Processing Provisional Tax P2 For February 2021 During A Pandemic

Research indicates that 60% of TP’s missed the November deadline! Unfortunately there are more deadlines to come so brace yourselves!

Before you know it you will be processing P2 Provisional February year ends starting in January for 2021. If you leave it too late and you don’t plan from now you are going to be under pressure and won’t manage. As a TP by the time you start with provisional tax calculations you will be doing tax returns to meet the end of January and February deadline for tax returns.

TP’s really need to understand the processes in regard to P2 provisional tax calculations with Covid-19 relief as the mindset is entirely different to the way P1 was processed. Note that the provisional tax provisions are the same that have always been applied in the past, but you have the added burden of now applying the Covid relief rules taking into account the economy to ensure that the taxpayer survives from a cash flow point of view.

P1 provisional tax payment August 2020
The golden rule for smaller businesses was not to claim the relief because of the complications of tax compliance but rather to reduce the income because of the lockdown as it was much easier rather than finding the taxpayer was not tax compliant and facing penalties generated by SARS for something that happened a long time ago. Larger tax compliant companies had to claim the relief simply for cashflow reasons as they had sufficient income necessitating payment.

P2 provisional tax payment February 2021
For P2 there is a different set of recommendations because we are coming out of the lockdown, the economy is opening up and we have to be within the provisional tax estimation rules in order to avoid an under estimation penalty. The taxpayer has to get this right before applying the relief rules.

Therefore for February 2021 note the following:-

• If the 2021 provisional income tax estimate is below R1 million and the basic amount (last assessment) is used for P2 and has not been reduced there can never be an understatement penalty, irrespective of what the assessment is provided the 2021 assessment is less than R1 million.
• If the 2021 provisional income tax estimate is above R1 million then the provisional tax estimate must be within 80% of the final assessment irrespective of what the basic amount is otherwise there will be an understatement penalty.
• The biggest risk is where the estimate (basic amount) used is less than R1 million but on assessment the income is greater than a million, there will be an understatement penalty on the difference between the estimate and the assessment. i.e. if the estimate is less than 80% ofthe assessed income.

Based on the above it’s so important to get the estimate right, however if the Covid-relief rules fit in with the taxpayer and there is a cash flow problem then one can obtain an automatic deferment of the payment on the understanding that eventually the taxpayer will have to catch up when P3 is due. Make sure the taxpayer complies with the Covid-19 relief rules.

So for P1 where we showed a much lower income because the taxpayer did not know the effect of Covid the lower income could be justified. Now we have to make a more measured calculation as the income may now have to increase.

Sticking to the provisional tax rules will prevent an understatement penalty for P2, but this in itself is complicated because added to the equation is the taxpayers cashflow situation and that’s where the Covid-19 relief comes in.-

So what can go wrong: 

• Lockdown has played havoc with predicting income making it difficult to comply with the provisional tax rules and if there is an under estimate this will result in penalties.
• Claiming relief which is a payment deferment can go pear-shaped if the taxpayer is not tax compliant, resulting in substantial penalties.

The important thing is that the TP has to start early and not leave it for the last minute. P2 because of the strict provisional tax understatement rules will take much longer to get right.

What’s more there is the year end break and the completion of tax returns by the end of January and February which will complicate the situation and affect your production time.

For a free recorded webinar on this topic choose the top webinar on the link below. https://www.accfinsoftware.com/tax-webinars.html.