Contractors, take the pain out of HMRC’s payment on account glitch

There are a variety of reasons for taxes not adding up correctly. While it’s often the taxpayer who has made the mistake, a recent glitch in HMRC’s systems has left many self-assessors believing that they owe more than they do.

Understanding what the payment on account actually is -- which is not always clear to contractors, is the fundamental step to completing the other potentially painful task HMRC has set you this tax-filing season -- working out if the error has impacted YOUR tax bill, writes Mike Parkes, technical director of GoSimpleTax.

Computer says no (you haven’t made a payment on account)

For some reading this, the amount you have to pay for the tax year 2017/18, should have been partially paid in advance by you making a payment on account in January 2018. The second payment on account was due on July 31st 2018. But the HMRC technical fault has caused some 2017/18 self-assessors to discover that the payments on account do not appear to have been deducted from their tax bill!

This means you may end up wrongly believing you owe additional tax. If you suspect something has gone awry in the Revenue’s calculation, you should not take the figure at face value. Instead, follow the official advice being given: contact HMRC to check.

But to spare your blushes and so you don’t complain to the taxman unnecessarily, you should note that there are some things you pay to HMRC which are intentionally excluded from the advance payment, as we explain in the next section. If you spot Capital Gains Tax as not having been taken from you, for example, that’s not -- on its own -- cause to contact HMRC and allege you’re a victim of the payment on account problem.

The advance payment

Unfortunately, the HMRC systems glitch might not be the only thing that comes as a nasty surprise to you. If this is your first year as a contractor, or if you have not previously been required to make payments on account, you might be wrongfooted to discover that you owe them to HMRC.

An advance payment is required because the Revenue wants you to pay your taxes in two parts. Basically, they will predict how much the self-assessment will amount to the next year by using the preceding year’s figures. One instalment is due by January 31st, the other by July 31st. It’s designed so that you are not met with a hefty tax bill each year, making it easier to maintain a positive cash flow.

If you work for yourself, included in the advance payment are things like Class 4 National Insurance (if you are classed as self-employed) but, crucially, not other amounts such as for Capital Gains or Student Loans. These are instead paid in a ‘balancing payment’ which is due for you to pay to HMRC before midnight on January 31st.

Exceptions

There are a few instances where you wouldn’t need to make an advance payment on account, such as if your self-assessment bill totals less than £1,000. If you have PAYE income and that accounts for over 80% of your tax bill, HMRC can collect any taxes due via your employer -- although to qualify for this you must have also submitted your tax return to HMRC before December 30th.

If you are required to pay the second payment, then this can be done via post, using the HMRC online portal, or by calling HMRC. Those of you who believe your tax owed will be lower than the previous year -- based on the most up-to-date performance of your company (which is something only you can really know about), can request to HMRC that they reduce the amount on the self-assessment form. Or send the SA303 form to the tax office.

And if for any reason the ensuing tax sum you end up forking out is not correct, such as it being an overpayment, perhaps due to the technical glitch, then HMRC should send you a refund -- although like their payment on account calculations, we recommend you keep on top of this. Or, if it’s an underpayment you made, you’ll be charged interest by HMRC because, with your systems at least, an error is unacceptable.