We are occasionally asked by clients what are the advantages of paying tax early. The answer is relatively simple.
- You avoid the late payment penalty. …
- You won’t be tempted to spend the money. …
- You’ll receive any tax refunds sooner. …
- And you won’t start the new calendar year with a (large) bill.
If you are self-employed, a sole trader or in a partnership, you can pay tax in advance by buying a tax certificate. Even better, you get interest on the advance payment, though at a lower rate than the usual personal savings rates (i.e. not a lot, but better than nothing).
On the other hand, if you are a limited company owner and want to pay your Corporation Tax bill before it is due (that is, nine months and one day after your year-end), you could receive an interest rate of 4.75% on all company tax paid before the due date. Moreover, if, having estimated your tax bill it turns out that you over-estimated and thus paid too much, you will get interest on any overpayment at 4% from the due date to the date you receive the refund.
So far, so good. But (you knew there would be a but, didn’t you)…
A Mr John Howard, a company director, has recently been fined by HMRC for paying his tax “too early.” In fact, what happened was that, having previously been fined for filing his tax returns too late, Mr Howard decided to get his retaliation in early, so to speak, by making three months of payments in advance, which he did on 4th September 2020. The important thing to note here is that these payments were for RTI (Real Time Information) returns. Introduced in 2013, RTI relates to employees’ wages and refers to PAYE returns, made every time you pay your employees (hence the ‘real time’ element).
Even though HMRC’s own software permitted him to do this, the taxman then decided (perhaps understandably, given they were now in advance rather than in real time) that these RTI payments were too early. He was fined £100 for each return, with HMRC saying they had not been “filed correctly and in time.” Nonetheless, given that HMRC is under huge pressure to collect tax timeously, it does seem grossly unfair that anyone should be penalised for paying their tax early.
Fortunately, at a tribunal, these fines were overturned on appeal. HMRC argued that it had sent Mr Howard a letter after the initial late payments and therefore that he should have known to file the return during the appropriate month. However, the tribunal pointed out that HMRC had not stated that early filing wasn’t allowed and therefore concluded that Mr Howard had a reasonable excuse to file the returns when he did.
Words fail us… well, they don’t but they are not suitable for a public blog!
Vivian Linstrom, M&S Accountancy and Taxation Ltd
