Ltd Co contractors gifted extra cashflow due to HMRC calculation errors

Conceptual error calculation written on chalkboard

Limited company contractors who pay contractor tax in twice-yearly instalments. Otherwise known as “payments on account”, these are being alerted to a glitch in HMRC’s systems that meant many tax return calculations issued by the tax authority in respect of payments due on July 31st were miscalculated. These resulted in substantially lower tax demands for the period, and, in some cases, an erroneous tax refund, or the lack of an HMRC reminder at all.

Payments on account are HMRC’s way of spreading a whole year’s tax liability into two payments. Long used for self-employed people and their income tax payments, limited company contractors have also been required to make them since 2018, due to changes to the way that dividends are taxed.

Whilst the lower July tax bill will mean extra cashflow for contractors paying tax on account, taxpayers are being warned to be cautious with their additional liquidity. HMRC expect the difference to be made up in January, resulting in higher than usual tax bills – straight after the Christmas period.

The payments on account relate to fiscal year 2018-19, but are based on the amount due in the previous year, 2017-18. Data included on tax return statements submitted for 2017-18 is believed to have been incorrectly processed by HMRC’s systems, resulting in lower payments on account for the 2018-19 year.

The glitch may provide some respite to contractors affected by the 2019 Loan Charge. It was due in the 2018-19 tax year for any taxpayers that did not take up HMRC’s much criticised settlement opportunity, which required taxpayers to waive their statutory rights to appeal. Affected taxpayers continue to lobby for a repeal of the controversial Loan Charge.

Lucienne Parry, partner at Moore Stephens, who have raised the alarm on the “glitch”, said: “A larger than expected payment in January will not only shock some taxpayers but will leave them with a large hole in their budget as they are forced to pay a huge lump sum in tax. Many are therefore likely to face serious cashflow problems.

“This is of particular concern given that many households are stretched due to the festive season.

“In some cases, we have seen individuals being wrongly sent automatic refunds from HMRC, which will need to be repaid. Those impacted are going to think it very unfair that an HMRC error could lead to interest charges and in some cases potential surcharges.”

Anyone who has taken their July tax bill at face value should be prepared for a higher than expected bill in January, covering the remaining liability for 2018-19. Taxpayers who did not pay anything in July will need to pay the entire year’s liability in January, plus any balancing payments due.

HMRC’s position is that it is the responsibility of individual taxpayers to check the calculations sent to them by HMRC and their own tax planning for total tax payments. HMRC have confirmed that they will continue to charge interest and penalties if the full tax bill in January 2020 is not paid on time, even if it is higher than expected due to HMRC’s own calculation errors.

Ms Parry recommended that taxpayers who were expecting to pay taxes on account and did not, or those with HMRC demands showing that the estimated taxes or payments were reduced to nil, should consult their 2017-18 tax return. Payments on account for 2018-19 should each be fifty percent of the individual’s total 2017-18 tax liability.

Seek tax advice from an expert accountancy firm to avoid getting financial penalties for exceeding tax deadlines or breaking tax rules or obligations, even if you are not at fault, directly.

If you are concerned that you may be affected, the Chartered Institute of Taxation’s Low Incomes Tax Reform Group has published a useful guide to the HMRC glitch that can be found here.

16th August 2019.