When any bill is overdue, be it tax or otherwise, it can leave you feeling uncomfortable. When you fall behind with multiple creditors the stress and worry rapidly increases. And when the creditor is an authority such as HM Revenue and Customs, many feel very exposed.
Sadly, most people actually overlook HMRC as a “creditor” – they usually list banks, investors and suppliers – but HMRC is the UK’s largest creditor.
When it comes to HMRC, if you can pay your taxes on time, then your relationship is relatively easy to manage. Should you fall behind on any tax however, then prepare for them to have you on their radar.
Think of all the different taxes which UK based businesses owe to HM Revenue and Customers… VAT payments, PAYE contributions, Corporation Tax to name just a few. A simple cashflow problem could easily put any one of those tax debts at risk of late payment.
The action HMRC takes can vary from a reminder notice that the tax payment is overdue, to more serious legal proceedings. Either way, if you can’t pay you VAT bill or any other tax, HMRC will come calling and apply the necessary pressure.
If you’re concerned that paying your VAT bill on time might become an issue, the following information will help you to understand the process with HMRC and the potential options available to help you.
VAT, or Value Added Tax, is a type of consumption tax which applies whenever a product or service gains value throughout the process. The current threshold for a company to register to pay VAT is when they reach £85,000 in annual turnover.
Most businesses will need to register to pay VAT, with few exceptions. Even if you sell VAT exempt goods and services you may still have a need to register, so make sure you check with HMRC.
The current standard rate of VAT is 20%, which came into force 4 January 2011. Some goods and services may have a reduced rate or zero rate, mainly food and children’s clothing.
Once you understand the level of VAT applicable to your goods and services, you’ve registered your business with HMRC and you are activity collecting VAT on your sales – then you’ll be legally required to submit a VAT return every three months. An exception to this is any company using the annual accounting scheme to pay VAT.
To submit your VAT return, simply file it online through the HMRC website. Make sure you pay your VAT on time and in full to avoid any difficulties with HM Revenue and Customs. Failing to do so could see HMRC charge interest on any outstanding balance, as well as noting a default payment on your record with them.
If your company has a default on record then you enter a surcharge period with HMRC. Surcharges and penalty fees start to apply on any outstanding debt with HMRC and these can add up quickly. Therefore it is always best to pay your VAT on time and in full to avoid these charges.
An exception to submitting your tax return online is if your company is in a CVA or Company Voluntary Arrangement. In this circumstance you can submit the VAT return offline by contacting HMRC.
Making Tax Digital, or MTD, has been introduced by HMRC to help businesses to pay VAT on time. This system should see businesses have more accurate VAT bills therefore making it a more manageable debt to pay.
Businesses will have a digital tax account which means that electronic data about your business from relevant sources, like bank accounts, building societies and other government departments, can be fed directly to HMRC in real-time.
This will help you to have a more accurate VAT bill because you’ll no longer need to manually process the information HMRC needs, and the live information means you get a more accurate calculation of the VAT you have to pay.
Currently MTD is in a live pilot testing stage with applicable businesses. From April 2019 all businesses above the VAT threshold will be required to utilise the digital tax account for their VAT returns. From April 2020 more taxes will need to be paid via this method.
If you don’t already use cloud accounting software now would be a good time to investigate potential software providers, such as Xero and Sage, so that you can be ready to adopt the new MTD process.
If managing your debts is becoming increasingly difficult you may be wondering “what are the actual risks if I can’t pay my tax on time?” Like any business who you owe money to, HMRC can apply penalty fees to outstanding debt and take legal action to recover what you owe.
As VAT is so important to pay on time, HMRC may do more than simply remind you payment is overdue. Their legal proceedings are serious, and can be forceful and aggressive. Something you’d much rather avoid if you are already concerned and stressed with debts in your business becoming unmanageable.
Your business is at risk of becoming insolvent if tax debts start accumulating. HMRC can choose to file a winding up petition against your company to recover the tax debt. If a petition is presented, your company may be put into compulsory liquidation and your business closed. It’s a legal document you must take very seriously.
At the end of the day you don’t want your business to have a troubled relationship with HMRC, especially when finances are already stretched. There are options to investigate should you find yourself with tax arrears with HMRC, and to help you respond accordingly and pay the money you owe.
It’s important to know that there are options available if you fall into tax arrears with HMRC. Understandably they will do all they can to collect any outstanding VAT debt, but HMRC does know that businesses will fall into problems from time-to-time. Ultimately, they benefit from helping companies to continue trading on their own, and to continue to pay taxes.
One option available is called a Time To Pay contract, or TTP agreement. This option is ideal for businesses who cannot pay their tax debts now, but potentially are able to pay over a set period of time.
A TTP agreement is a long-term payment contract between your company and HMRC, so you have the ability to pay your tax arrears in instalments. This means that your cashflow isn’t stunted and you can continue to trade without much financial difficulty.
Typically a TTP arrangement is for between 6-12 months, though in some circumstances longer-term agreements can be made with HMRC.
It’s important to remember that a TTP arrangement will only be offered by HMRC to companies it can identify as viable – that is, they have a proven cashflow history to support their ability to pay within the agreed period.
It is possible for a Time To Pay contract to include other tax arrears, such as Corporation Tax, as well as VAT. It just happens to be that TTP arrangements are more common for VAT arrears.
As already mentioned, being able to demonstrate your business is financial capable of paying its outstanding debts is key to agreeing a TTP contract with HMRC.
When debt becomes unmanageable in your business, it can be a worrying and stressful time. You may feel stuck and unable to see what options are available to improve your situation.
Falling behind with VAT payments can put you into an extremely difficult situation, and at significant risk of increasing your debt through surcharges and penalty fees being added.
Remember, if your company can pay, but not just yet, Time To Pay contracts could be the best way for you to get back on track with HMRC. Alternatively, look into whether third-party financing could help you to raise the cash you need to pay your debt immediately.
The sooner you seek help, the more options will be available to you. Contact us today or call 0800 0140 130.