The coronavirus pandemic has impacted several people and businesses in the UK and US, as well as the global economy. A lot of people are concerned about the impact this could have on tax returns. This page offers some information on the effects COVID-19 might have on your tax.
Impact on Tax Return in The UK
Those That Presently Owe Tax
If you have not been able to pay your tax because of cash flow challenges, the UK government has support resources to help you. HMRC has set up a dedicated line for coronavirus (0800 024 1222) to help people plan and choose an option most suitable for them. Arrangements are based on individual needs and capabilities. Time to Pay arrangements allows amounts to be paid off over some time with the possibility of suspending any ongoing debt recovery option.
Currently, you can get access to the 2,000 experienced call handlers between 8 AM – 4 PM Monday to Saturday. There are plans to open the lines from 8 AM – 8 PM on Mondays to Fridays as soon as the measures to stop the spread of the virus allow them to scale up. HMRC will waive all of the penalties and interest as a result of late payments in businesses that have admin challenges reaching out to HMRC or paying tax because of COVID-19.
More measures have been put in place to help small businesses and self-employed people with cash flow pressures.
You must register for VAT as soon as your business passes £85,000 in turnover or if you predict that you will reach this level of revenue in the tax year. A VAT registration service can assist you with the complicated registration process, thereby eliminating any potential mistakes.
All VAT payments with deadlines between 20 March and 30 June are deferred until a new deadline date of 31 March 2021 without any penalties or interests. If you already have it set to pay by direct debit, quickly contact your bank so you can cancel the debit mandate and benefit from the deferment. Otherwise, once your VAT return is submitted, the payment may be collected automatically.
Later on, you’ll need to activate the direct debit again so payment can be removed for the next VAT period after June 30, or use other payment options. Guidelines state that the deferral covers all UK VAT registered businesses and exempts businesses that pay UK VAT by Mini One Stop Shop (MOSS).
If possible, you should still complete and file VAT returns that are due for submission during this period on time. If a submission is not possible due to challenges like staff shortages or sickness, you can still submit the return as soon as you can after the due date and keep records detailing reasons for the delay. You need to have this information in case you have to appeal against late filing penalties.
Individuals with a Tax Payment Deadline on 31 July 2020
The second tax payment for the 2020/21 tax year that should normally come in before 31 July 2020 has been deferred till 31 January 2021. This means when it’s time to pay for that, your tax payment will be larger than usual. You can check if you can reduce your payments on the 2019/20 account. If you would rather pay for it at the usual time, then you can go on and use the normal process. HMRC will handle the payment and list it as voluntary before crediting your Self Assessment record with the amount.
Effect of Reduced Work on Your Tax
You would have most likely paid for your 2019/20 tax bill through one of the following methods:
· Construction Industry Scheme
· Budget Payment Plan
· Payment on Account
If this is so, any income drop you are experiencing now would not matter because you would have paid sufficiently enough to take care of your 2019/20 bill fully. In some cases, you might have overpaid and can easily ask for a repayment to improve your cash flow.
Construction Industry Scheme
If your tax has been deducted through the CIS and you have overpaid tax after factoring in other tax allowances like the trading allowance and personal allowance, you’re due a repayment.
If you would no longer be working in the construction sector before 5 April 2020 (the end of the present tax year) you can also apply for a refund.
Then, If you are still in the construction sector you should get all your business records complete and up to date so you can file your 2019/20 Self Assessment tax return when possible after the tax year. This is necessary so that you can get repaid for overpaid tax on time. You can easily apply for a tax return yourself or with a tax refund agent whichever suits you, but it is advisable to do so online. Filing a paper tax return can take a considerably longer time.
Budget Payment Plan
You may have paid for your National Insurance and tax in advance through this plan by regular weekly or monthly payments to HMRC. If you fall into this category and believe you might have overpaid you can call HMRC and ask for a halt of the BPP or a refund.
Payment on Account
You may have paid for your tax bill in advance with payment on tax. If your payments were regular and up to date, then already the first payment on account for the 2019/20 tax year should be accounted for by 31 January 2020. This payment should be the same as 50% of your income tax and Class 4 National Insurance for the 2018/19 tax year.
A recent drop in your income could mean your profits for the 2019/20 tax year will be lower than 2018/19. You should make a request as soon as possible to reduce the level of the payments on accounts. What this means is you could get back the excess account payment from January or choose to put it towards the next payment on account that was formerly due on 31 July 2020 but is now January 2021. Hence, you will not need to pay as much in the future. In both of these cases, you can use the SA303 form, and even though we would advise you to file it online, it can also be in paper form.
Class 2 National Insurance Contributions
Self-employed individuals pay two types of National Insurance based on their earnings – Class 2 and Class 4. When you pay for Class 2 national insurance, the money goes to your entitlement to benefits like the Employment Support Allowance, which was put in place to help self-employed people during coronavirus.
There are a lot of self-employed individuals going through a considerable income loss and may decide to stop trading. If you fall into this category, you should notify HMRC so you will no longer be held liable for Class 2 NIC (which is £3/week for 2019/20 tax year). Class 2 NIC is usually paid 31 January after the tax year, so 31 January 2021 is the due date for the 2019/20 tax year. You should consider the ramifications before you stop paying it if all you are experiencing is a business interruption and not trading cease.
Consider the Following Factors as it Regards to Trading Losses and Bad Debts
· If you have recorded a loss for this tax year, we would advise you to fill and submit your Self Assessment tax return for 2019/20 tax year as quickly as you can after 5 April 2020.
· Always document and keep proper records of any extra business cost during this pandemic period. These costs are expenses that will not normally be needed but are now necessary to run your business because of the coronavirus.
· If you foresee a loss in the next tax year (2020/21) or have already made losses, we would recommend that your business records should be kept on the accrual basis instead of the cash basis. You would benefit from this because there are considerably more reliefs for loss with the accrual basis. This includes carrying the loss back to the previous tax year which might give you refunds and using the loss against current tax year income.
Because of the pandemic, there may be an increase in customers that don’t pay you or those you believe will have a hard time paying what you are owed, this is called bad debts. You still need to find a way around it for tax and it will also depend on if you use the cash basis or accruals basis for account preparation.
Cash Basis: You don’t need to make any adjustments to your tax returns for bad debts if you use this account preparation method. This is because you’ll only account for sales income on payments received so you’ll be getting tax relief naturally.
Accruals Basis: You’ll need to make adjustments to your accounts for bad debts with this account preparation method. You have to account for income at the point of the sales transactions, so it could be before any payment. You would have an expense for bad debt and decrease your profit for the income you won’t receive.
Tax relief applies to only specific bad debts like a customer who informs you they are unable to pay your invoice or has stopped trading. When it becomes clear you won’t get paid, you can claim a bad debt relief either in the same accounting period with the invoice or a later one.
If you claim bad debt relief for an invoice, and then later receive payment from that customer you should take the invoice and record it. This should be in your accounts as income in the accounting period when you received the payment.
Tax relief doesn’t apply to general bad debts – it can only be applied on an invoice basis, not based on the percentage of what customers owe you.
Impact on Tax Return in The US
In preventing the spread of COVID-19, public gatherings and travels have been significantly reduced, and that hurt the economy. While the degree and extent by which it affects individuals may vary from state to state, there is no doubt that COVID-19 has affected your tax, and actions have been put in place to address it. Here are a few changes that COVID-19 has forced on your taxes in the US.
One of the first changes to tax because of the pandemic is the deadline for filing and paying 2019 income tax liability. Originally slated to be due on April 15, the IRS and US Treasury Department have pushed it by three months. Hence, the new deadline is July 15.
This new date also means there will be no interest or penalties for not filing your tax return for the 2019 tax year until the deadline (July 15). If you cannot file your tax by this date, request for an extension. This only gives you additional time to file but not additional time to pay.
Also, payment relief will be eligible to persons that have a federal tax return due before July 15, 2020. The relief also covers persons with a time-sensitive activity that needs to be done within April 1, 2020, and July 15, 2020. This covers all types of taxpayers which include individuals, trust, corporation, unincorporated business entity, and estate. You qualify for this relief whether you’re affected by COVID-19 or not.
According to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), you are eligible for economic impact payments. The IRS calculates and sends payments automatically for eligible individuals, but some people would have to provide additional information to get their payments.
As stated above if you have filed your 2019 tax return, you will automatically qualify for this payment. Even if you haven’t filed your tax return for 2019, your 2018 tax filings will suffice for the calculations. Retirement recipients who are typically not required to file returns need not bother. IRS will use already gathered information on previously submitted forms like SSA-1099 and RRB-1099.
You might not be eligible for payments if
· You are claimed as a dependent on someone else’s return ( Example: a child/student on the parent’s return)
· You do not have an SSN valid for employment.
· You are a nonresident alien.
· You are an incarcerated or deceased individual
How Much Are You Entitled To?
Individuals are eligible to receive $1,200 if their adjusted gross incomes are up to $75,000 for single filers. Household filers with gross income up to $112,500 are also eligible to the same amount of $1,200 while married couples who file jointly are eligible to $2,400. An additional $500 is given to couples per child.
Tax filers who have incomes higher than the amounts specified above will not get the same payment. There will be a 5% reduction on the general $1200 calculated from the difference between their incomes and the $75,000/$112,500/$150,000 limits. Single tax filers that have incomes greater than $99,000, $136,500 for household filers, and $198,000 for joint filers will not be eligible or receive any payments. Although the $500 per child applies regardless of your income level.
As the government in both countries respond to the situation, things could change and there may be new guidelines to follow. However, a very important part of this process is remembering to record and document information at every step of the way on how the coronavirus affects your business.