works?

Cash basis

We already have the cash basis for smaller businesses. Having trained as a very traditional accountant, I was against this initially. I advised a cautious approach in deciding who might ignore the accruals basis and so lose focus on their working capital. In fact, the cash basis for income tax purposes serves a very useful purpose for many people.

Changing the basis for taxing profits from accruals to cash moves tax receipts, but not always forwards. But it is simple and a lot of taxpayers like it because the tax due is better aligned to the cash they collect from customers.

The cash basis limit for income tax is currently just £350,000 while for VAT it’s £1,350,000 so there could be room for manoeuvre here. Perhaps this could be a Budget surprise from the Chancellor?

How else to collect tax receipts earlier?

Another way to narrow the gap between earning and paying income tax might be to require more payments on account for a year? This would be possible for many businesses, and would mirror the way corporation tax is paid by large corporates. If this was one of the considerations behind the government’s recent basis period proposals, it would have been a better way to address the tax payment aspect.

Of course one of the main problems with the basis period suggestions was the need for estimates and amended returns for those with accounting periods which didn’t align with the tax year. The additional administrative burden they would have faced was a serious issue.

ICAEW observed that the overwhelming majority of ITSA businesses already used 31 March or 5 April as their year end anyway, and those which didn’t had good commercial reasons for not doing so. Clearly if these rules are ever brought back for a second try, this might be a better way to move forward.

Start the conversation

I am not recommending any change in particular, but just stating some alternatives which might be relatively straightforward compared to some of the suggestions we have seen recently. I think that is what the Tax Administration Framework Review was all about. Let us have that conversation.

Luckily the basis period changes have been paused pending further discussion. But we don’t have long, bearing in mind that for any change to be implemented, new systems must be designed, tested and then communicated.

Slow down

Recently, ICAEW joined together with the CIOT, ICAS and ATT to ask the Financial Secretary to the Treasury to slow down the pace of change. We have already noted that slotting the basis period proposals in ahead of MTD ITSA would have been just one change too many in such a short period.

But to return to earlier tax receipts, if the UK does want these from the self-employed, then we should say so, and with a few carve outs, most of the suggestions I make above could work.

Replies (29)

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By Trethi Teg
21st Oct 2021 10:58

The tax burden on businesses and individuals is already far to high.

The ICAEW represents accountants who in turn represent businesses.

I cannot understand why a senior manager of the ICAEW should be putting forward thoughts on businesses paying taxes earlier than they do now.

The tax policy promoted by the ICAEW should be to lower taxes for all in the country.

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Replying to Trethi Teg:
tailwhip
By tailwhip
21st Oct 2021 11:17

Respectfully disagree.

As well as businesses, we also act for people. People in general like things like hospitals, schools, roads and importantly...surviving pandemics. These things all cost money.

Personally I don't like the idea of increasing the frequency of things like self assessment payments (from a purely selfish point of view of, its a lot of effort to administer in a tax department). If I was the chancellor, I'd get rid of payments on account (again, from a selfish point of view in that its a pain to explain to clients who don't really understand it anyway) and make the final payment in a one-er by 30th September. It would accelerate the tax take and simplify things for taxpayers as well as give them less time to have spent it all before its due to be paid. I guess that would accelerate the tax return submission deadline too...good thing I'm not the chancellor.

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Replying to tailwhip:
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By Trethi Teg
22nd Oct 2021 09:51

Respectfully disagree.

It is not an accountants role to concern themselves about what happens to tax revenues and what people generally like or not in this respect. The accountants role is to do their best for their client which in 99% of the cases means reducing their tax liability as much as possible within the law which has been enacted.

In my experience not one client has asked for his tax to be increased to pay for hospitals roads etc. However, allmost every cleint has welcomed the possibility of reducing his tax liability.

Outside your accounting role by all means promote the case for more taxes for healthcare, roads and so on but not when carrying out your role of acting for your client.

Similarly with the ICAEW. It is not their role to be involved with assisiting HMRC role out their agenda, righting social wrongs or saving the planet.

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Replying to tailwhip:
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By NeilW
22nd Oct 2021 10:46

"These things all cost money."

But since government has no need of money to be able to spend why worry about timing issues.

Public provision doesn't cost money. It costs real goods and services that are not under demand elsewhere. Government spends more like a general deploying the troops than a Finance Director worrying if he's up against this month's overdraft limit due to cash flow issues.

Tax is there to release resources, and it is PAYE/National Insurance that does the heavy lifting there - preventing companies hiring too many people.

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By ireallyshouldknowthisbut
21st Oct 2021 13:59

I don't think anyone has much of an issue with quarterly payments on account it would be well understood and easy to implement.

There is however a huge problem if these are based on the "snapshot" quarterly filings demanded by MTD, as cash basis is considerably more variable over quarters vs year and fails to take into account seasonality and 101 other factors which make it not fit for purpose for tax estimates. These filings cant be both "flash filings to demonstrate you are keeping up with your bookkeeping homework" and "for the purposes of taxation". Those are mutually exclusive positions.

All you need is a bit of carrot and not too much stick to ensure small traders and landlords over pay rather than underpay. Eg pay some interest as for CT for early payment. A lot of my clients would pay well in advance if they got 0.5% on the cash vs sitting in their bank accounts.

Virtually all my company clients pay within 1-2 months of the year end when we file their accounts, but the same clients rarely pay their SA early as there is no incentive to do so.

This is "take a pencil to space" stuff. We don't need to design a huge array of space pens to get the same result. ie tax collected. We seem to be increasingly lose sight of the fact that HMRC's and accountants role is to facilitate the most pain free method of paying the right amount of tax by the right date. Thats it.

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Replying to ireallyshouldknowthisbut:
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By Paul Crowley
21st Oct 2021 16:28

Spot on
Dates of payments can be sorted without MTD
Big companies already have it

I also have companies paying early for the interest credited.
I have already paid a big lump on the year after all well.

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By Paul Crowley
21st Oct 2021 16:20

Really this is tail about face
Companies payday is 100% 9 months after year end
Income tax pay day is on account 50% 10 months after year start. THAT IS NEARLY A YEAR earlier for the first half.
Second half 4 Months after the year end

Sort out corporation tax before following the HMRC agenda on MTD means pay tax now

Be a Chartered Accountant. Challenge HMRC why companies cannot pay as early as partnerships , the self employed and landlords.
Do not be an HMRC mouthpiece

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Replying to Paul Crowley:
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By Self-Employed and Happy
22nd Oct 2021 09:36

I often think the first year of Corp Tax should be similar to Self Assessment, pay balance plus PoA 1.

I then think 6 months after the first CT submission deadline it should revert to a monthly Direct Debit based on the PoA.

All payments are then tidied up in the CT Return resulting in a balance or refund which would just in turn increase or decrease the following years Direct Debits from the moment of submission.

(or something like that)

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By colinstewart
22nd Oct 2021 09:31

But, but , but, I refer the honourable Lady to the debate we had a few days ago - HMRC are rubbish at collecting tax anyway! You can't set up a perpetual Direct Debit for payroll taxes. CIS suffered is not automatically set off against Payroll Taxes. No reminders for CT and SA (until the interst gets added!). They do not make any effort whatsoever to help taxpayers pay their tax on time. Given this, it is beyond comprehension how they will collect tax with greater frequency.

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Replying to colinstewart:
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By Self-Employed and Happy
22nd Oct 2021 10:06

PAYE not having a DD is an absolute pain in the [***].

Especially on the odd occasion a client has a "lapse" and puts the wrong reference or even one at all on the BACS payment!

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Replying to Self-Employed and Happy:
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By colinstewart
22nd Oct 2021 12:19

...and some banks don't give you enough characters in the payment reference to put the full Accounts office reference AND the month/year identifier! You do lose the will to live sometimes!

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By Paul Crowley
22nd Oct 2021 10:22

Every other tax needs fixing first
Companies are disolved without paying them Permanent loss

Income tax early is just a timing issue
People do pay their tax as personal insolvency is damaging

Paying early just means a once off windfall for personal tax

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By Duggimon
22nd Oct 2021 10:42

The year end for all businesses under income tax is, in all likelihood, changing to 31/3 / 5/4 for everyone.

At that time, every business will be paying roughly half their tax before their year end and half their tax just after it. I have no idea why anyone would think this needs further accelerated, it seems crazy already that tax is paid on profits in some cases before they are earned.

As others have said, the delay in payment of income tax, which is virtually no delay whatsoever, is not a problem needing addressed. Corporation Tax is the elephant in the room here, PAYE, Income Tax and Capital Gains Tax (at least on residential property) are all paid at least six months sooner than Corporation Tax.

And besides, the timing of payments is not an issue for the government provided they are capable of managing their cash flow. The same tax rolls in eventually, regardless of the timing of payments, accelerating payments benefits nobody in the long run unless our Treasury are really that bad at managing money, and if that's the case we have problems a new payment regime can't fix.

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By NeilW
22nd Oct 2021 10:41

It's time that unincorporated businesses ended.

The businesses of sole traders/partnerships should become unlimited liability corporations and then they can pay PAYE and corporation tax like other businesses.

Drawings are then subject to PAYE and National Insurance (including the social care levy) and are paid monthly/quarterly as usual. Profits are then taxed based on size like other corporations. Distributions are taxed as dividends.

There's no reason to continue with the 'third' option.

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Replying to NeilW:
paddle steamer
By DJKL
25th Oct 2021 12:10

Be careful what you wish for, tax rates and tax compliance can impact behaviour and competition for talent is cross border.

Right now my son (software developer) offers his services usually to HMG or its Scottish equivalent, usually on a three month or six month contract, but recently he has been pulled from pillar to post by changes in interpretation/ approach, frankly it is a pain and he is becoming fed up.

He also ,like a lot of his professional colleagues, readily appreciates that he does not need to be in the UK to provide the services he does and given he is heading to the USA anyway, once he gets a work permit, he is currently considering dumping existing government work for a return to the private sector who are less [***] re where he might be living in the world when performing the contracts. (They are also offering £650 a day rather than £500)

When he contracted in Frankfurt the Germans had a particular type of contractor role with its own tax rules, less shoehorning into ill fitting business structures not fit for purpose, imho if you want to keep talent within the UK software market (and is this not the stated growth area of our economy per our Great Leader) then shoehorning it all into one legal structure is the last thing you ought to be considering.

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By Ian McTernan CTA
22nd Oct 2021 10:45

I think this article rather neatly sums up exactly why most members feel their Institutes are not on their side nor taxpayers.

Stop pandering to HMRC all the time because you want that cosy relationship and are scared to rock the boat.

You're supposed to be there to represent your members interests not promote earlier tax collection or a more complex system with yet more payment dates, etc.

Suggesting 4 quarterly payments instead of the current two POA and final balancing payment 'because this is possible and would mirror large businesses' ignores the major issue which is that they are NOT large businesses and don't have a large finance team handling it, so it would create more work for the small clients and their advisors (the type of work we don't want, before you say it's a good thing).

Maybe every now and again everyone in the Institute should be forced to work in practice in a small firm and get out in the real world - maybe then they might remember whose side they are supposed to be on...

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By Michael C Feltham
22nd Oct 2021 10:51

Those of us with much of a brain, suggested that the hidden sting in MTD ITSA quarterly reports, was to set the table for imposing periodic payments of Tax and NIC, in order to assist the Treasury's cashflow.

The next objective will clearly be to impose monthly payments, in line with PAYE.

However, since, as I repeatedly state ad naseum, 48% of UK plc's private sector GDP is generated by SME, Class Sized Zero Businesses (The vast majority being One Man Bands) the case and pressures are rather different to larger incorporated activities.

In my experience, most of these smaller sole traders are fire-fighting, in terms of capital all the time. They tend to pay last year's tax from the next year's cashflow.
Since the self-employed already pay 50% of next year's tax twice, already (!!)
surely the unfettered greed of HM Treasury would not seek even more?

Wouldn't put it past 'em!

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By Nebs
22nd Oct 2021 11:07

The self employed already pay the same rate of tax as employees. It seems they will eventually pay the same rate of NIC as employees. And it seems they will be expected to pay it all at the same time as employees.
So,to be fair, the self employed should also get paid by the government for 5 weeks annual leave, bank holidays, statutory sick pay, statutory maternity pay, be restricted to 48 hours work a week (accountants would be exempt in January), and a Christmas party.

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Replying to Nebs:
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By Michael C Feltham
22nd Oct 2021 16:21

[quote=Nebs]

The self employed already pay the same rate of tax as employees.".

It is my contention, Nebs that in fact they pay more!

Since Class IV NIC enjoys no accruing benefits and in reality is simply a tax on electing to try and earn one's own living!

Even Thatcher, who introduced it, eventually realised how unfair it was and allowed 50% to be set-off against mainstream income tax.

However, Labour, the haters of free enterprise soon sorted that concession out...

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Replying to Michael C Feltham:
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By DJKL
25th Oct 2021 12:13

Strictly 50% of its cost set of against profits subject to tax.

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By Kaylee100
22nd Oct 2021 11:37

I was in practice and would think moving to a system of quarterly POA or ten monthly like VAT annual accounting would make sense if HMRC are happy with so many more transactions to get the same amount of money.

Now I'm employed with a smaller self employment of approx 6 invoices a year, I pay a set sum into my HMRC account each time I am paid by invoice for self employed work and it's so easy to do, but my situation is almost as simple as its gets. It's not a system I would recommend being upscaled to most self employed and why I don't support MTD for ITSA - I just think HMRC should live with one report a year and find a way to collect tax a little quicker.

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Replying to Kaylee100:
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By Self-Employed and Happy
22nd Oct 2021 11:41

That wouldn't work under the current system, if you pay Corporation Tax before the return has actually been submitted they automatically refund the money via cheque.

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By trecar
22nd Oct 2021 12:50

I know it is not generally thought to be advisable but I have clients where I have recommended that they pay their tax by regular weekly or monthly DD ahead of knowing what the liability will be. They all have told me how it removes uncertainty for them and worry about how they will meet their tax bill. I obviously calculate beforehand what their liability may be and they run with that. They are then forced to include it in all their cash flow calculations and trade accordingly. Not the most efficient of cash flow management techniques I grant you but it does give them peace of mind which they value. If it works for them why not others? It would stop HMRC trying to advance payment by messing around with the system to the detriment of most accountants and businesses systems.

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Replying to trecar:
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By Hugo Fair
23rd Oct 2021 11:45

'Putting money aside' was the basis of most systems back in the '70s (and before then) ... from buying stamps for the leccy to the Christmas club contributions. It has always worked for those who are permanently short of money or are simply unable to apply the concept of accruing for future liabilities.
I still have a 'household' account at Barclays into which a SO transfers money monthly - and from which all utility and maintenance invoices get paid. I had to do an annual review of the SO during hyper-inflationary times, but 5 minutes p.a. is all that's been needed for many a year.
I may not fit the standard profile of those for whom this works ... but it's actually quite liberating (no thought required when the bills roll in)!

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Replying to Hugo Fair:
paddle steamer
By DJKL
25th Oct 2021 12:27

Snap.

We have had a joint budget account with Bank of Scotland for over 30 years, fixed S/O in from me every month (it has been increased 3-4 times) then household bills all paid from it plus food bills ( apart from the food most of these SO/DD these days)

Only change we are now making is we are now going to accumulate more excess cash in this joint account and less in our personal accounts in case one of us drops of the twig (administratively simpler for the survivor), so now it is to be fixed floats in individual accounts, each of us then retains £XXX a month pocket money and the rest gets switched into the joint account which will then be be raided once a year re ISA contributions.
(Though we also now have an unplanned need to buy another car as daughter in law lost her engagement ring down the air system in wife's car so it (the car) is now in many pieces- ring was at least recovered- interesting useless fact, to remove the air/heating system in a Fiat 500 you have to take the doors of the car(plus entire dashboard etc))

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By Mr J Andrews
22nd Oct 2021 14:16

Dear Anita
The header ''...........perhaps WE need different rules.....'' and introducing ''........something akin to PAYE for the Self Employed.........'' makes me think that perhaps you have just had lunch with Jim Harra ?
But isn't this the way our tax system is going ? Before we sort out the ridiculous concept of MTD , let's all dream up some jolly good nonsense for a new Tolleys Red Book - to supplement the creaking Yellow and Orange versions

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Pile of Stones
By Beach Accountancy
22nd Oct 2021 18:04

Can't we sort out the fact that CT has to be paid before the return has to be filed first!!!

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By Barry Adams
23rd Oct 2021 10:14

One thing that certainly needs to change is HMRC guessing how much someone is going to earn in dividends etc and trying to collect during the year.

Often the dividends are not going to be paid and it is a pain to get the PAYE codings changed.

Any changes to payments on account for self assessment should be done so that it does not penalise clients where circumstances mean that the taxes are not going to be due.

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By Pam Moreland
24th Oct 2021 15:08

I have always thought that it would be far easier just to divide the annual tax liability into four instead of two and have three payments on account and one final payment in January. This is just keeping the same system with which most taxpayers are familiar but slightly accelerating payments. It might make cash flow and hence debt collection easier as the quarterly payments would be smaller than half yearly ones. We would still have the ability to reduce payments on account to fit the current trading conditions. Simple and efficient and avoiding the purchase of IT products - what's not to like!
The unrepresented taxpayer does present a different set of problems but MTD won't solve that one.

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