It’s tax season. Have you had a tax bill you’re not happy with? The worst feeling as an accountant is when I estimate one for a new client and they look shocked. Actually, worse than that is when they say they’re not angry, just disappointed. But delivering a large tax bill just before it has to be paid shouldn’t need to happen.
I’m not a magician and I operate within the legal and tax rules, but I see my strength as helping people plan. There’s nothing I can do if the tax is already due, but that will only happen once. Our system at Hive means you pay tax so far after it’s been earned that you’re prepared for it, and you have time to do everything possible to reduce it.
If you have a limited company then there’s no reason to get caught out. The financial structure of your business lends itself to fixing your taxes. Tax planning dovetails with the way most limited companies set their dividends one or two years in advance. This isn’t complicated, it just needs a bit of communication from you, and we make this as painless as possible with tools like Xero bookkeeping that give us visibility over your numbers.
What you don’t want
The payments on account system used by HMRC for personal tax is a way to get you to make a downpayment on next year’s tax. It’s default level is set to what you paid last year which, in normal times, might be more or less OK. The trouble is I see accountants blindly following the rules and sticking to the way they have always done things — that won’t work in your favour at the best of times, but certainly not this year, which is far from normal.
Say you had a £40k tax liability for profits earned in the year March 2020. HMRC would ask you to pay £20k in January 2021 and £20k in July 2021. But what if your income for 2020-21 is lower than 2019-20, as it will be for countless business owners? We’re asking people to tell us exactly what they earned so far. We want to see whether they kept their revenue and profits the same or whether there’s been a dip. Then we can forecast and see what their tax liability for March 2021 will realistically be.
Let’s say that rather than £40k, your tax liability looks like it will be £15k. We can make a claim to reduce your payments on account from £20k to £7.5k. It’s worth saying here that I’ve seen via professional clearance from incumbent accountants that clients have had their tax done for 2020 and their accountants have left their payments on account alone. You can imagine what that means for cashflow. In our example that is £25k pumped back into the business.
Cashflow is a big reason why SMEs go under. Research by Xero found that 50,000 UK businesses fail each year due to cashflow issues, and we can expect that to be increasing steeply given that large sections of the economy have been levelled by successive lockdowns. It hasn’t been easy for dentists, but it could have been worse. This is now a question of survival. If you don’t apply for a reduction you will have to pay last year’s levels, then wait till January 2022 to get your money back. That might be too late.
