As self-assessment deadlines loom, many people could end up receiving a higher tax bill than usual this year!
On January 31, 2022, self-assessment tax returns, including activity from 6 April 2020 to 5 April 2021, need submitting. Also payments need making by that date. This timeframe includes the period of lockdowns and restrictions that resulted in the government stepping in to provide coronavirus support.
With grants and loans available, many business owners successfully applied for support. But due to a reduction in outgoing expenses – such as business travel – these may have artificially inflated the usual profits of many businesses.
And if you took out a Bounce Back Loan and used any of it to cover drawings or to pay dividends, you could face a much larger tax bill than usual.
Our advice is to take steps before the end of the month! Here’s what you need to know.
Why could I receive a higher tax bill?
First of all, not everyone will receive a higher bill! But it appears that many people who are self-employed or business owners who received other grants may get a shock this year.
The main issue is due to the way in which self-assessment is paid. By 31 January, you have to pay tax calculated on the profits you made in the previous trading year. You also need to make a ‘payment on account’, which is a percentage of next year’s tax bill in advance. This is calculated on the profits of the previous trading year.
As a result of the Self-Employment Income Support Scheme (SEISS), Eat Out to Help Out or the Small Business Grant Fund, profits make look higher than usual.
Whilst your next bill will be lower next year, it could cause issues in the short-term if its based on artificially higher profits.
Meanwhile, many people were confused by what was tax-free support and what wasn’t. Most government support was taxable, including SEISS, so it will be treated the same any income.
How can my profits be higher than usual?
If your business was hit with a downturn due to Covid-19, it was only fair to take the grants on offer. But your outgoings may have been significantly reduced.
For example, you may not have needed to buy as much stock if you’re a restaurant because much of your trade was takeaway food. If you usually meet clients in person, you won’t have racked up the mileage or other expenses.
Without realising it, you may have increased your profits.
What about Bounce Back Loans?
If you received a Bounce Back Loan (BBL) there could be additional tax consequences. Using a BBL for personal loans, drawings, salaries or dividends could result in a big tax bill.
What should I do?
Our advice is to act now. The end of January is fast approaching and if you don’t prepare, you may face problems paying your tax.
If you are unsure, speak to our team today. We’re always on hand for our clients but if you don’t have an accountant, ask us for a free discovery meeting.