How to defer your tax payment
Note: The tax deferment scheme discussed in this article is no longer active. The article below has been updated to reflect that these actions happened in the past, but HMRC stopped honouring tax deferment due to COVID-19 as of 6 July 2021.
The COVID-19 pandemic has directly impacted businesses all over the world, with many companies facing financial strain due to an economic downturn.
Thus, the UK government has deployed relief strategies in the form of deferrable VAT and income tax payments to support entrepreneurs and small businesses.
As a small business owner, you may also want to defer your tax payments to maintain positive cash flow or to strategically scale your operations, for example.
In this article, we’ll explain when it makes sense for you to defer your tax payments and how to do so according to HMRC’s guidelines.
Table of contents
- Why you may want to defer your tax payment
- How to defer your tax payment
- Consequences of deferring your tax payment
- Wrapping up
Top Tip: Before diving in, it’s important to understand which combination of the six main types of business tax applies to your chosen business structure. Each type comes with its own set of rules and deadlines for how to pay, when to file and when to pay. To learn more, read our simple guide to small business tax 📊
Why you may want to defer your tax payment
Regardless of size and industry, every business in the UK needs to file taxes with HMRC. Your specific annual tax requirements will vary depending on your business structure, as well as your current year income, profits and several other conditions.
The way that you can claim your expenses and thus catch a tax break also varies depending on your business structure. To learn more about how to claim taxes as a limited company, read our guide to what allowable expenses limited companies can claim.
If you’re a sole trader or in a partnership, you can learn more by reading our guide on how to claim reimbursable expenses.
But filing taxes on time may not always be possible. Sometimes, business owners may find themselves in a difficult financial position, which can impact their ability to pay the amount of taxes they owe.
You may run into financial difficulties if:
- You’re struggling to meet sales targets due to low product demand
- You’re in the middle of restructuring your internal processes
- You need to pay off your bank loans
- You have tied up too much money in advertising
Most small businesses are already working with a tight budget and any kind of financial disruption can significantly impact their bottom line.
Another reason you may want to defer your tax payments is because of the COVID-19 pandemic. Research shows that around 80% of SMEs have reported a decrease in revenue because of COVID-19.
To help businesses facing financial difficulty due to the coronavirus, HMRC has introduced a new system that allows VAT registered businesses to defer their VAT payments and certain individuals who work for themselves (often sole proprietors) to defer their income tax payments.
Top Tip: Understanding if and when you need to register for VAT is an important part of being a responsible business owner and taxpayer in the UK. To learn more about this process, read our guide to everything you need to know about VAT 💡
Additionally, HMRC is allowing businesses negatively affected by COVID-19 to defer payment of other types of taxes by requesting a Time to Pay Arrangement.
These extensions will help to ensure that eligible businesses have enough cash flow to survive during this difficult time.
Finally, you can choose to defer your tax payments even if you’re not facing any financial issues whatsoever. For example, you may simply want to have some cash-in-hand for investing in a business project or a key new product or service that you will help to expand your customer base.
Whatever the case may be, you can defer your tax payments as long as you’re adhering to HMRC guidelines.
Top Tip: Half of small business owners report making errors on their VAT return. To avoid the same fate, check out our guide on how to avoid and rectify common VAT mistakes ⚠️
How to defer your tax payment
Let’s examine exactly how to defer your tax payment in accordance with HMRC’s rules.
If you’re unable to pay tax because of coronavirus
As mentioned above, due to the impact of COVID-19 on UK businesses, the government is offering VAT registered businesses and qualifying sole proprietors the ability to defer paying tax on certain VAT and income tax payments.
Additionally, HMRC is allowing businesses negatively affected by COVID-19 to defer payment of other types of taxes under Time to Pay Arrangements.
Defer VAT payment
The window to defer your VAT payments ended on 30 June 2020.
If you did defer your VAT return payment before that date, you had until on or before 31 March 2021 to pay your owed VAT.
Additionally, businesses had the option to:
- Join the online payment scheme by 21 June 2021 and pay off deferred VAT in small, interest free instalments
- Contact HMRC to make a payment arrangement by the 30th of June 2021
If you did not pay in full or come to a payment arrangement by the 30th of June 2021, a 5% penalty may be applied to any outstanding deferred VAT.
Request Time to Pay Arrangement
‘Time to Pay’ literally means that you need more time to pay your taxes. Setting up a Time to Pay Arrangement on the GOV.UK website allows you to clear your tax liability in monthly instalments, for example.
If you do decide to set up a Time to Pay Arrangement, you will need the following information before you contact HMRC for government support:
- Your reference number (e.g. your 10-digit Unique Taxpayer Reference or VAT reference number)
- The specific amount of your tax bill that you’re struggling to pay and the reasons why you are facing difficulties
- Your attempts thus far at trying to accumulate the funds to pay your tax bill
- The estimated amount that you can pay immediately and how long you may need to pay the rest of the bill off
- Your bank account details
HMRC will decide if you are eligible for a delayed payment or not. If they feel the need, they may ask you for more evidence before they make a final decision.
If you do get granted more time to pay, you will negotiate a payment plan with HMRC and establish more realistic due dates.
If you end up missing these new due dates and/or make a late payment, you will be charged late payment penalties for the delay.
If you are not granted more time to pay, and you miss your payments, HMRC will begin enforcement action to retrieve the money from you. To avoid this, contact HMRC the moment you know that you won’t be able to pay on time.
What if your company is in tax debt?
If your company is in tax debt and facing insolvency, you’ll have the opportunity to draw up a verbal proposal in which you outline how you’ll pay your tax bill in the shortest time possible.
HMRC will provide you with access to an adviser, who’ll assess your proposal and help you work out if it’s financially feasible for you. Before you enter a Time to Pay arrangement, you should aim to reduce your debt as much as possible.
Delay Self Assessment payment on account
Regarding eligible sole proprietors that want to defer income tax payments, HMRC was allowing businesses to delay making their second payment on account for the 2019-2020 tax year.
You were eligible if you were:
- Registered in the UK for Self Assessment, or
- *Finding it difficult to make your second payment on account by 31 July 2020 due to financial disruption from coronavirus
Because of COVID-19, HMRC extended the due date of the second Self Assessment payment on account by six months. Therefore, instead of the deadline falling on 31st July 2020, it was slated for 31st January 2021.
Note: *At the time of writing, we are past the initial July payment due date and the extended January deferment. If you missed the deferral period, you need to file your tax payments as soon as possible. If you cannot pay your Self Assessment tax at all, contact HMRC as soon as you can. Read on for more details.
Self Assessment payments on account are tax payments made by self-employed people twice a year to spread out the total cost of the full year’s tax.
It essentially allows you to pay your tax bill in two instalments, one midway through the year and the other at the end of the year. Traditionally, the first payment is due on 31st January of the tax year and the second payment is due on 31st July of the same year.
Top Tip: Self Assessment is intended for people whose income isn’t taxed automatically when it’s paid. This will affect you if you are a sole proprietor or have multiple income streams outside of your primary employment. To learn more, read our guide to everything you need to know about Self Assessment tax returns ⚡️
HMRC could do any of the following in case you fail to make your due payments:
- Collect owed payments through your earnings or pensions
- Engage a debt collection agency
- Acquire your assets and sell them
- Withdraw money directly from your bank account
- Take you to court
- Close down your business
It’s important to note that if you were still unable to make your second payment on account even after the six-month extension, penalties or interest on missed payments may now be applicable.
It’s a good idea to contact HMRC to discuss your specific case if you still have questions.
Self Assessment Payment Helpline
- Telephone: 0300 200 3822
- Monday to Friday: 8am to 4pm
Claim a grant through the Self-Employment Income Support Scheme
If you’re self-employed or a member of a partnership and have been negatively affected by COVID-19, you can claim a taxable grant from the government. While not specifically a tax deferral, this grant is worth mentioning as it can help businesses struggling due to COVID-19.
The grant does not need to be repaid, but it will be subject to Income Tax and self-employed National Insurance.
HMRC has also announced that from late July 2021, the online service to claim the fifth grant will be available. This grant covers the timeframe of 1 May to 30 September, 2021 and HMRC will assess your eligibility to claim this grant.
That said, you can visit GOV.UK’s Self-Employment Income Support Scheme page to get a head start on your eligibility check.
Note: GOV.UK has written this disclaimer, “The fifth grant is different from previous grants. In most cases, when making your claim you’ll need to tell us about your business turnover so we can work out your grant amount.”
Based on your turnover, the fifth grant will be worth:
- 80% of 3 months’ average trading profits, capped at £7,500, for those with a turnover reduction of 30% or more
- 30% of 3 months’ average trading profits, capped at £2,850, for those with a turnover reduction of less than 30%
If you’re unable to pay tax due to other reasons
If your business has not been affected by COVID-19, you may still be able to make Self Assessment tax payments in instalments under the Time to Pay Arrangement.
In order to be eligible for this, you must owe HMRC less than £10,000. If you meet the criteria and feel that it makes sense for you to defer your tax payments, you can set up a Time to Pay Arrangement online, as mentioned above.
Make sure that you reach out to the Self Assessment taxpayers helpline (number listed above) if you’ve missed your payment dates or are unable to use the online service.
If you’re unable to make tax payments other than your Self Assessment bills, you may also pay the due amount in instalments under the Time to Pay Arrangement with HMRC.
If you fall into this category and want to make a deferred payment, your course of action depends entirely on whether you’ve received a payment demand or not.
A payment demand is a legal document demanding tax payment from your business. It can be anything from a simple tax bill or a letter threatening you with legal action.
In case you’ve received a payment demand, call the office that sent you the letter to discuss your options for deferring any overdue tax payments.
In the case that you haven’t received a payment demand, call the Payment Support Service to set up an arrangement.
Payment Support Service
- Telephone: 0300 200 3835
- Monday to Friday: 8am to 4pm
Consequences of deferring your tax payment
Deferring tax payments may make sense for your business in some situations, but it comes with its own set of consequences.
If you chose to make delayed tax payments in January 2021 instead of paying on the initial deadline in July 2020, you’ll have had to make this payment along with the other tax bills due this year.
This means that your cash flow may get disrupted more than usual this year. Knowing this, it’s more important than ever to understand how to effectively budget your money so that you don’t run into any further cash flow difficulties, unexpected or otherwise.
Top Tip: To avoid a financial disruption and cash flow problems, create an effective business budget to ensure you are putting away enough money each month into an emergency fund. By properly planning for a large one time expense, you can stay maintain positive cash flow and a balanced financial system. To learn more, read our article outlining 8 steps to create an effective business budget 📊
If you’re unable to pay your business tax due to the coronavirus or any other reasons, it might be worth considering tax deferment, provided you abide by HMRC’s guidelines.
If your business hasn’t been adversely affected by COVID-19, it’s still a good idea to still fulfill your tax payments on time to avoid facing cash flow issues in the future.
Photo by Ekaterina Bolovtsova, published on Pexels