New business and planning for payments on account

In the last year I have received concerned calls from clients about the calculation of their tax bill. This blog should help answer some of your questions about this complex area.

You are a new business finding your way, building a client base and absorbing all your start up costs. You are rightly focused on developing the business but, what can be overlooked is the preparation of the annual accounts, tax return and the consequences for cash flow, late payment and penalties.

It is a fact that some clients wait until well into the following tax year before contacting their accountant to prepare the accounts and the tax return. When the work is completed the likely outcome is that in year 1 some clients have nothing to pay and for others  the tax payable is probably  below £1,000 and therefore no payments on account are triggered.


Year 2, is the crucial stage when the problems may start.

·         You have won new orders / clients; the business is growing in sales and profitability.

·         The expenditure in this year may be less due to the amount spent on starting the business up.

·         The tax bill increases above £1,000 and the trigger for payments on account start.


Many clients are shocked to discover the sudden increase and have failed to plan their cash flow accordingly.

An example should make things clearer.

A client prepares their 2010-2011 tax return at the end of October 2011 and has a bill for £1,600 and then discovers that a whopping £800 is also added onto the bill as a payment on account for the current year 2011-12 as a first instalment payable by the 31st January 2012. The second instalment is payable by 31st July 2012.  By delaying the completion of their tax return the client will have to find £2,400 in the space of a few months.


How do we avoid this problem?

·         When the tax year is finished push yourself to hand over your paperwork to your Accountant by the end of May at the latest. This will give you time to make sure you have saved the tax payable to HMRC.

·         You must plan to put aside money to pay for the tax year just finished and more importantly additional money for your first payment on account for the current year, this is often forgotten or not entirely understood by new business clients.

·         You may wish to make this money work for you and invest your spare funds in a variable cash Isa or deposit account offering the best possible interest for your savings.

·         The net profit that you make is not your salary. Please bear in mind that you are likely to have tax payable at 20% less your personal allowance of £7,475 and class 4 national insurance at 9% if your profits are above the lower profit limit of £7,225.

If you have any queries please don't hesitate to contact me.

Mark McDowall FCCA



Are you aware of the new tax penalty regime?

Did you know that over one million tax returns are filed late to HMRC. Yes, I know this is hard to believe and with the new penalty regime commencing things are going to get a whole lot more serious for individuals who continue to file late.

The deadline for online submission is 31st January but realistically if an individual has not approached an Accountant at the beginning of January at the latest then the chances are that you may miss the deadline or you will be in a queue behind other clients. Did you also know that even if you have nothing to pay then you will still be subject to a £100 penalty for late filing.

Please have a look at my Hot Topics page to see how severe the penalties can now be. Surely it is better to avoid these penalties and get someone who wants to help you complete your basic accounts and tax returns on time.
I know that I would rather have a nice spring break instead of worrying about how to pay the penalty and even worse the additional costs and interest charges after three and six months.


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