The self-employed, members of a partnership or LLP, freelance consultants, buy-to-let investors and others who pay tax under the self-assessment system have just days to contact the taxman if their earnings or other income fell last year, thereby entitling them to pay a smaller amount of tax to meet the 31 July tax deadline than HMRC may be expecting.
It is important to organise this before the July deadline, otherwise any underpayment will lead to automatic penalties and interest charges. The penalty is 5% of the outstanding tax, and interest kicks in after 28 days.
"The July tax deadline is the second in a two part story. The first part was the January payment. Anyone paying tax on 31 January 2013 under self-assessment was effectively paying half of their tax bill for the 2012/13 tax year. HMRC expects the 31 July tax payment to represent the other half of the tax due for the 2012/13 tax year. These payments are based on the income tax liability for 2011/12 so will be excessive if the actual liability for 2012/13 is less," said Richard Mannion, national tax director at Smith & Williamson, the accountancy and investment management group.
He continued: "For example, if you had earnings from say, a holiday home letting or second job, which gave rise to a tax bill for 2011/12 of £4,000, then you would owe tax of £2,000 on 31 January 2013 and a further £2,000 due by 31 July 2013 for the 2012/13 tax year. As these payments are estimates based on your previous year's earnings, the system allows a reconciliation through the tax return submitted online by 31 January 2014 which details actual earnings," said Richard Mannion, national tax director at Smith & Williamson, the accountancy and investment management group.
"However, if your earnings were down on the previous year – and let's face it, lots of people have variable earnings - then you are entitled to apply for a reduction in your July tax payment by using form SA 303 in which you explain the reasons. These reasons for the drop in earnings must be genuine and not simply that you have spent the cash."
"In this day and age of tax scrutiny, once people get a mark against their name, it's likely to mean the taxman takes a particular interest in their affairs for several years to come. But if you are truly struggling to meet the deadline, HMRC may be prepared to give you some extra time to pay although interest will continue to build up on the outstanding amount. In any event, you need to contact the tax authorities to agree this with them," concluded Richard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
