Category: General Business

Budgeting for the tax bill and Interest on early payment of tax

Pay corporation tax early and get a better interest rate from HMRC than from banks.


1.0 Budgeting

A usual question is how to budget for the tax bill at the end of the year.

HMRC has helpfully created a calculator (Link) which can estimate the amount of money an individual should save to pay their tax bill.

2.0 Saving mechanism

Now the question arises how to save this money.

2.1 Self-Assessment (Income tax) – No interest is paid for early payment. So in case an individual client wishes to save for their tax bill it is advisable to save in a bank where they can earn some interest before tax is due. Remember to pay payment on account.

2.2 Corporation tax – Yes, interest is paid for early payment but the earliest date HMRC will pay interest is from 6 months and 13 days after the start of your accounting period. Currently HMRC is paying interest at the rate of 5% w.e.f 14 Aug 2023 (source). It is difficult to find a interest bearing account giving such good rate. Please note this interest income is taxable.

Source:

For Corporation tax

Problem on gov.uk webpage

How to inform gov.uk team about the problem.

Basically there are two methods:

A. First

At the bottom on every page. Use the button:
Report a problem with this page

B. Second
Use the webpage https://www.gov.uk/contact/govuk
advantage with the second method is that it allows you to give your email address so that Gov.uk team can update you with their response.

You should receive an automated response on email from gov.uk team with the ticket number.

Lastly, remember the riddle of Hatim Tai – “Do good, and cast it upon the waters.” Hindi translation – नेकी कर, दरिया में डाल.

Profit extraction via interest on Director loan account

Small company owners can lower their tax bill by charging interest to their own companies.

Where company owes money to shareholders. Shareholders can charge interest to the company on the outstanding loan balance.

In case interest is charge on a loan for a period less than a year there is no need to deduct tax and complete form CT61.1

Interest rate should be a commercial rate i.e. few points above BOE base rate. In case, rate charged is too high HMRC can treat it as remuneration or dividend.1

Company gets relief in the accounting period when interest is actually paid or within 12 months after its end. So simply crediting interest amount in Director Loan Account will not work.2

Interest Income received by the director will be added to his taxable income but it is taxed on receipt basis.2

Main advantage of this interest over dividends is:

  • No tax on starting rate of savings upto £5,000. So directors save income tax.
  • Company gets deduction for interest paid.

Notes on form CT61

  • In case loan is for a period over one year, 20% (basic rate) tax will need to deducted and deposited with HMRC using Form CT61.
  • CT61 returns are filed every quarter.
  • Nil returns not needed.
  • Return cannot be downloaded. A structured email needs to be sent to HMRC; they will send the form in post.
  • Both Returns and Tax deducted are due within 14 days from the end of the return period.
  • Company can issue Form R185 to the person whose tax has been deducted.

Source:
1. Para 1.148 Bloomsbury Tax Planning Book.
2. Para 2.47 Peter Rayney’s Tax planning for owner managed companies.

Why should I pay taxes?

Besides paying penalties, interest, criminal prosecution and reputational damage, I have listed a few reasons for paying taxes in full and on time:

The usual ones are:

1. Taxes fund public services like roads, NHS, schools, transport systems etc.

2. Keeps us safe by funding police, justice system and armed forces.

3. Safety net – helps people in case of job loss, sickness and old age.

4. Directs behaviour – like high taxes on cigarettes, alcohol and fuel duty.

5. Helps target resources towards disadvantaged areas by tax incentives.

6. Wealth distribution – transferring wealth from the wealthy to the needy. Prime example is inheritance tax, this ensures wealth is not perpetuated through generations and creates a more equal society.

Basically price of living in a civilized society. Reason a person is successful is the support system a civilized society provides them.

Now some novel ones, equally relevant:

7. Basis of fiat money – one of the main reasons of value of fiat money is that government accepts it for paying taxes. Fiat money enables the government to control the economy. To read more on the topic of fiat money go to Section 3 `The Return to the Gold Standard` of Essays in Persuasion by John Maynard Keynes, one of the most influential economists of 20th century.

8. Paying a fair share of taxes gives the taxpayer the moral authority to question lawmakers.

9. Basis of democracy. In historic times in England when kings wished to raise funds for their wars; they needed to call in Parliament to raise taxes. Parliament (especially the Commons) developed over the centuries giving universal franchise. This today gives us the right to chose who governs us and how.

But it is a social contract. People pay their taxes and governments govern them prudentially.

Often when governments become corrupt people are disinclined to pay taxes.

Thus, taxes keep peace and harmony and help create a better society.