To pay or not to pay, that is the question
Neil Warren ponders the July self assessment tax payments: should tax advisers encourage clients to pay now or defer until January 2021?
On 20 January 2021, it will be sixty years since US president JF Kennedy made his famous comment: “Ask not what your country can do for you, ask what you can do for your country.”
I thought of this quote when I did my usual early July task of emailing my clients about their July self assessment tax payments on account. The boundaries are different this year because the payment can be deferred until 31 January next year due to the Covid-19 crisis. That has never been an option before. Should I encourage them to pay or defer? After all, the government needs the money!
In times gone by, I might have suggested to all clients that they take advantage of the six-month payment holiday for two reasons:
- Bank interest: in the days of decent interest rates for savers, a six-month deferral of a £20,000 tax payment would have meant perhaps £300 of extra interest. But those days have passed.
- Rainy day fund: a bit of extra cash put by for emergencies is often worthwhile but we are dealing with storms rather than rain at the moment.
I decided on a different approach this year.
I put my private clients into three categories:
These are wealthy in terms of both cash and assets. In my email, I included the sentence: “Although you can defer your tax payment until 31 January, I see little benefit in doing this so suggest you make the payment as normal by the end of July.”
There are some clients who unfortunately see a decent bank balance as a licence to ‘spend now.’ I’ve got one client who can’t resist buying a new handbag when it shines brightly in the stores. To quote Oscar Wilde: “The only way to deal with temptation is to yield to it.”
Deferring tax payments might be welcome in the short term but the double payment in January 2021 will cause a major headache. My email was adjusted: “Although you can defer your payment until 31 January, I suggest you pay on time by the end of July if possible, to avoid a double tax bill in January when business might be slow after Christmas.”
I’ve got some clients who have been hit very hard by the lockdown and economic impacts of the virus. They are struggling in a big way. The payment deferral is not only sensible but essential. The challenge is to ensure they take advantage of the opportunity and don’t feel guilty about it. After all, that’s what it is there for: “I understand that it is a difficult time for your business but you can defer your July tax payment until January. I think this will be sensible as it gives you extra cash in these difficult times.”
By proactively encouraging my ‘wealthy’ and ‘spender’ clients to pay their July tax on time, I hope that both I and the clients have done a very small bit to boost the government’s coffers in these difficult times. JFK would be proud of us.
Negative interest rates?
A final thought: I was in Stockholm last year and was told by some local business people that it is common practice to pay tax early in Sweden. The reason makes sense: they had a negative interest rate at the time apparently, which means that banks charge savers for looking after their money. Early payments, therefore, reduce bank charges.
With all the emergency and crisis borrowing going on at the moment, are we heading for negative rates in the UK? If this is the case, I’d better send out my July letters in April next year!
We live in interesting times.