Easing the headache of January tax bills

The birth of a new year brings with it hopes and aspirations; indeed, millions of people set resolutions with the intention of improving aspects of their lives.

The year ahead offers unlimited possibilities for self-improvement and personal growth and many of us will have been prompted by festive overconsumption and Covid-related lack of physical activity to start the year with a plan to get fitter and healthier.

"Many firms have been able to keep operating during the pandemic, but their cashflow has been affected by lower sales and reduced income, or because their own customers are slower at settling their bills."

For others January 1st could be the start point for getting their finances in order, whether it’s finally sorting out their savings and pensions, or knuckling down to pay off credit cards or loans, and generally reigning in on their spending.

This positive outlook is often quickly tempered by the realities that January brings, and life gets in the way of good intentions. The other unavoidable certainty of January is that self-assessment tax returns need to be completed, and any tax due paid, by the end of the month.

This year HMRC has delivered a late Christmas present and is extending filing and payment deadlines. While still encouraging people to pay on time, late filing penalties will be waived by HMRC if returns are completed online by 28th February. The taxman is also giving taxpayers an extra couple of months to pay by not charging a late payment penalty if people pay their tax in full, or set up a Time to Pay arrangement, by 1st April.

HMRC says it recognises that the coronavirus pandemic, and in particular the recent Omicron wave, is affecting the capacity of some agents and taxpayers to meet their obligations in time for the 31st January deadline. There is also acknowledgment from the government that many people may face tough financial times this year. Announcing the extensions, Lucy Frazer, Financial Secretary to the Treasury, said: “Waiving late filing and payment penalties will help ease financial burdens and protect livelihoods as we navigate the months ahead.”

This may offer some help to those whose finances have been affected by Covid this year, especially the self-employed, sole-traders or individuals in a partnership who pay their tax via self-assessment. It does not, however, offer any support to companies whose business has also been negatively impacted by Covid and could be struggling to find the cash to settle their tax bills.

For businesses, late payment or non-payment of Corporation Tax late triggers a late payment penalty of 2.75%, plus 0.5% interest on the amount of tax due until it’s paid. Interest is charged from the day after the tax should have been paid, normally nine months and one day after the end of your accounting period, so the total amount due can quickly build up.

Sometimes it’s not a simple case of a business not having the funds to settle their tax bill. We know that many firms have been able to keep operating during the pandemic, but their cashflow has been affected by lower sales and reduced income, or because their own customers are slower at settling their bills.

For example, one of Recognise Bank’s customers, a successful engineering consultancy, was able to navigate the worst of the pandemic by using government backed coronavirus loans as a cushion against economic shocks while it got its business back on an even keel as its industry sector, and its own cashflow, began to recover. But when faced with a big bill for professional indemnity insurance, costing several hundred thousand pounds, the customer knew that paying the premium in full out of its cash reserves would remove some of that cushion.

Instead, it came to us for a Professional Practice Loan to pay the indemnity insurance premium. That way the business was able to settle its bill, knowing it had a monthly fixed payment to factor in to its cashflow, while also preserving its business surplus for ongoing costs, such as purchases or business investment.

The Professional Practice Loan can also be used by SMEs facing Corporation Tax bills which they either can’t afford to pay in full at the moment, which will lead to costly penalties and interest payments, or feel that the option of funding a one-off tax payment via a loan facility is better for their financial circumstances and cashflow.

Professional businesses such as law firms, architects, and surveyors, along with healthcare companies including doctors, dentists and pharmacies, are amongst some of the UK’s SMEs who have lost out the most in recent years because the mainstream banks have pulled back their relationship managers and lost their appetite for supporting business models they don’t really understand.

Recognise Bank’s Professional Practice Loans aren’t just for tax payments, as they can be used to fund the refurbishment of premises, purchase of equipment and even business acquisitions. And because professionals come in different shapes and sizes, it’s a tailored, flexible loan to meet the needs of most types of business, from Sole Practitioners, Partnerships and LLPs through to Limited Companies.

Paying your tax bill is a perennial headache for lots of us, whether as a self-assessment tax payer or a business. This New Year, after a tough couple of years under Covid, businesses can at least make a resolution to talk to their adviser or a suitable lender to investigate funding options that can help ease that headache.