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HMRC internal manual

Self Assessment: the legal framework

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HM Revenue & Customs
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Payment of tax: introduction

Outline of the payment system

Under the Self Assessment system the obligation to pay tax is not linked to the issue of an assessment. Usually the taxpayer is automatically required to make two payments on account towards the tax due for any year and then a third and final ‘balancing payment’ to meet any tax still outstanding at the 31 January next following the year of assessment.

The payment scheme covers all income and capital gains tax due. So there is a single set of payment dates for all sources of income and a single tax bill for the year. Each taxpayer has a single charge account. Statements are issued showing all payments made, and all liabilities outstanding.

The first payment on account is due on 31 January of the tax year in question (ie the usual filing date for the preceding year’s return). The second payment on account is due on the following 31 July, and any balancing payment on the next 31 January (ie the usual filing date for that year).

Each payment on account is approximately one half of the income tax liability for the year. Payments are calculated by reference to the previous year’s income tax liability and reduced to give credit for tax deducted at source. Capital gains tax and Student Loan repayments are only included in the balancing payment.

Taxpayers have the right to claim to reduce or cancel payments on account, where they have grounds for believing that payments based on the tax liability for the previous year will lead to an overpayment of tax in the current year.

The main exceptions to the general scheme are where the self assessment is amended after the filing date, or where HMRC raises a discovery assessment (see SALF400). In such cases the additional tax is due 30 days after its notification to the taxpayer. Where a notice to file is issued late (and there is no failure to notify chargeability) the balancing payment is required three months after the issue of the notice to file.

Interest is charged on any amount of tax unpaid at the due date for payment, whether that tax is due as a payment on account or as a balancing payment. In the case of an amendment to a self assessment made after the filing date, or to a discovery assessment, the interest charge runs from the original dates when payments were due for the relevant tax year.

Repayment interest (known as ‘repayment supplement’) is paid on overpayments of tax (subject to certain conditions). This includes overpayment of surcharge and penalties, but excludes late payment interest charges. Repayment interest runs from the ‘relevant time’ until the date on which the repayment is issued. See The relevant time in SALF306 for details of when the ‘relevant time’ is.

Payments and credits that have never been allocated to a charge (excluding balancing overpayments), do not attract repayment interest upon repayment or set-off.

Reliefs and deductions carried back to earlier years remain relevant to the later year. The repayment that would otherwise arise from the relief or deduction might be used to ‘pay’ the tax of the earlier year, but the tax for the earlier year is not reduced and was still due at the original due date. Interest is due from that date until the tax is paid by the set off of the tax that would otherwise be repaid as a result of the claim (S86 and Schedule 1B).

Example

A balancing payment of £2,000 for 2002-03 is due on 31 January 2004 and remains unpaid. A loss for 2003-04 is claimed on 15 September 2004 and is to be set against income for 2002-03. This claim results in a repayment or set off for 2003-04 of £2,000 which is to be set against the tax due for the earlier year. Interest will be charged on the balancing payment from 1 February to 14 September 2004.

In addition to any interest that may arise on tax paid late there is also a ‘surcharge’ to encourage prompt payment. The surcharge is initially 5% of any payment still outstanding after 28 days from the balancing payment due date, with a further surcharge of another 5% of any payment still unpaid six months after the due date. A new regime of late payment penalties to replace surcharges applies to balancing payments for the tax year 2010-11 onwards.

Taxpayers can appeal against the imposition of a surcharge or late payment penalty on the grounds of having a reasonable excuse for late payment.

Interest is charged on all late payments of tax, surcharge or penalties, and any interest charge made is added to the balance on the taxpayer’s Statement of Account. The interest charge is automatically updated whenever there is a change in the taxpayer’s affairs, for example when a payment is made (SALF305 onwards).