The amount of tax debt in the UK surged during the COVID-19 pandemic, largely due to the deferring of VAT payments in Q2 2020 and self-assessment income tax instalments in July 2020. Tax debt, which typically stood at £16 billion in January 2020, skyrocketed to £67 billion by August 2020.
Following the pandemic’s peak, tax debt gradually decreased, reaching £42 billion by June 2022. However, a year later, by June 30, 2023, it had rebounded to £45.9 billion. What’s concerning is that this increase isn’t merely a lingering effect of the pandemic; it signifies new tax debt. HMRC’s performance update for June 2023 reveals that the value of this fresh tax debt in 2021/22 is 50% higher than the average for the tax years 2017/18 to 2019/20. Furthermore, this elevated level of new tax debt persisted throughout 2022/23.
Time to Pay arrangements have proven beneficial for taxpayers with relatively small debts. The online VAT Time to Pay system accommodates debts up to £20,000, while the income tax Time to Pay system can spread tax burdens of up to £30,000, and the automatic PAYE payment plan covers debts up to £15,000. It’s important to note that the taxpayer, not their tax agent, must establish a direct debit from the business bank account to operate the automated Time to Pay system.
In March 2020, approximately 647,000 taxpayers were under Time to Pay agreements, encompassing a total of £2 billion in tax debt. By March 2023, around 912,000 taxpayers had such arrangements, collectively owing £5.7 billion. However, the majority of tax debt, £40.2 billion, remains outside of Time to Pay agreements.
One notable aspect is the high interest rates associated with tax debt. Setting up a Time to Pay agreement before incurring late payment penalties doesn’t halt interest accumulation on the outstanding debt. Since August 22, 2023, interest on most overdue tax has been accumulating at a rate of 7.75%, making it more challenging for taxpayers to settle their debts, whether through a Time to Pay agreement or other means.
Taxpayers currently enrolled in Time to Pay agreements should assess whether their monthly direct debit payments cover both the principal debt and accruing interest. If in difficulty, contact HMRC to discuss a reasonable payment plan. For PAYE debts, call 0300 200 3810; for VAT debts, call 0300 200 3831; for income tax self-assessment debts, call 0300 200 3820. While there isn’t a dedicated number for corporation tax debts, you can use the HMRC digital assistant to guide you.
Interestingly, some companies may have sufficient funds to pay their corporation tax bill early. In such cases, companies can make early payments and earn interest from HMRC, currently set at 4.25%. This interest rate surpasses what most banks offer on commercial business accounts. However, companies must be prepared to pay tax on the interest in the subsequent year.
For advice and information on your own specific circumstances, get in touch with us today.
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