31 July may not seem like a very significant date for many people but for the self employed it’s time to make another payment towards their tax liability. The position is complex but fifty percent of their tax liability to 5 April 2011 will have been paid in January 2011, together with any balance due for the previous year. The July payment is the remaining fifty percent of the 2010/11 year’s tax liability.
One question that often arises is what do I have to do if my profits to 5 April 2011 aren’t the same as the previous year? The answer is simple where your profits are higher because there is nothing further to do because your payment in July does not change. However, you will face a much higher January 2012 payment because you will pay the extra tax due on the increased profits for the current year plus, of course, a higher payment on account for the next tax year.
If you consider your income for the 2010/11 tax year is likely to be significantly less than in the previous year you can make a claim to reduce your July payment. You can do this by downloading form SA303 from HM Revenue & Customs website and completing this yourself, or asking your professional adviser to do so on your behalf. It is important to note that if the July payment is reduced to an amount less than turns out to be due, the difference owing will incur interest.
Furthermore, great care is needed for those in the construction industry. In this industry, businesses are required to have up to date tax payments. Therefore, if you reduce your payments incorrectly, leaving a balance that would be paid late, the HM Revenue & Customs could withdraw the gross payment status, which could be devastating for the business
For those whose accounts haven’t, as yet, been prepared, now is the time to gather the information together in order to make a forecast for the year. Anyone in business who has a March year end, for example, is unlikely to have their accounts finalised. However, it may be possible to gauge the profit level by examining internal management accounts and reduce the payment, if appropriate.
It is also possible to take action now to mitigate the 2010/11 liability. You could make an investment into an Enterprise Investment Scheme and so long as this is done before 6 October 2011 you can obtain half of the tax relief in the 2010/11 tax year. The rules for EIS are fairly complex and have been covered in previous Money Matters articles but suffice it to say a significant tax saving can be achieved and the July tax burden could be reduced considerably.
There are many factors to consider and forecasting an accurate figure for the July payment on account will often be difficult but with professional guidance it should be possible and, if worthwhile, to make a claim to reduce the July payment. After all, who wants to give the Taxman more money than is due?