Taxpayers in credit card debt warning
People can now pay their tax bill by credit card in a move prompting concerns that some taxpayers could see their bills increase significantly and risk getting deep into debt.
HM Revenue & Customs announced earlier this month that 2008/09 is the first year people paying their taxes can do so by credit card. Payments can be made either online or over the telephone, with the final deadline 31 January.
Credit card payments can now be made for self-assessment, PAYE, corporate tax, VAT, stamp duty and some miscellaneous payments.
However, paying by card will see you face a 1.25% transaction charge or 0.91% for self-assessment tax bills paid over the telephone.
The Institute of Chartered Accountants (ICAEW) warns that allowing people to pay their tax bill by credit card could push taxpayers into financial difficulty and see them clock up expensive debts.
Anita Monteith, technical manager of the ICAEW’s tax faculty, says: “Paying by credit card is only sensible if you have the funds to clear your credit card debt before is begins to accrue interest.”
Debt charities are also concerned about this new option, as it could prove too much temptation for people struggling to pay their tax bills.
Tom Howard, spokesman for the Consumer Credit Counselling Service, says: “On one hand, it is good that HMRC is allowing people to be more flexible but there is a real risk that people could stick their bill on credit card without knowing how they are going to pay it off.”
He advises people to take any credit card interest into account and budget so that they can pay off the balance as soon as possible – preferably during their interest-free period.
“Taxpayers should also weigh up pros and cons of paying by loan or overdraft instead, taking the interest rate and any charges into account, as this could be cheaper,” he adds.
Andy Hardy, development director for TaxCalc.com, warns that for new businesses, paying a tax bill can be a financial shock, especially as they have to make a first ‘payment on account’, which can mean the payment accounts for 150% of the tax due.
“If you simply haven’t got the money to pay your tax this year, the ability to use a credit card is a useful one as by doing this you will avoid HMRC’s own interest charges and its 5% surcharge which applies to tax remaining unpaid after 28 days,” he adds. “However, as we all know, the interest on credit cards can be very high and so an overdraft may be a cheaper alternative.”
What if you can’t pay your tax bill?
HMRC sets 31 January as the deadline for tax bills to be paid. However, with the economic downturn causing cashflow problems for individuals and firms.
PKF accountants and business advisers says those experiencing problems paying their bills could contact HMRC’s Business Payment Support Service to discuss their circumstances. However, not having the cash to pay your tax is not a ‘reasonable excuse’ and could result in you facing interest and surcharges.
John Cassidy, tax investigations partner at PKF, says: “All too often, people do not put aside money to cover the tax bill. Those that did plan ahead may have had to use the money for more pressing bills if their mortgage payments have jumped or they have been made redundant.”
Cassidy recommends that only people experiencing short-term cashflow problems should use a credit card to pay their bill, as high rates of interest could end up adding significantly to your total debt.
An alternative is opting for a staggered payment schedule with HMRC, although bear in mind that 3% interest will be added to the outstanding amount.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.