How to settle your tax bill when finances are challenged

High cereal and milk prices that bumped up profits for the arable and dairy sectors were short-lived and significant price cuts have followed.

Coupled with higher interest rates and little downward movement on record input costs, the financial landscape is now a very different one.

Some businesses are finding themselves in a challenging financial situation, with the tax owing on their 2022-23 income due to be settled on 31 January 2024, along with a payment on account for 2023-24 and followed by a further payment on account in July.

See also: How to avoid common tax return mistakes

“If HMRC is not paid and there is no payment plan in place, it is likely to appoint a debt collection team to secure tax overdue,’’ warns Ricky Taylor, of accountant Dodd & Co.

But there are several options that businesses can consider.

Negotiate an extension on payments

From experience, HMRC is usually quite reasonable in granting payment plans, but Mr Taylor makes two recommendations.

First, the client should call HMRC themselves, as they will be in a better position to answer all of their questions, such as why they cannot pay and details on their current financial position. They will also need to set up a direct debit.

There is an online facility that can be used to get a payment plan in place if the income tax owed through self-assessment is £30,000 or less, and if other conditions are met. 

Second, make contact before the payment deadline.

While the taxpayer may still be able to secure a plan if they have missed that deadline, they are more likely to get one if they call before the due payment date.

HMRC will still charge interest, and usually factor this into the payment plan.

However, if the payment plan is arranged before the due date, HMRC will usually not charge late payment penalties, as long as the payments agreed are made on time.

If no payment plan has been agreed and the balance of tax is not paid on time, HMRC penalties will apply:

• A 5% late payment penalty if 30 days late
• Further 5% penalty if six months overdue
• An additional 5% penalty if 12 months late.

Actions to reduce payments

Those with a large tax bill for the previous financial year may be able to reduce payments on account if they are expecting profits to be lower in 2023-24.

This can be requested with HMRC either online or by post. If the reduced payment on account turns out to be more than is actually eventually due, HMRC will refund any overpayment.

If the reduced payment on account is less than is eventually due, interest will be charged.

Capital investment in equipment qualifying for tax relief can help to reduce expected profits, but the spending must make sense for the business and not simply be to reduce tax.

For example, a farmer with a 31 March year end may have a large 2022-23 tax bill, and an estimated taxable profit of £100,000 for the year ending 31 March 2024.

If that business spends £250,000 on qualifying plant and machinery before 31 March 2024, this will produce a large adjusted loss for tax purposes.

This means payments on account could possibly be reduced to nil, depending on other income sources.

For those who are likely to be a higher rate tax payer, but who do not need to purchase plant and machinery, personal pension contributions can be used to reduce the tax burden.

For example, a farmer who is aware they are going to be £10,000 into the higher rate tax band could pay an £8,000 net personal pension contribution in the same year, which grosses up to £10,000 as HMRC contributes the £2,000 difference.

Instead of the farmer paying 40% tax on the £10,000 of farm profits, they will only pay 20% if they are a UK taxpayer, and save £2,000 in income tax.

Two or five year averaging will also be worth considering for farmers on completion of their tax returns.

Many farmers may be pushed into higher rate tax for 2022-23, where they have not been in previous years.

Averaging may not only save them tax for 2022-23, but also for the 2023-24 payments on account, helping with cashflow.

Keep information up to date to support HMRC payment requests

Having up-to-date information gives more evidence as a basis to reduce payments on account for the following year.

Using cloud accounting provides information in real time.

This allows figures to be reviewed at nine months to establish, at that point, what the profits are estimated to be for the next year end.

Accountants are then able to advise on options.

For example, if there is a large tax bill expected and accounts for a 31 March year end can be completed by 31 May, that leaves eight months in which to plan for how to make the tax payments which will fall due in the following January.

Individuals have those eight months to plan for their 31 January 2024 tax payments.

Recent records and the ability to provide relevant figures also help if bank borrowing or extended overdraft facilities are needed.

Payment extensions can be negotiated for company structures

The payment date for corporation tax is nine months and one day following the company year end – for example, a company with a 31 March 2023 year end will have to pay this tax by 1 January 2024.

Larger companies may need to pay quarterly and partly in advance of their year end.

Companies struggling to pay tax can negotiate an extension on payment using the same approach as sole traders and partnerships.

A director will need to attempt to agree a payment plan with HMRC before the corporation tax becomes due.

Another option is for a director loaning money to the company to pay the corporation tax and the company repaying the director at a later date, when the cash is available.

HMRC v bank interest charges

Whether it is better to pay HMRC interest payments or increase a bank overdraft facility to settle a tax bill will depend on the circumstances of each individual and the terms of the bank facilities offered.

HMRC interest rates are much higher than those previously charged – 7.75% for late payment of income tax from 22 August 2023 compared with 2.6% in April 2020.

Compare the HMRC rate to the interest rate that would be charged by a bank for borrowing the cash needed for the payment.