Let’s be realistic. Sometimes deadlines get missed, you’ve been very busy and forgot or perhaps didn’t realise that you should have registered with HM Revenue & Customs, submitted your Tax Return or paid your tax. It happens, and not just to escorts. So what do you do?
Well, what I don’t recommend is that you push the idea to the back of your mind. Partly because in a few months time it will probably come to the front of your mind at about 3 am, but by then problem will be more expensive to sort out.
Late Registration for income tax & NI
The deadline for registering as self-employed has recently been relaxed. It used to be the case that you had to register within 3 months of starting in business. It is still a good idea to register as soon as possible (you cannot register before you actually start in business) but the deadline is now 5 October following the end of the tax year in which you start.
So if you start working just before a tax year ends, say on 1 March, the last date before you must get your registration done is 5 October of the same year. Giving you a window of about 7 months. However if you start 2 months later, on 1 May which is just inside the new tax year, you have until 5 October of the following year before you absolutely must register. A window in this case of 17 months.
The purpose of this deadline is that it gives HMRC time to set you up on the self-assessment system so that you can send in your return and pay your tax on time.
The penalty for failing to register on time is up to 30% of the unpaid tax, provided late registration is down to carelessness – for deliberate failure penalties are higher. And the penalty is on top of the tax itself, and also interest.
Late registration for VAT
If your turnover is hovering near the VAT registration limit (currently £85,000) it is all too easy to go over it and miss the deadline for registering. The first thing to remember is that VAT works on total business income before deducting any expenses. So it’s the total amount you receive from your clients that matters. You also need to know that the limit applies to all businesses in the same ownership. So if you are an escort receiving £45,000 a year from your clients and you are also the sole-proprietor of a chimney sweep business doing another £45,000 of sales, then you are over the £85,000 threshold and you need to register.
It is not sufficient to wait until the end of the tax year and add up the income received from clients. You need to monitor the position at the end of each month and add up your receipts for the previous 12 months. so at the end of April 2021 you add up the receipts during the 12 months to 30 April 2021, then at the end of May you add them up for the 12 months to 31 May 2021, and so on. If you find you have exceeded the £85,000 threshold you need to register within 30 days and your registration will take effect from the beginning of the following month.
You can avoid registration if you can convince HMRC that your business turnover in the next 12 months will be below the de-registration limit, which is slightly lower (currently £83,000).
If you register late then there is a penalty of up to 15% of the VAT not paid, depending how late you are. Registering up to 9 months late results in a 5% penalty, between 9 and 18 months is penalised at 10%, and 15% applies if you are more than 18 months late. There is also a minimum penalty of £50.
Most escorts will want to avoid VAT registration because it has the effect of skimming off the top slice of your income and handing it straight to the taxman.
But if you discover you should have registered then the advice is to complete the registration form (VAT1) but to make sure you can keep your future turnover below the threshold so you can apply for immediate de-registration.
Late tax returns
The tax year ends on 5 April and within a few days you will receive your tax return form to complete. You have until 31 October to send in your tax return if you want to fill in the paper form. HMRC will also calculate your tax bills for you.
Alternatively you can use the Revenue’s on-line tax return system which automatically calculates the tax for you, in which case you have until 31 January. There is also a separate, and more sophisticated, on-line system for accountants to submit tax returns on behalf of their clients.
There is an automatic £100 penalty if you miss the 31 January deadline. If the return has still not been submitted by the end of April an additional penalty of £10 per day kicks in. After a further 3 months extra penalties of 5% of the tax are charged.
Of course charging penalties doesn’t get HMRC their tax. So at the same time they can issue a Determination. This is their estimate of your tax and class 4 NI. It’s likely to be an overestimate and the tax will be due for payment immediately because the normal due dates for payment of tax will almost certainly have already passed. You cannot appeal against a determination, but provided you get your tax return in within the next 12 months the determination will automatically be replaced by the figures from your return.
Late payment of income tax & NI
The general rule is that interest is charged on income tax paid late. The interest rate is designed to be commercial but not penal, and is more expensive than a bank loan or mortgage but cheaper than a bank overdraft. Since 2009 the rate has been 3.00% which is 2.50% above bank base rate.
On top of the interest there are also surcharges, which are designed to be penal. The final payment of tax for each year is normally due on 31 January. Interest starts running immediately but there is also a 5% penalty on anything which is still unpaid 30 days later, a further 5% penalty on anything unpaid 5 months later, and another 5% penalty on anything unpaid 6 months after that. So leaving tax unpaid for 12 months would attract a penalty of 15% as well as interest.
The Revenue will normally accept payment by instalments and allow you time to pay, rather than immediately jumping in with legal proceedings to recover the full amount you owe. However if you are able to it makes sense to try to clear as much of the debt as possible before the penalties kick in.
Late payment of VAT
There is no interest charged on VAT paid late. Instead there is a complicated system of surcharges which rise from 2% to 15% depending on how frequently you have paid late in the past.