Option to defer July self-assessment payment on account

Taxpayers facing financial difficulties as a result of the COVID-19 pandemic can opt to delay making their second self-assessment payment on account for 2019/20, due by 31 July 2020. As long as the amount is paid in full, together with any outstanding balance for 2019/20, by 31 January 2021, HMRC will not charge any interest or penalties.

Requirement to make payments on account

Under the self-assessment system, taxpayers are required to make payments on account of their tax and Class 4 National Insurance liability if their self-assessment bill for the previous tax year was £1,000 or more, unless at least 80% of the tax owed for that year was deducted at source, for example, under PAYE.

Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Although Class 2 National Insurance contributions are collected via the self-assessment system, they are not taken into account when working out payments on account. Payments on account are made on 31 January in the tax year and on 31 July after the end of the tax year, with any balance being paid by the tax return filing date of 31 January after the end of the tax year. If the payments on account are more than the eventual liability, the excess is refunded or set against the next year’s liability.

The first payment on account for 2019/20 was due by 31 January 2020. The second payment would normally need to be paid by 31 July 2020.

Option to defer

This year, taxpayers have the option to defer the second payment on account if they are finding it difficult to make the payment by 31 July 2020 due to Coronavirus. There is no obligation to defer – taxpayers can still make the payment by 31 July 2020 if they so wish.

Where a taxpayer takes the deferral option, the outstanding payment can be made whenever the taxpayer is able to meet the payment, as long as this is no later than 31 January 2021. Any balance owing for 2019/20 must be paid by the same time, together with the Class 2 National Insurance liability for the self-employed and the first payment on account for 2020/21.

Taxpayers choosing the deferral option do not need to tell HMRC – they simply pay the tax by 31 January 2021; nor do they have to provide evidence that they were adversely affected by the COVID-19 pandemic.

Guidance on the deferral option is available on the Gov.uk website.

Pros and cons

Delaying the payment will no doubt help those struggling as a result of the COVID-19 pandemic. Indeed, it may provide a lifeline for particular groups of taxpayers, for example, those who are self-employed and who do not qualify for a grant under the Self-employment Income Support Scheme and who have been unable to work due to the restrictions.

However, the deferred tax has to be paid eventually, and the payback for having nothing to pay in July is a big bill in January 2020. Not only will the deferred tax be payable then, but also any balance due for 2019/20 and the first payment on account for 2020/21.

Get in touch

It would be a pleasure to help you decide whether the deferral option would be beneficial to you and what it will mean for your cashflow come January 2021.

Changes to trading activities as a result of COVID-19

The COVID-19 pandemic and restrictions on trade have led many businesses to change what they do in a bid to survive. An example of this is the village pub opening instead as a local shop selling food and other essentials. Alternatively, a business may have ceased trading temporarily as a result of the lockdown.

HMRC have recently published guidance on the tax implications of crisis-driven changes to trading activities.

Nature of trade

When a business changes what they do, the tax implications will depend on whether the new activity is broadly similar to their previous activities or completely unrelated.

New trade

If a business has started something new which is completely different to their usual business, for example, a hairdresser starting to manufacture face masks, the business making face masks will be treated as a new separate business. The profits and losses should be calculated separately from those of the existing hairdressing business.

Existing trade

However, if a business starts to carry on a new activity that is broadly similar to its existing trade, the new activity should not be treated as a new business. Instead, profits and losses should be included when working out the profits and losses of the existing trade. An example of this would be a restaurant that instead offers a takeaway and delivery service.

Temporary break in trading

In the initial strict phase of the lockdown, many businesses were not allowed to trade. The list included those in the leisure and hospitality sector, non-essential shops, hairdressers, beauticians and barbers. As a result, the business will have a temporary break in its trade.

HMRC have confirmed that where a business closed its doors to customers or otherwise ceased trading as a result of the pandemic, the break will not be treated as a cessation of trade where the intention is to continue trading once the lockdown restrictions are lifted. However, this is conditional on the activities after the break being the same as, or similar to, those prior to the break. Any income and expenses relating to the gap in trading should be taken into account in calculating the profits or losses for the period.

Help and advice

Discuss the tax implications of any changes to or breaks in your trade with us.

Flexible furloughing

The Coronavirus Job Retention Scheme (CJRS) has provided a lifeline for many employees and employers during the COVID-19 pandemic. As at 21 June 2020, 9.2 million employees had been furloughed by 1.1 million employers who had, collectively, claimed grants totalling £22.9 billion.

Prior to 30 June 2020, employees who had been furloughed could not work for their employer while on furlough. This changes from 1 July 2020 with the introduction of flexible furloughing.

The CJRS runs until 31 October 2020. As the scheme draws to a close, the grant support provided to employers is gradually reduced from 1 August 2020.

Reduction in support

The CJRS enters its second and final phase from 1 July 2020. While employees will continue to receive 80% of their wages for furloughed hours up to the maximum amount for the duration of the scheme, the amount that employers can claim changes each month.

For July 2020, employers can still claim 80% of the furloughed employee’s wages up to £2,500 per month, plus the associated employer’s National Insurance due on the grant amount and the minimum employer pension contributions due under auto-enrolment. For pay periods commencing on or after 1 August 2020, the employer is no longer able to claim back employer’s National Insurance or pension contributions. For August, the grant claim remains at 80% of the employee’s pay up to £2,500 per month; however, this reduces to 70% for September up to £2,187.50 per month and to 60% for October up to £1,875 per month. For the last two months of the scheme, the employer must make up the difference so that the employee continues to receive 80% of their pay for furloughed hours up to the maximum amount.

Nature of flexible furloughing

Flexible furloughing enables employers to bring back furloughed workers for any amount of time and under any work pattern while continuing to claim a grant for the employee’s normal hours that they are not working. The employee’s normal hours are effectively split between hours that they work for which they are paid by the employer as normal and hours that they do not work – treated as furloughed hours – in respect of which the employer is able to claim a grant under the scheme.

From 1 July 2020, employers can only claim a grant for an employee if the employee had previously been furloughed for at least three consecutive weeks between 1 March 2020 and 30 June 2020. To meet this test, the latest date an employee could have been placed on furlough for the first time is 10 June 2020. However, this does not apply to employees returning from statutory leave (such as maternity, paternity or adoption leave) after this date who can be furloughed when their leave comes to an end.

Calculating the amount of the claim

The calculation of the claim amount under flexible furloughing can be complicated. However, detailed guidance is available, with examples, on the Gov.uk website.

The starting point is to determine the employee’s usual hours, the hours that the employee works and the furlough hours (which are simply the usual hours less the hours worked). The Government guidance explains how to work out an employee’s usual hours.

Having determined the furlough hours and the usual hours, the next step is to work out the minimum furlough pay. This is found as follows:

1. Find the lesser of 80% of the employee’s usual wages and the maximum amount (equivalent to £2,500 per month).
2. Divide this by the employee’s usual hours.
3. Multiply this by the number of hours that the employee is furloughed in the pay period.

Example

In July 2020, an employee returns to work on flexible furlough. The employee’s usual hours are 155 hours and the employee works 56 hours in July, for which they are paid by their employer as normal. The remaining 99 hours are furlough hours for which the employee can claim a grant.

The employee’s usual pay is £3,000 per month; 80% of which is £2,400. As this is less than £2,500, this figure is used to calculate minimum furlough pay.

The minimum furlough pay is £2,400 x 99/155 = £1,532.90.

The employer can claim £1,532.90 for July plus the associated employer’s National Insurance and pension contributions.

Claims for August, September and October

The amount that the employer can claim for August is the minimum furlough pay, for September 70/80^ths of the minimum furlough pay, and for October 60/80^ths of the minimum furlough pay.

For pay periods on or after 1 July 2020, claims must start and end in the same calendar month. If the pay period spans two months, two separate claims must be made.

Help with claims

We can provide guidance on flexible furloughing and submit claims on your behalf.

SEISS extended

The Self-Employment Income Support Scheme (SEISS) has been extended. Eligible self-employed taxpayers will be able to claim a second, and final, grant under the scheme in August.

Eligibility

The eligibility criteria for the second grant are the same as the first. To qualify, the individual must:

• have submitted their self-assessment tax return for 2018/19 by 23 April 2020;
• traded in 2019/20;
• be continuing to trade when they claim the grant, or would be except for the Coronavirus pandemic;
• intend to continue to trade in 2020/21; and
• they have lost profits due to the Coronavirus.

The grant is limited to traders whose trading profits are £50,000 or less, either for 2018/19 or on average for the three years 2016/17 to 2018/19 inclusive. Profits from self-employment must also comprise at least 50% of the individual’s income to qualify for the grant.

‘Adversely affected’

The taxpayer will need to confirm that they were ‘adversely affected’ by COVID-19 on or after 14 July 2020 when making their claim for the second grant. HMRC have published examples on the Gov.uk website of circumstances in which a business will be deemed to be adversely affected by the pandemic. They include:

• an inability to work because the taxpayer is shielding, self-isolating, sick with Coronavirus or has caring responsibilities as a result of the virus;
• a scaling down of the business due to interruption of the supply chain;
• a loss of trade because staff are unable to work; or
• a loss of trade because of a reduction in customers or clients.

Amount of the second grant

The second grant is based on 70% of average monthly profits for three months, based on the profits for 2016/17, 2017/18 and 2018/19. The calculation is adjusted where the taxpayer was not trading for all of these years. The second grant is capped at £6,570.

Making the claim

The claim cannot be made until August. As with the first claim, it must be made online. While agents cannot make claims on behalf of clients, we can help you determine whether you are eligible and what you are entitled to receive.

NIC implications of COVID-19 support payments

Various support payments have been made to help those affected by the COVID-19 pandemic. How are those payments treated for National Insurance purposes?

Grant payments under the CJRS

Where an employer claims a grant payment under the Coronavirus Job Retention Scheme (CJRS), the full amount of the grant (topped up to 80% of wages in the last two months of the scheme) must be paid over to the employee. As far as the employee is concerned, this is treated in the same way as a normal salary payment. The employer deducts Class 1 National Insurance and pays it over to HMRC.

The payment is also liable to employer’s Class 1 National Insurance to the extent that it is not covered by the employment allowance. For pay periods prior to 1 August 2020, the employer can reclaim the associated employer’s National Insurance on grant payments from the Government under the CJRS. The employer’s National Insurance must be paid over to HMRC in the usual way.

Grants under the SEISS

Grants under the Self-Employment Income Support Scheme (SEISS) should be taken into account in computing profits for 2020/21. Where those profits exceed £9,500, Class 4 National Insurance contributions will be payable. If the profits for 2020/21 are more than £6,475, you must pay Class 2 contributions.

As a result of the pandemic, profits may be lower in 2020/21 than previously. If profits are below the small profits threshold, set at £6,475 for 2020/21, there is no obligation to pay Class 2 contributions. However, it may be worthwhile to do so voluntarily to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes. This is much cheaper than paying Class 3 contributions to make up a shortfall.

Other grants

Businesses may also receive other grants, such as those payable to businesses qualifying for small business rate relief or payable to specific sectors, such as the hospitality and leisure sector. For self-employed taxpayers, these are taken into account in calculating profits, which in turn will determine whether a liability to Class 2 and Class 4 National Insurance contributions arise.

Talk to us

Speak to us to ascertain the effect of grant payments on your National Insurance bill.