RSM asks should partnerships pay tax on 31 July if they can?
The government has announced that the self-assessment tax payment due on 31 July can be automatically deferred until 31 January 2021 and there will be no interest charged. But should everyone automatically take advantage of this concession?
This raises an interesting issue for partnerships and LLPs. Whilst such structures are most commonly used by professionals, such as accountants and lawyers, lots of ordinary businesses are set up in this way. Some such businesses will have been badly hit by the COVID-19 shut down, some will have seen little effect on their business, and some will be making more money than usual.
So what should partnerships do about the 31 July payment?
- The announcement says the deferral is optional and any persons still able to pay their second self-assessment payment on account on 31 July 2020 should still do so. Some may be well able to pay this Summer’s payment but may prefer to hold on to the tax to see what the aftermath of COVID-19 brings. Is there a moral angle that people ought to consider? Will partners in funeral directing businesses or wine merchants be named and shamed for availing themselves of a concession that they may not need to take advantage of?
- Larger partnerships tend to pay the partners’ tax bills on their behalf. A partner, particularly one in a large partnership, may have suffered a cut in drawings, a non-payment of historic profits or even a cash call. As the tax is a personal liability of the partner, he may prefer it not to be deferred rather than HMRC knocking on his door for it next January.
- Will partnerships engage with partners on what they decide to do regarding this possible deferral?
Furlough provisions
The furloughing provisions for employees provide a government grant to cover 80% of salary up to £30,000. However, the provisions provide no government support for partners earning more than £50,000. One partnership may have a policy of making people junior partners once their income becomes, say, £51,000. Another firm might have the equivalent person as a senior employee. The junior partner will attract no government support but £30,000 of the salary cost of the senior employee will be covered.
The junior partner in the first partnership has been able to take advantage of the lower effective tax rates for the self-employed, but then now don’t get support. Is this a justified comeuppance for the tax planner?
Profits
When the COVID-19 crisis hit, the large number of partnerships whose accounts are made up to 31 March will have had a relatively normal year with perhaps only the last 2 or 3 weeks trading hit.
However, profits from 1 April 2020 will in many cases have taken a nosedive. It may be possible to defer the year end to, say, September and thereby accelerate being able to factor current low profits into a partnership’s tax calculations.
Lastly, particularly in large partnerships, monthly drawings may be taken akin to a salary. Many partners think those drawings will automatically be taxable. Whilst, generally that is how it works out, partners get taxed on profits not on drawings. If, due to COVID-19, there are no profits, there is nothing to pay tax on. This matters a lot if a partnership is in the habit of paying partners gross with the partners settling their own tax. Where this happens, the partners may be left with a tax windfall – an unintended consequence of COVID-19.
