Taxes due dates, "on account" payments, and "leveling payments"

Ok, someone let me know if I don't have this correct? Assuming there is no tax withheld from income at the source, and ignoring dealing with double-taxation issues and the IRS:

Say your first year in country is 2017/18 tax year. Dutifly at the end of the tax year (April 2018) you send in your paperwork to HMRC. They come back with a tax due. Let's say, for "what ifs", it's 3,800 pounds. You have to pay all of that to HMRC by 31 January, 2019, correct?

PLUS, you have to pay half that much again by the same date, "on account" towards your 2018/19 taxes. So you get whacked with 1,900 on top of the 3,800 for that first tax payment in Jan 2019. You have to pay 5,700 pounds.

You then pay the second half of your 2018/19 taxes by 31 July 2019.
So by 31 July immediately after the end of the 2018/19 tax year, you will have paid all your taxes for that tax year.

You continue on like this - paying 1/2 of your prior year's tax amount by 31 Jan 2020 towards your 2019/20 HMRC tax.
You pay the second 1/2 of your taxes hypothetically due by 31 July of 2020.

If your tax due goes up from a prior year, you have to pay a "leveling" payment by 31 Jan so that your 31 July payment pays off that year's tax due. If your income, and thus tax, drops in a subsequent year, you chat up HMRC and reduce the amount you pay by each of the two dates.

There is an option to pay HMRC monthly, but you have to be in good standing with them (no arrears) before they'll let you do that. 
If you can't make a lump sum, they may take installment payments.
If your first year's taxes were under 1,000 pounds you don't have to do the twice-a-year thing  - its all due by 31 July immediately after the end of the tax year in question. (?)

Have I got all that correct?

That sounds about right to me.

If you are paying your taxes online then I believe you can pay any amount at any time. Suppose you file your taxes in July and have £3,600 to pay by Jan 31 then I think you can start paying a sum each month, say £600, so that come Jan 31 you have it all paid off. The same goes for the estimated payment due end of July, pay £300/month for 6 months.

Say your first year in country is 2017/18 tax year. Dutifly at the end of the tax year (April 2018) you send in your paperwork to HMRC. They come back with a tax due. Let's say, for "what ifs", it's 3,800 pounds. You have to pay all of that to HMRC by 31 January, 2019, correct?

Correct.

  PLUS, you have to pay half that much again by the same date, "on account" towards your 2018/19 taxes. So you get whacked with 1,900 on top of the 3,800 for that first tax payment in Jan 2019. You have to pay 5,700 pounds. 

Possibly correct if the tax due is £3,800.

  You then pay the second half of your 2018/19 taxes by 31 July 2019.
So by 31 July immediately after the end of the 2018/19 tax year, you will have paid all your taxes for that tax year. 

Possibly.

I'm not trying to be difficult, but if the source of the income is from abroad and there is no UK source income from which a Tax Code can be adjusted, or HMRC decide they don't want to use an adjustment to the Tax Code if one exists for UK source income, the exchange rate can cause havoc - trust me on this as someone who has been through this for decades. Varying exchange rates mean neither you nor HMRC have any idea what your income (and hence tax due) will be for the upcoming UK tax year will be (in this case - 17/18). The 1/2 payments only reflect the amount that was underpaid for 16/17.

When a Tax Code exists, and foreign sourced income is included, it is up to the taxpayer to call for an adjustment to the Tax Code. Simply declaring a new amount of foreign source income will not change HMRCs estimate for future years. Both the taxpayer and HMRC understand that this will remain an estimate, because the exchange rates cannot be predicted.

Unfortunately, fun and games rule.

  You continue on like this - paying 1/2 of your prior year's tax amount by 31 Jan 2020 towards your 2019/20 HMRC tax.
You pay the second 1/2 of your taxes hypothetically due by 31 July of 2020.

If your tax due goes up from a prior year, you have to pay a "leveling" payment by 31 Jan so that your 31 July payment pays off that year's tax due. If your income, and thus tax, drops in a subsequent year, you chat up HMRC and reduce the amount you pay by each of the two dates.

Yes, basically correct, but since you have prepaid the possible majority of taxes due, if the exchange rates now favour the £, you may, in fact, have overpaid and have a refund due. (Been there, done that.)

It all works brilliantly for the UK. Our unique problem is the consideration of US tax, which is not HMRCs concern.

I'm going to get into trouble for saying this - but if one is reasonably certain they will never, ever return to the US to live, filing US tax using FTCs (1116) and the accrued method works a charm.

Yeah, I know about the exchange rates issue, thanks. All my income is from outside the UK, and it's all retirement income.

I filed and they received the form on 27 April. Per the information I had at the time, I should owe no HMRC taxes for 2017/18 due to the UK/US Tax Treaty.  Worst case, if they say I've misapplied the Treaty I'd owe them something and I will pay it in full prior to 31 Dec to claim IRS FTC to wipe my 2018 USA taxes and carry back a bit/carry forward the excess.  I have that money saved back.  If they decide my pension IS taxable, I will set up a payment plan with them and cancel my IRS withholding on my pension, diverting that withholding into the HMRC instead.

I just spoke to a nice woman at HMRC on the phone and she apologized and said there'd been a terrible backlog, but that someone would give me a status on my taxes by the 27th of this month.  At this point I just want to know what it is they will want. If my taxes go to HMRC, fine. If they to to IRS, they go to IRS. I just don't want to end up paying both on the same income and so I need to know what to pay prior to 31 Dec. (I guess I could just make a guesstimate lump sum payment to HMRC prior to 31 Dec even if they haven't settled everything, so that I can later claim it against my IRS taxes?  If I end up overpaying, HMRC would either keep it on account to cover future tax or refund it?)

I'm going to get into trouble for saying this - but if one is reasonably certain they will never, ever return to the US to live, filing US tax using FTCs (1116) and the accrued method works a charm.

Sorry if I’m being slow but could you explain a bit more about why FTCs and the accrued method might work better for non-returners?

Just trying to get my head around it - not applicable to me at present but could be in future.

Sorry if I’m being slow but could you explain a bit more about why FTCs and the accrued method might work better for non-returners?

Just trying to get my head around it - not applicable to me at present but could be in future.

I have now filed twice with the IRS using FTCs  and checked the accrued box each time because by the time I file I already know exactly how much I will owe HMRC but have not yet paid. However I didn’t know there would be a wrinkle if I ever moved back to the USA so I also would be interested in the advantage of doing it this way.

We have no intention of ever moving back but one never knows.

Yeah, same here. I am hearing differing stories about which is best - "paid" v "accrued".

There's always the possibility, with the world as it is today, that I'd end up back in the States. It's not my plan, but plans sometimes have to be changed. I would think that checking "accrued" would mean that if there's something like a HMRC audit later on, and more tax is added on to a given year you could file at 1040X for the applicable year and claim any additional UK tax paid as a credit. If you select "paid" instead, you can only take it off the year you pay it - which could be good or could be bad, depending, I guess.  And I believe you can't bounce back and forth between the two (paid v accrued).

In my case, my income is such that my UK tax (if I am liable to HMRC for tax on the pension) will always wipe out my USA tax and leave a substantial credit.  I am only dealing with SS payments (where I know precisely the UK amount as it's directly deposited into my UK bank) and my US pension, which I am logging with the exchange rate on the date it's disbursed onto a spreadsheet. I have no other income. So I know the exchange rates at the time I received the money.

Only my first tax year is complicated, because I did not make any sort of payment to HMRC before 31 Dec (2017) of my arrival year, not having a clue what my tax to HMRC would be for the UK tax year ending the following April (2018). So if I end up owing HMRC for the subsequent year (2018/19), I'll be able to file a 1040X and file a retro foreign tax credit against the arrival year's IRS tax (2017) by doing a carryback of any HMRC tax I pay for 2018/19 that is more than the IRS tax for that next year. But you can only "carryback" one year, and then any excess credit goes forward. I think that's right.

And having to pay by 31 Dec is the contingent if you select "paid" v "accrued". Correct? Otherwise, if it accrues in one year and you don't pay it until the next year, you can still take it off your IRS taxes for the first year. Because it's "accrued" to the April of that year. (?)

@underfall, @durhamlad, @Nan D.,

First, I will apologise in advance for my lack of abilities for putting down on paper (or ether) concise thinking. In my professional career I always had a pencil in my hand, but it wasn't for written composition. Forewarning if this becomes incomprehensible.

Can we start with the 'Cash' Basis. 99% of all US resident individual taxpayers compute and pay their tax on the 'Cash'  basis. Completing a tax return is all about what one earned in the last calendar year and how much prepaid withholding was deducted during that calendar year. The only major variation might be individuals who are also entities. The US tax system, for individuals, is very much based around this calendar year cash basis reporting. Businesses, on the other hand, may use an accrual method.

For the US individual taxpayer resident in the UK and paying HMRC, the individual UK tax is also based very much on a cash basis for the reporting UK non-calendar year. As we all know, the problem arises with the non-calendar tax year (UK) versus the calendar year (US) reporting. As much as I often malign some professional tax advisors, they do have the client's interest at heart when it comes to the dual reporting. Put simply, if needing to report to both systems, it is easier to align with the US cash basis system if the individual is and intends to remain a USC, especially if the USC is only temporarily resident abroad (and 'temporary' can be from 1 year to a lifetime). Form 1116 makes this quite easy to achieve provided the cash basis rules are followed for UK tax paid.

On the other hand, the accrual method can create complexity. The key can be the complexity of the individuals sources of income. The more complex ones' tax affairs, the more the potential for complexity in reporting. But even simple affairs can create complication (selective income streams and basic bank accounts) . This is multiplied by a relocation back to the US where a cash basis is the norm, but the taxpayer has been filing on the accrued method. First - one must have the IRS agreement to change back to a cash basis method. Following on, second, the misalignment of the two systems plus months that have been declared and tax paid versus months of undeclared and unpaid US tax due leaves additional tax due, often requiring a 1040X. We often see a similar problem exist for UKCs moving to the US - known as "the first year complications" - but they do not have the need to change reporting (accrued to cash) clearance from the IRS nor the past US taxation on income/assets with prior reporting requirements. As was noted in an earlier post, although by June we know what the HMRC bill is for the past non-calendar year (accrued), it can be the case that that bill may still alter at a later date - in which case a 1040X must be filed. The problem with filing a 1040X is the additional tax due, or more likely tax rebated, must be apportioned to that particular income stream (general, passive, etc., or earned income, SS income, dividends, etc,) which requires additional (and not simple) calculations for correct allocation to the US tax return. Multuply this by more complex tax situations, plus the need to sort different sources of accrued income, and even the pros prefer the 'cash' basis. If the individual is back in the US when the change in UK tax becomes apparent, now agreed with the IRS to be on a 'cash basis',...........

The Repatriation Tax/GILTI has also sent a skyrocket up the backside of USCs abroad (a fact largely unacknowledged on this site). The ability to completely change past legal tax reporting, retroactively, and deem prior legally tax exempt income to now be subject to taxation was a shocker. This may be exaggeration, but using FTC vs. FEIE, and the US cash basis, aligned to US reporting norms, may in the future prove to be a wiser choice for those still wishing to be USCs abroad (Yes - conspiracy theories!!).

All the above is my simplistic, naive opinion. I'm sure the professionals can add to this comment concerning the pitfalls of the accrual method.

Like durhamlad, I too file via 1116 using the accrued method; this started over 35 years ago when I was employed in France. I have no intention of ever returning to the US permanently. For the past 2 years, many USCs abroad have been waiting to see if anything of the promised relief to US tax reporting comes to fruition, and delaying any action they may have been considering. The current incarnation is TTFI. The number of those who would benefit from TTFI are limited (not everyone). If the TTFI initiative fails, the writing is clearly on the wall for any future relief (none, with every chance of even more draconian rules). All those USCs resident abroad with no intentions of returning to the US permanently will need to carefully re-evaluate their situation, or at least how they approach US tax reporting.

The Repatriation Tax/GILTI has also sent a skyrocket up the backside of USCs abroad (a fact largely unacknowledged on this site). The ability to completely change past legal tax reporting, retroactively, and deem prior legally tax exempt income to now be subject to taxation was a shocker. This may be exaggeration, but using FTC vs. FEIE, and the US cash basis, aligned to US reporting norms, may in the future prove to be a wiser choice for those still wishing to be USCs abroad (Yes - conspiracy theories!!).

Many thanks for the clear and comprehensive explanation!

I have a different question arising from your reference to the Repatriation Tax.  I thought I had figured out that the justification for the retroactivity was that for C corporations (treated like a US corporation) the tax was deferred (pending repatriation) all those years.  So - never exempt from US tax.   Am I mistaken?

Thanks for a great explanation.

One thing I didn’t say is that I file my HMRC taxes aligned with the calendar year, stating so in the “white space” with the reason being that it aligns better for FTCs when filing my US return. The vast majority of my income is from the USA so it is only a couple of small UK pensions that I report to HMRC without the use of the figures on the P60. Having my W2 (non qualified pension), 1099-Rs, 1099-INTs, 1099-DIVs and 1099-Bs all align with the same year as an HMRC calendar year makes the accounting a lot easier.

Many thanks for the clear and comprehensive explanation!

I have a different question arising from your reference to the Repatriation Tax.  I thought I had figured out that the justification for the retroactivity was that for C corporations (treated like a US corporation) the tax was deferred (pending repatriation) all those years.  So - never exempt from US tax.   Am I mistaken? 

You are correct, but if the individual (who is now personally subject to the tax if the entity is a CFC) is - say - an accidental American who has no intention, never, ever of returning to the US, and no intention of ever 'repatriating' those funds to the US (they may not even be able to obtain a US bank account), then whether 'exempt' or 'deferred' is a moot point. The funds invested in the business may be the basis for the individuals retirement savings, so overnight, they've lost - what- 15% of their established retirement savings. Of course, this effect is not limited to accidental Americans, and many normal USCs resident abroad who own a foreign business and who never intend to return to the US are also losing (doctors, attorneys, IT specialists, etc.).

You are correct, but if the individual (who is now personally subject to the tax if the entity is a CFC) is - say - an accidental American who has no intention, never, ever of returning to the US, and no intention of ever 'repatriating' those funds to the US (they may not even be able to obtain a US bank account), then whether 'exempt' or 'deferred' is a moot point.

Makes no difference to the pain and the unfairness, I agree entirely; but may help to guess what kind of future blows might fall.  And thus avoid being vulnerable.  Just a thought.

For the past 2 years, many USCs abroad have been waiting to see if anything of the promised relief to US tax reporting comes to fruition, and delaying any action they may have been considering. The current incarnation is TTFI. The number of those who would benefit from TTFI are limited (not everyone).

TTFI only seems to be being mentioned on social media, and nobody seems to know what’s in it. 

Thanks for a great explanation.

One thing I didn’t say is that I file my HMRC taxes aligned with the calendar year, stating so in the “white space” with the reason being that it aligns better for FTCs when filing my US return. The vast majority of my income is from the USA so it is only a couple of small UK pensions that I report to HMRC without the use of the figures on the P60. Having my W2 (non qualified pension), 1099-Rs, 1099-INTs, 1099-DIVs and 1099-Bs all align with the same year as an HMRC calendar year makes the accounting a lot easier.

Eeeeeh?