EM6008 - Contract Settlements: Interest: Calculation for SA Years
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
At the time you provide the taxpayer with your calculation of tax and NIC lost, you should also calculate the interest arising under TMA70/S86.
If you are dealing with a pre-6 April 1994 partnership (an ‘old’ partnership) for 1996/97 see however EM4010+.
For SA years, income tax/NIC is usually partly payable, see SAM1110, on the two ‘payment on account (POA)' dates under TMA70/S59A, and partly on the balancing payment date under TMA70/S59B. Where additional tax/NIC has been agreed for a number of years, interest for each year should normally be calculated from the three relevant dates for each year. Each payment on account is normally based on half of the additional income tax/NIC for the previous year.
There is a SEES program to help you perform these calculations.
In a straightforward case, see the example below, there will be no increase in the POA’s in the first year of any additions.
This is because any POA for that year is based on what the correct balancing payment should have been for the previous year. This will always be the case where the first year of any additions is the year of commencement. Where however there were originally two payments on account in the first year of any additions, and these were reduced as a result of the inaccurate return, then interest should be charged from the original POA dates. The POA amount, upon which the interest is charged, cannot exceed 50% of the balancing payment for the previous year.
Example in straightforward case
Additional income tax/NIC agreed as a result of enquiry.
2006-07 |
(first year of additions) |
£800 |
2007-08 |
£1300 |
|
2008-09 |
£2000 |
Interest should be calculated from the following dates.
2006-07
on balancing payment |
£800 from 31 Jan 2008 |
2007-08
on POA1 |
£400 from 31 Jan 2008 |
on POA2 |
£400 from 31 July 2008 |
on balancing payment |
£500 from 31 Jan 2009 |
2008-09
on POA1 |
£650 from 31 Jan 2009 |
on POA2 |
£650 from 31 July 2009 |
on balancing payment |
£700 from 31 Jan 2010 |
Non-straightforward cases
In cases where the additional payments on account exceed the original liability for the year, you will need to do a full calculation, for each year setting out all of the original and revised payable amounts.
When working out the interest you will need to take into account the original POAs and also consider if these have been paid or not.
Please note that you will have to go back to the original amount of the POA in order to calculate the correct revised POAs and interest arising.
Example
Table 1: Original figures
| Year | Original POA 1 | Original POA 2 | Original BP | Total |
|---|---|---|---|---|
| 2018-19 | 0 | 0 | £6,400 | £6,400 |
| 2019-20 | £3,200 | £3,200 | £51,000 | £57,400 |
Enquiry adjustments / additions following the enquiry:
2018-19 additional tax £28,000 so the total liability for the year is £6,400 + £28,000 = £34,400
2019-20 additional tax £20,000 so the total liability for the year is £57,400 + £20,000 = £77,400
Table 2: If the taxpayer had declared the correct amount originally, the total tax due would be as per the table below
| Year | POA 1 | POA 2 | BP | Total |
|---|---|---|---|---|
| 2018-19 | 0 | 0 | £34,400 | £34,400 |
| 2019-20 | £17,200 | £17,200 | £43,000 | £77,400 |
You will see from the table above, the final total tax liability for the year (so the original plus additions) impacts the POA for the following year (CY+1).
The additions to the total tax liability for 2018-19 result in a change to the POAs for 2019-20 (see s59A TMA)
Table 3: The table below shows the increase only to the POA. This has to be considered in contract settlement cases
| Year | POA 1 | POA 2 | BP | Notes |
|---|---|---|---|---|
| 2018-19 | 0 | 0 | £28,000 |
The POAs stay the same and interest is due on the
additions to the BP. Interest is calculated from the date the BP is
due until payment |
| 2019-20 | £14,000 | £14,000 | £43,000 |
In this year the POAs do change because of the outcome
of the enquiry in 2018-19, see below |
| - | £17,200 - £3,200 | £17,200 - £3,200 | £51,000 - £43,000 = £8,000 | - |
For 2019-20 the POAs do change because of the outcome of the enquiry. We have to revisit the POAs by looking at the original POAs and then calculating the difference. For this year the additional POAs will be as follows
Revised POA £17,200
Original POA £3,200
Additional POA £14,000
Interest will be charged on the additional POAs from the due dates of the POAs (31 January and 31 July respectively) until payment is made.
As a result of this the BP is affected. It will be reduced by £8,000.
If the original BP was paid, this will be reallocated against the POA’s and interest will need to be recalculated based on what was outstanding at a given date until payment. A full tax calculation will therefore be needed to ensure the correct amount of interest is calculated.
Examples for less straightforward cases are at SALF305.
As regards interest on the increased Payments on Account for the post enquiry year see EM6009.
In general you should make sure that any future POAs are reinstated on the SA record, at the close of the enquiry.