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I am currently employed as an accountant but also have a small part-time practice which I hope to expand in the next few months. As a result, I am expecting to leave my employment during the summer and devote my working time to my own practice.
I am currently employed as an accountant but also have a small part-time practice which I hope to expand in the next few months. As a result, I am expecting to leave my employment during the summer and devote my working time to my own practice.
In the course of preparing cash-flow statements, I am mindful of the tax payments that I will need to make over the next couple of years. In particular, I will have a balancing payment to make on 31 January 2003 (and possibly a payment on account of 2002-03 as well). It is generally understood that I can get a repayment for tax deducted in respect of my employment on the strength of my P45, although I am not sure what provisions govern this. In particular, assuming that my repayment claim is not processed by January 2003, will I be able to offset this repayment against the tax due at the end of that month?
(Query T15,948) – Hay.
It is assumed that 'Hay' will only be self employed full time at some time after 6 April 2002 and so for 2001-02 a significant part of his income will be derived from his employment.
For the year ended 5 April 2002, and indeed any year, his tax liability is calculated on the aggregate of his profit from self employment, his earnings from the employment and any other income that he may have. The tax deducted at source from his employment and from other income is then deducted from the tax as calculated to produce the net liability for 2001-02.
If the net liability for 2000-01 was more than £500 and more than 20 per cent of the 'gross' tax payable, i.e. before taking away the tax deducted under pay-as-you-earn, 'Hay' will already have made payments on account for 2001-02 on 31 January 2002 and 31 July 2002. Each payment on account would have been half of the net liability for 2000-01. Those payments on account will then be deducted from the net liability for 2001-02 and if they are less than that sum, the balancing figure is payable by 31 January 2003. Alternatively if the payments exceed the net liability a refund will be due.
After dealing with 2001-02, we then move to 2002-03. Firstly, if the net liability for 2001-02 exceeds £500 and is more than 20 per cent of the 'gross' tax liability for 2001-02, payments on account will have to be made for 2002-03. They will each be half of the net liability for 2001-02 and they will be payable on 31 January 2003 and 31 July 2003. Therefore the total amount payable on 31 January 2003 will be the balancing payment of tax for 2001-02, if any, and the first payment on account, if any, for 2002-03.
The potential for a hefty tax payment will come not at 31 January 2003, but at 31 January 2004, as this is the date when any balancing payment of tax for 2002-03 will be payable.
If the practice meets expectations, the net tax liability after deducting the pay-as-you-earn on the employment up to 'Hay's' departure will be much higher than in previous years as the portion of income from which tax is deducted at source will be much lower. The payments on account, if any, for 2002-03 will also have been modest and so the balancing payment for that year, payable on 31 January 2004, may be substantial.
In addition, the first payment on account for 2003-04 will also be payable on 31 January 2004 and, as the net tax liability for 2002-03 will be so much higher, so too will be the payment on account.
Hopefully this is sufficient for 'Hay' to be able to complete his cash flow forecasts. They will show relatively modest payments of tax on 31 July 2002, 31 January 2003 and 31 July 2003 and a large payment on 31 January 2004. –Hodgy.
It would appear that the schizophrenia enjoyed prior to self assessment is now over. In this respect I refer to the claim (by a Schedule E taxpayer) of repayment to cessation, prior to becoming self employed. The claim, on an Inland Revenue form P50, would have accompanied the form P45 thus mopping up all personal allowances and lower tax rates, giving a much needed boost in the form of a tax rebate to someone starting up in business.
The modernised form P50 now asks any potential claimant in this situation to certify that he or she will not be taking up self employment before the start of the new tax year – a formidable deterrent. However, Inland Revenue forms are not legislation. Tax offices should consider each case on its merits; where cash flow is a problem, especially where losses are anticipated at the outset, a claim should be pursued.
In the case of 'Hay', he is already clearly within the self assessment régime. The general problem is not necessarily confined to the change from Schedule E to Schedule D but the far more reaching perplexity of forecasting income until such time that the next tax return is prepared for submission to the Revenue.
As 'Hay' has gone to the trouble of preparing cash flow statements and is consequently fortunate enough to be aware of his tax payments over the next couple of years, it should be a simple matter of either paying the normal 31 January and 31 July amounts in 2003 – based upon his next tax return or seeking reduced payments on account based upon total income, and tax paid at source.
Simplified assessing, I believe self assessment was called, at the outset; 'Hay' does appear to be creating a confusing slant on the situation. – Jim.
