How strong bookkeeping can help with your Payments on Account
James Allsop from our accounts department provides some useful tips to help you manage your income, expenditure and tax liabilities.
The benefits of strong bookkeeping are too numerous to include in one article. I hope that by focusing on one specific area – Payments on Account – I can show that bookkeeping is not just a trivial chore to do every now and then, but actually a great exercise to allow forward planning for your business.
It's common knowledge that HMRC will issue penalties as well as interest on late Payments on Account. Avoiding these is essential, especially during the coronavirus pandemic, where businesses may already have cash flow problems. Many sole traders faced three payments to HMRC in January 2021, due to the government allowing the July 2020 Payment on Account to be delayed until January 2021. This may have seemed like a benefit for people who were struggling with cash due to the coronavirus pandemic, but it actually provided a bigger cash flow challenge when making three payments in January 2021. The scheme highlighted the importance of sound bookkeeping in the future to ensure that late payments do not occur and fines and penalties from HMRC are avoided.
The fines and penalties for late payment can often be a significant expense to an individual, which means it is imperative that Payments on Account are made on a timely basis. When a late payment occurs, HMRC will first place interest on any amount not paid. HMRC state that interest charges are to 'cancel the immediate financial advantage for those who pay late'.
The interest rate from April 2020 is 2.6% per annum. HMRC will calculate the charge daily until the late payment is paid. HMRC will then issue penalties on top of the interest incurred. If payment is late by more than 30 days, a penalty arises of 5% of any unpaid taxes. If, after a further five months, the tax remains unpaid, another penalty arises – again of 5% of any unpaid taxes at that date, as well as interest of 2.6% per annum on the original late payment penalty.
If, after 11 months in total, the tax still remains unpaid, another penalty charge is incurred of 5% of unpaid taxes. Interest will be charged on any outstanding penalty charges. These penalties and interest charges prove the importance of ensuring your Payment on Accounts bills are settled on time, which is something better bookkeeping can help you achieve.
People making use of the deferral option faced three tax payments on 31st January 2021: Payment on Account deferred from July 2021, the January 2021 Payment on Account and the balancing charge from tax year 19/20. With poor planning and understanding of your books, it is easy for cash flow problems to prevent you paying the whole amount due. Of course, it can be argued that coronavirus has made it difficult to use your bookkeeping to create a forecast of your cash position at any time, but an analysis of your expenses might have highlighted expenses which you could reduce. Or even those you could pay monthly rather than annually, to ensure that your cash flow isn't too low at any one time. Strong bookkeeping will allow comparison between expenses year-on- year, allowing you to show increases (or decreases) in revenue month-on-month. It can also be used to gauge potential in the future, as well as evaluate past performance. Importantly for Payments on Accounts, it can help you plan to get sufficient funds to pay your tax on time.
Although we seem to be emerging from the pandemic, it is important to remind ourselves of the lessons we learnt from the Payment of Account deferral from the government. Collating all information on your expenses and revenue in a simple and understandable format can allow you to manage your expenses and income more effectively. It can be easy to fall into cashflow difficulties. Proper management of expenses and income can, however, sometimes make the difference between paying expenses on time or, in the case of late Payment on Accounts, facing penalties and interest charges.
If you'd like any advice on the issues raised in this article, please don't hesitate to contact Page Kirk on 0115 955 5500 or email us at enquiries@pagekirk.co.uk.