When running a business, it is normal for market fluctuations and external factors to result in periods of financial pressure, which sometimes means there is not sufficient money in the bank to cover all running costs.
HMRC applies a penalty system when your company defaults on its VAT liabilities. This includes the late filing of your VAT return as well as late payment of the VAT due.
Where HMRC feels there is a risk of non-payment of tax from a company, they may request a security bond is paid before trading can start or continue. This is done by issuing a Notice of Requirement in respect of VAT, PAYE, or National Insurance.
Struggling to pay the VAT is a common problem for companies, however, this does not mean the problem should not be taken seriously.
All registered companies in the UK must pay corporation tax on their profits. The rate of corporation tax varies between 19% and 25% depending on the level of profits of the company.
Companies that are VAT registered usually have to pay their VAT bill once every few months and they should calculate along the way how much VAT they are likely to be due to pay to HM Revenue and Customs (HMRC).
As of January 2023 companies in the UK can now get penalty points if they submit their VAT Returns late, even including nil payment returns.
Although negotiating a Time to Pay Arrangement with HMRC can be challenging, in many respects, this is the easy part. This is because, once the Time to Pay Arrangement is agreed, you’ll not only have to pay HMRC the money you owe in instalments over the next 6 to 12 months, but you’ll also have to pay your ongoing VAT, PAYE and corporation tax bills on top of this.
HMRC is the most common creditor for UK businesses and it’s easy to see why. When faced with a cash flow crunch, rather than not paying key suppliers that your business relies on, the easier option might be to delay a VAT or PAYE payment to HMRC. However, HMRC has enforcement powers that go beyond that of other creditors, which makes building up PAYE and VAT arrears a risky situation to be in.
I'm really worried and would like some advice please. I am the sole director of a limited company providing IT consultancy and have recently accepted a permanent job with another company starting in two weeks. My company will then become dormant. I have been naïve and silly and taken too many dividends and consequently can't pay back the corporation tax and VAT owed which totals £25,000.
Corporation Tax arrears and cash flow problems are often a precursor to insolvency which is why early advice is key.
If your company is falling behind with PAYE tax payments, this is a serious indication of insolvency and you should take early advice to appease the situation.
A Nudge Letter is a reminder from HMRC to review your tax liabilities accurately to avoid investigation. You will need to complete a Certificate of Tax Position.
A Time to Pay arrangement may be granted to allow companies to repay their tax arrears in instalments. However, what can you do if HMRC refuse your request?
Directors and other connected individuals can now be held liable for outstanding tax liabilities in certain situations as part of the Finance Act 2020.