How is HMRC’s payments on account requirement a fair system?

Payments on account can seem unfair in certain situations, and there are legitimate concerns about how the system works. Here are the main fairness issues and the system’s justifications:

Potential Unfairness

Based on Past Performance

• Calculated using the previous year’s liability, which may not reflect current circumstances
• Doesn’t automatically adjust for business downturns, job loss, or reduced income
• Can create cash flow problems when income has genuinely fallen

Interest Penalties

• If you reduce payments and get it wrong, you’re charged interest from the original due dates
• Creates a “damned if you do, damned if you don’t” situation – pay too much and lose use of your money, pay too little and face interest charges

Cash Flow Impact

• Requires payment before you know your actual liability
• Particularly challenging for businesses with seasonal or volatile income
• Can force borrowing to meet advance payments

The System’s Justifications

Revenue Collection

• Ensures steady government cash flow throughout the year
• Prevents large tax bills becoming unmanageable debt
• Reduces the temptation to spend money that should go to taxes

Spreading the Burden

• Splits tax payments across the year rather than one large sum
• Mirrors how PAYE works for employees (tax deducted throughout the year)
• Makes tax more manageable for most taxpayers

Adjustment Mechanisms

• You can reduce payments if circumstances genuinely change
• Automatic review when you file your return
• Overpayments are refunded with interest

Built-in Protections

Thresholds

• No payments required if previous year’s liability was under £1,000
• No payments required if over 80% was deducted at source

Flexibility

• Can make multiple claims to adjust during the year
• Can revise earlier claims if circumstances change further

The system arguably balances revenue collection needs with taxpayer flexibility, but it does place the burden on taxpayers to actively manage their payments and bear the risk of getting estimates wrong. Whether this is “fair” often depends on your specific circumstances and ability to navigate the adjustment process effectively.