I had a question about “payment on accounts” due to HMRC if working through a LTD company and the zakat status of that. For example I have some dues to pay HMRC by end of July as “payment on account” – now technically speaking this isn’t money owed to HMRC as actual (confirmed) tax, it is just an advanced payment estimated based on previous years accounts. One could still consider it as their own money which may be re-payed back, at least partially, if business activity is not at the same level as the previous years – highly likely given the current pandemic. Should this money be excluded from the total zakatable assets of an individual, or not, when calculating the zakat?
My previous understanding was that one can get access to the fund which has been deposited with HMRC. If this is the case then a person has the complete ownership of the fund. Since the fund is deposited for a future tax bill, it is therefore not tied up to a current debt. Therefore Zakat will be due on the full amount.
However if the fund is locked in an account where the person does not have access anymore, then it can be said that the possession of the fund is incomplete, which means Zakat will not be due on the fund.
Just to add more flesh on this @Mufti_Billal: HMRC allow you to put a “payment on account” during the tax year so that when you face your tax bill at the end of the tax year, you have already tucked some money away.
The amount of payment on account is set the previous year, based on your previous tax return. There are usually 2 payments on account I believe during a tax year. It seems Umer is saying he has one such payment to HMRC at the end of July.
Could he deduct it on the basis that it’s a known liability which is due in the near term, or is the end of July too far away?
No, the ‘payment on account’ due in July is not a liability. Therefore it cannot be deducted from the Zakat calculation.
The rational behind it is that in calculating Zakat, you can only deduct a cost that has occurred prior to you Zakat anniversary date. In this scenario, the tax bill has not been issued yet and the ‘payment on account’ is an advance payment i.e. it’s not related to a cost that has occurred yet.
With regards to the payment on account issue, I have already made one payment on account in January to the HMRC for the expected tax bill for year ending April 2020. There is a further payment on account due by the end of July for the same tax year. Please note that the actual tax bill for year ending April 2020 has not been calculated or submitted - and it can be delayed until the Jan 2021 deadline. I understand that the payment which is due in July can not be deducted as a liability from my total zakatable assets. But how about the money already paid in January which is now with HMRC and not in my posession - should I include it in my total zakatable assets even though I’m no longer in posession of that money (and unlikely to have most, if not all of it ever returned to me once the actual tax return is calculated). My thinking is that if I have overpaid HMRC through the payments on account (which will actually only become clear once tax return is done and submitted) then part of the payment on account made to HMRC will be returned to me and I can then pay zakat on it in the subsequent year. However, if I pay zakat on the value of the money already to HMRC through payments on account and it later transpires that my actual tax bill matches (or exceeds the payments on account) then I would have paid zakat on money which wasnt mine?!
"Here are 2 Zakat rules on tax you need to know about:
Personal taxes such as road and income tax are not exempt from Zakat. However, if the taxes being paid are overdue, they become a deductible debt and exempt. 2. Money being saved for tax purposes is deductible from the Zakat total."
"If you are self-employed or own a business, then you will be responsible for filing your own tax returns to HMRC. This could potentially mean that you have cash in the bank that has been set aside for tax returns – this total would be deducted as this is money owed and the liability is known.
To put it simply, unpaid tax from the previous financial year can be deducted from your Zakatable amount, while future bills cannot be deducted as payment is not yet due."
Jzk. This suggests that you can only deduct cash reserves set aside for Corp tax when annual accounts have been filed and you’re aware of what the actual liability is.