How to defer your tax payment
The COVID-19 pandemic has directly impacted businesses all over the world, with many companies facing financial strain due to an economic downturn.
In an effort to provide relief to entrepreneurs and small businesses negatively affected by the coronavirus, the UK government has announced some changes regarding the ability for eligible businesses or persons to defer VAT and income tax payments.
As a small business owner, you may also want to defer your tax payments for other reasons, such as to maintain positive cash flow or to strategically scale your operations.
In this article, we’ll help you learn when it makes sense for you to defer your tax payments and how to do so according to HMRC’s guidelines.
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.
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
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. As mentioned above, your specific tax requirements will vary depending on your business structure, as well as your income, profits and several other conditions.
But filing 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 tax by the initial deadline.
This financial disruption could be due to various reasons, such as:
- 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 to a later date.
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 staying within the provided HMRC guidelines.
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 have until on or before 31 March 2021 to pay your owed VAT. If you think you won’t be able to pay your VAT in full by the deadline, you can contact HMRC’s Time To Pay (TTP) service to request to pay in instalments.
Request Time to Pay Arrangement
‘Time to Pay’ literally means that you need more time to pay your taxes, thus setting up a Time to Pay Arrangement online allows you to pay your tax bill in instalments.
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 with HMRC to decide what new due dates are realistic and possible. If you end up missing these new due dates and making a late payment, you will be charged late payment interest 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.
Delay Self Assessment payment on account
Regarding eligible sole proprietors that want to defer income tax payments, HMRC is allowing businesses to delay making their second payment on account for the 2019-2020 tax year.
You are eligible if you are:
- 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
Note: *At the time of writing, we are past the initial 31 July 2020 due date. If you missed it, you can still pay by the extended due date of 31st January 2021. 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.
Because of COVID-19, HMRC has 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 is now slated for 31st January 2021.
If your business has experienced a dip in performance or you’re struggling to make ends meet due to coronavirus, you can opt to defer your second and final Self Assessment payment on account until the new extended deadline in January 2021.
While making this deferred second payment on account, you’ll still also need to make the balancing payment for the 2019-2020 tax year, and the first payment on account for the 2020-2021 tax year.
There are two ways you can settle your deferred tax payments during COVID-19:
- You can pay in full anytime between the 6-month relaxation period using HMRC’s online service
- You can set up a payment plan to make your second payment on account in instalments.
In case you want to make your second payment on account in instalments but are already settling your overdue taxes through a Time to Pay arrangement, you must reach out to HMRC to include both payments in the initial arrangement.
Once your deferral period ends for the second payment on account, HMRC has the right to take action against businesses that miss payments.
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
HMRC has also updated its IT systems to prevent customers from incurring any interest on late tax payments. They’ve also issued Self Assessment statements showing the second payment on account as being due on 31 January 2021 instead of the normal due date of 31 July 2020.
HMRC has made it clear that deferment due to the COVID-19 is completely optional. This means that businesses who are unable to make their second payment on account can make the deferment, while others may go on and make their payments in full.
It’s important to note that if you are still unable to make your second payment on account even after the six-month extension, penalties or interest on missed payments may be applicable.
If you missed the July deadline and did not yet request a delay you should still be in the clear. As long as you pay your second Self Assessment payment on account instalment on or before the new deadline of 31 January 2021, you may not be charged a late payment fee or interest.
It’s a good idea to contact HMRC to discuss your specific case.
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.
According to GOV.UK, “the second taxable grant is worth 70% of your average monthly trading profits, paid out in a single instalment covering 3 months’ worth of profits, and capped at £6,570 in total.”
At the time of writing, applications for the second grant are open. Final applications for the second grant application window must be in on or before 19 October 2020.
The grant does not need to be repaid, but it will be subject to Income Tax and self-employed National Insurance.
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.
If you want to pay your second instalment in full, you can pay any time between 31 July 2020 and 31 January 2021 using the online service.
Make sure that you reach out to the Self Assessment 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 choose to make delayed tax payments in January 2021 instead of paying on the initial deadline in July 2020, know that you’ll now have to make this payment along with the other tax bills due next year.
This will drive up the amount of tax you pay at one time, potentially disrupting your business cash flow.
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.
Note: If you choose to delay your tax payment and you normally make your payments on account by Direct Debit, make sure to cancel your Direct Debit as soon as possible to avoid HMRC automatically and unintentionally collecting your payment on the original due date.
If you’re unable to pay your business tax due to the coronavirus or any other reasons, you certainly have the option to defer your tax payments, provided you abide by HMRC’s guidelines.
If your business hasn’t been adversely affected by COVID-19, it’s a good idea to still pay your tax payments on time to avoid facing cash flow issues in the future.
Photo by Ekaterina Bolovtsova, published on Pexels