Contractor guide to Time to Pay: when you need to pay HMRC at a more affordable rate, due to covid-19 or not
Time to Pay is one of the central planks of the government’s response to coronavirus that could help PSC contractors amid this pandemic.
But this HMRC service has been with taxpayers long before the covid-19 outbreak; meaning it will outlast it too.
So, asks Davinia Douglass, senior tax consultant for investigations at Markel Tax; what is Time to Pay; how can limited company contractors benefit from the enhanced arrangements; can ‘disguised remuneration’ contractors benefit too, and where should contractors take care when using TTP?
Time to Pay: then and now
HMRC has always, at its discretion, been able to enter into Time to Pay arrangements where taxpayers are unable to pay their tax liability by the ‘due payment date’ or a payment arrangement as part of a settlement.
For the purposes of this article, ‘taxpayers’ includes individuals, sole traders, members of partnerships, and companies including personal service companies and umbrella companies.
For all these parties, under the current exceptional circumstances, HMRC has broadened the scope of TTP and relaxed the rules on the payment of tax liabilities to help taxpayers deal with the economic impact of COVID-19 on their businesses and finances.
Agreeing with HMRC
There is no general ‘one-size-fits-all’ approach, when it comes to TTP. HMRC looks at each request on a case-by-case basis.
Under normal circumstances (pre-COVID–19), the factors HMRC look at when considering a TTP include:
- Has the taxpayer exhausted all other avenues before asking for TTP? E.g. selling assets (generally not the family home), obtaining loans from financial institutions, even borrowing from friends and family have been suggested in some cases I have dealt with; and
- Has the taxpayer proposed the best possible payment plan they can realistically afford over the shortest period of time, taking into account not only the liabilities under the TTP, but, also any other taxes outside the TTP that will become due during the TTP period; and
- Their compliance history.
How much Time (to Pay) you’ll get
HMRC guidance generally states it is preferable that TTP is for a maximum of 12 months and the decision to enter into arrangements for this amount of time can be made at local office level.
However, longer periods are available with more senior approval, and are decided on a case-by-case basis. Remarkably even the most junior officers can authorise TTP on amounts up to £349,999.99 for 12 months.
In practice, HMRC will only consider a TTP for more than 12 months after a thorough review of the taxpayer’s financial position. Such a review examines income and expenditure statements and projected profits/income over the period requested; whether the taxpayer has any pensions that could be cashed in or savings available to make an upfront payment on account, and whether third-party loans are available to help fund the tax liability. TTP has traditionally been viewed very much as the ‘bank of last resort’ by HMRC.
Time to Pay's Pros & Cons
TTP has many advantages:
- It enables taxpayers to spread the cost of their tax bill over an agreed period of time.
- It increases cash flow available to meet other obligations and keep businesses going. However, HMRC will not make allowances for reinvesting in business growth. The main objective with a TTP is to ensure that it is affordable and is over the shortest period of time.
- It provides certainty for how much the taxpayer is expected to pay over the duration of the TTP. As part of the TTP, HMRC provides a payment schedule that needs to be adhered to.
- Providing the agreement is entered into in good faith and the taxpayer keeps to the conditions set out by HMRC including keeping them appraised of any improvements in their means, it is binding on HMRC.
- Under s108 FA 2009, no penalties are imposed for missing the original payment deadlines, providing the arrangement is made before the penalties are triggered.
- If the taxpayer’s financial situation changes, there is the possibility of reviewing TTP to accommodate this, whether it is making extra payments or reducing payments over a longer time.
However, before going down the route of TTP, it is worth considering the possible downsides of the scheme:
- Having to provide HMRC with detailed financial forecasts including income and expenditure statements and projected income or profits.
- Provision of details of all assets and liabilities The purpose of this is to see if there are any assets that could potentially be sold or savings and pension pots that could be utilised. If there has been an investigation already, a statement of assets may have already been provided and the investigator may share this with the collector.
- The schedule of payments must be adhered to otherwise HMRC can cancel the agreement and take legal action to recover the outstanding debt. If a taxpayer anticipates difficulty in keeping to the agreed instalments, it is imperative that they contact HMRC as soon as possible so that a revised agreement can be made.
- Forward interest. This is calculated by HMRC based on the normal interest rate plus 1% is calculated on the progressively reducing balance after each instalment. If the arrangement changes, the interest is recalculated to increase or reduce the interest accordingly.
The amount of information required depends on how long is requested. HMRC generally breaks this down into 15 days and over but less than three months; over three months and up to one year, and over one year.
Clearly the other big downside of entering into a TTP arrangement with HMRC is, that if something goes wrong, they have a lot more information about your financial affairs than they did before, which will aid them with any enforcement measures.
Contractor loan schemes
Due to HMRC’s clampdown on taxpayers who have entered into what they consider to be ‘disguised remuneration’ schemes, such as individuals or companies who have entered into contractor loan schemes, we have seen an increase in demand for TTP, as in most cases these taxpayers do not have the capital reserves.
For taxpayers eligible to settle contractor loan schemes under the November 2017 settlement terms, HMRC has made it easier for those whose annual earnings are less than £30,000 or £50,000 to pay their liabilities over five or seven years respectively, without the need to provide any financial information. These TTPs are granted on the following conditions:
- The taxpayer is no longer engaged in any tax avoidance schemes (N.B there are still providers actively marketing schemes);
- They have provided HMRC with all the information needed to settle their disguised remuneration matters by April 5th 2019; and
- They agreed to settle by the date prescribed in the settlement letter sent by HMRC.
If a taxpayer’s income is higher or they need a longer period to pay, under the November 2017 settlement terms for contractors, HMRC will still consider TTP. For cases that do not fall into the category of ‘simplified arrangements’, HMRC will undertake a review of the individual’s financial circumstances in line with the ordinary TTP rules as discussed above.
The only difference here, is that HMRC has confirmed that there are no defined minimum or maximum time periods for TTP, but they will request detailed financial information before agreeing. We have seen instances where HMRC have agreed a 20-year TTP under the settlement for an individual who had used a contractor loan scheme!
The enhanced COVID-19 payment terms
Following the outbreak of COVID–19 and the subsequent government-ordered lockdown, many businesses and individuals are facing ever-harder financial strain. Accordingly, the government has instructed HMRC to offer a number of packages to individuals and businesses to help with the upcoming payments of tax, in particular VAT and income tax. As yet, there are no arrangements for extending the payment deadlines for corporation tax.
It is clear from conversations with HMRC officers on the COVID-19 Helpline, that the Revenue’s policy is to ensure they are as helpful and a flexible as they can be to ensure that taxpayers do not feel additional pressure regarding their tax liabilities at an already very challenging time.
Income tax deferment for payments becoming due
At his Budget, the chancellor announced that payments under income tax self-assessment, normally due on July 31st 2020, will be deferred until January 31st 2021. This applies to all taxpayers who make payments on account, not just self-employed individuals. During this period, individuals will not be charged any penalties or interest for late payment.
The deferral will apply automatically to all, unless a taxpayer wishes to continue to make their second payment on account. Furthermore, taxpayers who believe their 2019/20 income will be lower than their 2018/19 income, can make claims to reduce their payments on account.
Also announced by Mr Sunak, a deferment applies to VAT payments due to be made to HMRC between March 20th 2020 and 30th June 2020 (rather than relating to VAT returns covering this period or the tax point of a transaction), and these payments will now become payable on March 31st 2021.
The deferment is automatic and the taxpayer does not need to contact HMRC to tell them that they will be deferring payment. However, if as with the income tax deferment, a taxpayer wishes to pay their VAT liability, they can do so.
If deferment is needed, and the VAT liability is paid by Direct Debit it is important to cancel this DD, otherwise payment will be taken as usual.
As with the income tax deferment, no interest or penalties will be levied on any amount deferred as a result of the chancellor’s announcement.
Note however, VAT returns still need to be filed and HMRC will continue to process VAT reclaims and refunds as normal during this time.
Enhanced TTP for other liabilities including corporation tax, PAYE
There has not been any official extension for the payment of other tax liabilities. So where businesses and individuals are facing difficulty making payment, they may request a TTP arrangement with HMRC. Such liabilities include:
- Pre-existing tax liabilities
- Tax liabilities that will become payable under settlements with HMRC
- Corporation tax that is not yet due
The difference between this TTP and the ordinary TTP is that as the COVID-19 crisis has been classified as a ‘Special Situation’ for the purposes of s 135 FA 2008, HMRC are exceptionally:
- Able to waive the interest normally payable as part of these arrangements and this treatment;
- Waive late payment penalties, including those that have already become due;
- Able to apply this treatment to any debt due to HMRC commissioners.
Speak early, speak frankly
Given the current pressure that HMRC are under and the government’s commitment to ease the burden on taxpayers, it is likely that the evidence requested under the current circumstances will be no more than would ordinarily be requested. And in fact we would expect to see a significant relaxation of the requirements, depending on the amounts involved, nature of the business, the individual’s circumstances and the amount of time required.
So it’s been heard by contractors before -- but there’s now unprecedented circumstances to warrant it; the key message for the taxpayer is this: it is important to speak to HMRC as soon as it becomes apparent that they will not be able to make a payment deadline. This is to ensure that clear and reasonable discussions can begin regarding payment options.
Experience tells us that HMRC is more likely to agree to a TTP proposal where a taxpayer is upfront with them about inability to pay early on, rather than waiting for it to be passed to the collector or escalated to the enforcement office. In addition, outside the special COVID-19 terms, making contact earlier on also opens up the possibility of avoiding any penalties that may be imposed due to late payments, which once applied, will not be waived.
So if you’re in need, ring them up. HMRC’s dedicated hotline is available to any taxpayer experiencing difficulty in paying because of the impact of COVID-19: Those experiencing payment issues should speak to their tax adviser and call 0800 024 1222, Monday to Friday 8am to 4pm.