According to statistics released last month as part of a wider FOI release, 156,000 businesses out of 590,000 that took advantage of the VAT deferral offered between 20 March and 30 June 2020 have failed to get in touch with HMRC.
They have not repaid any money owed even though the deadline to either repay in full or arrange a repayment plan passed on 30 June 2021.
The total amount of outstanding tax was £2.7 billion of which 9% was made up of VAT deferrals. Additionally £17.8 billion of VAT has been repaid and another £13 billion is due through agreed monthly instalments.
The VAT Deferral New Payment Scheme was set up to allow businesses to self-serve by spreading their deferred VAT payments by up to 11 equal monthly instalments, interest and penalty free.
An HMRC spokesperson said: “Businesses had up to 30 June to make arrangements to pay deferred VAT, so those who failed to take action should contact HMRC to pay what they owe.
“They may still be eligible to receive support with their tax affairs through our Time to Pay service. These arrangements are agreed purely on a case by case basis and tailored to individual circumstances and liabilities.”
Now, HMRC will begin their efforts to reclaim as much outstanding VAT debt as possible and will make every effort to do so. They have begun by announcing that any business that fails to get in touch to arrange a payment plan for their overdue VAT payments will face penalties of 5% of the money owed plus interest.
The next step usually involves bailiffs and other direct debt enforcement measures.
Chris Horner, Insolvency Director with Businessrescueexpert.co.uk, said: “In our years of experience, we know that HMRC are not happy when businesses ignore their liabilities - whether they’re behind on VAT payments or have bounce back loan debt they can’t repay.
“They have no problem letting their debt management unit loose to enforce and secure debts - especially if the owners or directors haven’t been in touch with them. Even before the pandemic, HMRC was the most tenacious and committed creditor any business could face.
“Now the government has a real vested interest in recovering owed debt - whether it be VAT, outstanding bounce back loans or CBILS borrowing - HMRC will be happy to be seen to be leading the crusade.
“Usually HMRC can be negotiated with if a business approaches them to let them know they will have difficulty making repayments. If HMRC come knocking themselves then time to pay arrangements are more difficult to negotiate and if there are significant liabilities involved then debtor companies should be prepared to face the prospect of court action and subsequent penalties.
“Additionally, HMRC has also recently been granted new powers to make directors and members of businesses personally liable for debts where there’s a risk the business will fold so it’s even more important than ever for business owners or directors to get advice if they are in this position.”
Explainer - What is VAT?
VAT - or Value Added Tax - is paid by any UK business if their taxable turnover exceeds or is expected to rise above £85,000 in any 12 month period.
If a business reaches this threshold then they have to become VAT registered although any business generating less than this can register if they choose to.
VAT registered companies have to submit regular VAT returns so HMRC can estimate how much is owed. Returns can be submitted electronically every quarter unless the company applies for dispensation to file them manually.
It’s important to gain this as filing paper returns without express prior permission incurs an automatic £400 fine.
VAT returns must also be filed within one calendar month and seven days of the end of an accounting period - and the deadline for paying any VAT owed in full falls on the same date.
What are surcharge periods and notices of assessment?
One of the things we take pride in is cutting through jargon and official terms to try and explain - in plain English - what things mean.
With VAT, there are one or two confusing terms that crop up with regularity so we’ll do our best to go through them.
If a business is late or non-compliant in paying VAT by the deadline, or they dont pay in full then their account is said to be in default and they may enter a surcharge period.
This lasts for 12 months and adds penalty charges for future defaults based on a percentage of the outstanding VAT amount owed - although the business is not issued with a penalty for its first VAT default.
If further defaults occur during the surcharge period then the percentage increases with each occasion and the initial 12 month surcharge period will be extended each time it happens.
If a company fails to submit their VAT return on time or pay the amount due then HMRC will send a VAT notice of assessment of tax.
This is a summary of what HMRC believes should be due in VAT.
On receipt of a notice of assessment, a business has a couple of options.
They can send a completed VAT return and pay any owed amount; they can notify HMRC within a 30 day window if they believe the estimate is too low and produce an accurate and corrected VAT return and associated payment.
This is important to get on top of because a company could receive a penalty for willingly paying an assessed amount they know to be lower than it should be.
If the assessed amount is greater than you believe it should be, unfortunately there is no appeal procedure. The business should submit an accurate VAT return and pay the exact amount due.
A business should always submit a quarterly VAT return even if it can’t afford to pay the due VAT. This shows HMRC that they are complying with requirements they can meet and prevents an excessive notice of assessment being issued.
Not being able to pay VAT payments, PAYE arrears, bounce back loan arrears or any other debts when they come due might be a sign of a bigger issue - that the company might be insolvent or might inadvertently be guilty of wrongful trading.
The most important thing to do in this situation is not to panic but to calmly get in touch with us to arrange a free initial consultation.
We will go through your predicament with you in detail to understand what has transpired so far, where the business is and will report back with the options you have quickly.
We have negotiated with HMRC on countless occasions and know that they prefer honesty and transparency.
We do too because this will give you more room to maneuver and chance to turn things around than you might think you have.
Our experience also tells us that the sooner you act, the better it is for everyone.
Directors still need to perform their legal and fiduciary duties, taxes still need to be paid and if you’re a limited company then you are still required to file your accounts with Companies House.
The traditional penalty for missing this important date in the corporate calendar is the threat of a winding-up petition from HM Revenue & Customs but additional measures announced last week will give business some breathing space.
Companies House will temporarily pause the strike off process to prevent companies being dissolved. This will give businesses affected by the coronavirus pandemic and lockdown additional time to update and file their records and accounts.
They also said that companies issued with a late filing penalty due to Covid-19 will have appeals treated “sympathetically”.
The delay won’t be granted automatically - companies will still have to apply for a three month extension to file accounts although any giving Covid-19 related issues will automatically and immediately granted an extension.
Companies House Chief Executive Louise Smyth said: “We recognise that these are uncertain times for businesses and that’s why we’re doing all we can to help.
“By easing the burden, we can help businesses through this period and enable them to thrive in the future. I would encourage companies who believe they would benefit from this new flexibility to make an application in good time.”
Companies required by law to hold Annual General Meetings (AGMs) should wait for imminent legislation that will allow them to do so safely and consistent with current guidelines on restrictions of movement and gatherings.
These changes do not apply to businesses which are being dissolved as part of an insolvency procedure such as administration or liquidation.
Companies making an application for voluntary dissolution still have to file a DS01 form which will be registered at Companies House and a notice published in the Gazette but any further action to strike off the company will be suspended.
It sometimes takes a generational event to make you stop and consider your place in the world.
No matter what has been happening in your business or personal lives, the sun has kept rising and setting, the clock has kept ticking and life has kept going.
If you’re considering your company’s present and future in the current circumstances then you might be forgiven for thinking negatively.
You might not be considering all the angles though - why not speak to someone with no bias who can give you the full, unfurnished picture and let you know what can be done, quickly and efficiently?
Contact us and one of our team of expert advisors will arrange a free initial virtual consultation where we can discuss your situation and what your immediate options are.
Once we have the full picture then we can work with you to come up with a plan to secure your business and get it in the perfect shape to come out strongly when it’s opening time once again.
You usually put the plain brown, HMRC branded envelope in a separate pile to be dealt with when you’re at your mentally strongest but it’s a nice afternoon and who knows? You might have just received a tax rebate!
It’s only when you open it and see words like “tax investigation” and “fraud” that your mood sinks quicker than Lusitania.
Here’s our guide to what it means when HMRC have reason to believe that there’s a suspected tax fraud; what they’ll be investigating; what a Contractual Disclosure Facility (CDF) is and how the Code of Practice 9 (COP9) work.
It’s a fair COP
The first thing to understand about COP9, which takes place under the structure of the CDF, is that it’s a chance for anyone under investigation to make a total and complete formal disclosure of any and all tax malfeasance and irregularities that they’re aware of.
This means being honest and admitting to deliberately not declaring all income or deliberately making claims for VAT, expenses or tax relief they know they aren’t eligible for.
There are only 60 days from the date of the receipt of the offer to accepting the offer to take part in the CDF so time is of the essence. .
The most important consideration to bear in mind is that if the offer is accepted and a full disclosure is made to HMRC then they will not prosecute or pursue legal action against the recipient.
Tell them everything and legally at least, it ends here.
Two paths, one choice
i) COP9 Acceptance
COP9 sets out two formal paths that can be followed from this point:
The recipient either accepts that they have done something wrong or they deny it.
If the HMRC doesn’t receive a reply after 60 days of issuing then they will classify it as a denial.
If the recipient accepts the offer to take part in the process then the next step is to make an outline disclosure which is overseen by an HMRC inspector.
This is a brief outline and summary of the key facts of the case including amounts, individuals or companies involved, dates they occurred and your reasons for reaching these conclusions. They can also include other tax irregularities at this stage that are not considered as fraud in order to tidy them up.
HMRC may decide to test the report which is where they will run the numbers and investigate the circumstances as well as they can to see if they obtain the same outcomes.
If the information supplied matches up to their evidence and the inspector is satisfied that this is the case then HMRC will confirm that the investigation is closed in writing and request a meeting to discuss next steps including taking part in the HMRC’s managing serious defaulters programme if applicable.
2) COP9 Denial
It’s important to state that not everybody accused of tax fraud has committed an offence.
If you believe there’s been a mistake and you’ve nothing to own up to then you can complete the form to state this and decline to take part in the CDF.
This will automatically trigger an HMRC investigation and because the CDF has been declined, it leaves the recipient open to possible prosecution if illegal activity is uncovered or proven.
There will be a pressure - not just because of the investigation - but also because of the presumption of guilt that the issuing of a CDF confers.
If the HMRC already believes an offence has been committed, they will be motivated to prove it along with rectifying any other financial discrepancies they uncover in the course of their investigation.
Words to the wise
Chris Horner, Insolvency Director with Business Rescue Expert, cannot stress enough the need for specialist advice to be taken at every stage of the CDF.
He said: “The financial penalties alone from not taking a CDF seriously or mishandling the response can be terminal for a business.
“There is also the possibility of being publicly labelled as a tax avoider along with your name and details appearing in The London Gazette so it can be found by current and future lenders and business partners.
“This is on top of possible civil or even criminal action being taken by the HMRC based on the findings of their investigations.
“This is where you need specialist expert advice from professionals who deal with HMRC regularly, who already have a strong working relationship and a good reputation with them. The consequences for not taking this seriously or mishandling the response could be professionally and personally catastrophic.”
Take our advice and get some
Snap back to that moment in the kitchen when you felt your world begin to circle the plughole.
It should be no secret or surprise that HMRC will be thorough, methodical, deliberate and calm. Exactly what you need to be from this point on. If you have just received the first round of paperwork and dispute there is an issue we can get you the right help in defending yourself.
Alternatively, if you have already received a demand for payment, and it is financially unmanageable, the circumstances are rare under which HMRC will accept a CVA or Time to Pay arrangement, due to the historic compliance, so we can discuss options such as voluntary liquidation or administration to help you move forward.
Finish that coffee and contact us to set up a free initial consultation because acting quickly and correctly are both critical for you right now.
Business rates though have always met with more opposition than most and John Allan, Chairman of Tesco and the Confederation of British Industries, has launched the latest multi-pronged attack, calling them “uneconomical, unsustainable and unintelligible”.
Speaking at a CBI conference, Mr Allan cites recent corporate administrations such as Debenhams and the debilitating effect that high business rates can have even on large retailers.
His high profile intervention comes as MPs on the Treasury Select Committee are currently investigating the impact of business rates and considering possible alternatives to the property-based tax.
What are Business Rates?
There has been some form of tax on business properties in England since 1572 with the proceeds traditionally used to fund local services. The most recent iteration came into force as the Local Government Finance Act 2012 which, amongst other measures, changed the income formula to allow local authorities to be able to keep half of the revenue collected, with the other half going to central government who would then distribute it to other local authorities in the form of revenue support grants.
Business rates are calculated based on a property’s estimated value on the open market with appraisals taking place every three years. The CBI and others want this system to move to an annual appraisal citing regional variations and other economic events which means that rates “lag far behind economic cycles and property prices” claiming that economically depressed areas are overpaying when there is weak demand and the effect is the same for areas undergoing a revival.
John Allan told the conference: “The lag between an area’s boom in property prices and its latest business rates revaluation has seen firms suddenly having to cope with an almost 50% increase in their bill - that’s a hit that some won’t be able to survive.”
The next rates revaluation is scheduled to take place in 2021 and Chancellor Philip Hammond brought in some changes in the last Budget In an attempt to help small businesses.
From April this year businesses in a property with a rateable value of less than £51,000 will see a 33% reduction for two years. He estimated that this would be an average annual saving of £8,000 for 90% of independent businesses. This is in addition to £12 billion of business rates relief already announced by the Treasury.
Non Payment Penalties
Sadly, regardless of how fair or unfair you may believe your business rates to be, they remain a legal requirement and failure to pay can have severe legal consequences.
A council can raise a Liability Order which requires the recipient to pay the full amount of any business rates owing along with any additional costs incurred.
If the amount isn’t cleared then a court has further sanctions at its disposal including:
Owing outstanding business rates is an intractable problem for any company - it is not going to go away.
If you are facing this scenario or have other outstanding business debts then the best thing you can do is to contact us and set up a free consultation to look at your situation in more detail.
We can look at the circumstances and let you know exactly what your options are.
You can read what we’ve previously had to say about the Loan Charge in more detail here.
Firstly a little background on Employee Benefit Trusts (EBT) as they are at the heart of the story.
An EBT is set up by a company to hold cash or other assets ostensibly for the benefit of employees. They are a separate legal entity from the company that created them even though they can be guided by them and the trustees can take advice on what to do with any assets or property the trust receives from that company or others. The trust will continue even if the company that set it up is eventually sold or wound up and liquidated.
The 1990s was a wild time. The Spice Girls were everywhere, Eric Cantona was booting rowdy fans and simply everybody was reading The Beach while wearing French Connection tee shirts and cargo trousers. This was also the dawn of the EBT.
Some bright sparks had the idea that they would transfer money into an EBT instead of paying it to their staff. The EBT would then give them the money (less administration fees of course) in the form of an interest-free loan with a repayment date of never. This is what has irked the HMRC - if it is not expected to be repaid then it’s not a loan is it?
The HMRC considered these as tax avoidance schemes as the EBT and the loanee didn’t pay either Pay As You Earn (PAYE) income tax or National Insurance Contributions (NICs). So, the Loan Charge was created to tackle these schemes on the basis that they are not loans at all but disguised remuneration or pay.
Many people who are receiving demands proclaim innocence/ignorance and that they were assured by their company, accountants and EBTs that the schemes were 100% legal at the time. While this may be an accurate summary of the advice received, HMRC's view is implacable - they were wrong.
Officially known as the Sch.11 of the Finance (No 2) Act 2017, the Loan Charge applies to all loans made since April 6 1999 IF they are still outstanding by Friday April 5.
The new rules mean that any distributions from an EBT or similar will be taxed as income from employment which means they are liable for both income tax and national insurance contributions.
The loan charge will not be applied if:
Impact for Insolvency Practitioners
We have a lot of legal duties to diligently perform for our clients and the Loan Charge adds more.
We now have to notify the HMRC of any EBT schemes we know about or become aware of. After we do this then the employer who set it up or has an interest is legally obliged to contact the HMRC with all the info.
The HMRC have previously said they wouldn’t enter into direct agreements with individuals when we were handling a company’s insolvency proceedings without telling us and including us in those negotiations.
However, if individuals approach the HMRC directly themselves to discuss settlement or set up an arrangement then they WILL deal with them directly. So it’s important to tell us if you have contacted the HMRC and have any settlement terms already agreed with them.
Additionally anybody who benefited from any EBT payments have to provide certain information to their employer or former employer by Monday April 15 to allow PAYE and NIC liabilities to be calculated. If the company is insolvent then this info should be passed to us.
If you think you might have received pay through an EBT after April 6 1999 then you should contact the HMRC.
The moral of the EBT saga and other clever tax avoidance schemes is a simple and timely one - If something seems too good to be true, then it probably is.
A Hyrax is a small, shy, furry mammal usually found in Africa but HMRC caught a big one of their own this week.
Hyrax Resourcing was found by a First-Tier tribunal to have promoted a disguised remuneration avoidance scheme under Disclosure of Tax Avoidance Schemes (DOTAS) rules.
The scheme allowed Hyrax to pay users loans to enable them to avoid paying income tax and national insurance on their earnings. The users paid Hyrax a fee of 18% to allow them access to the scheme. The amounts received were loans and not declared as income by the recipients.
Not only did are HMRC set to collect £40 million from Hyrax in unpaid taxes but they must now disclose the full details of the scheme to the tax authorities including the names and details of the 1,180 users of the scheme.
Failure to do so could result in a further penalty of up to £6 million - £5,000 per client and an additional fine of £5,000 per day for non-disclosure.
Mel Stride MP, financial secretary to the Treasury, said: “HMRC is cracking down on unscrupulous promoters who sell these highly contrived tax avoidance loan schemes.
“Promoters should take note of this decision and get in touch with the Revenue about other undisclosed schemes immediately”.
There is no right of appeal against the decision although Hyrax are entitled to pursue a judicial review.
The HMRC are serious creditors and require a serious response. If your company has received a nasty surprise in the form of an HMRC Accelerated Payments Notice (APN) or a Follower Notice then you should take a breath and contact one of our expert team to discuss your options.
But what are the signs?
Every business has ups and downs but in our experience there are some common, unmistakable warnings that, taken together, can indicate that a business is off course and heading for rocks:
Some financial records are more informative than others. A healthy understanding of profit and loss is essential but there are several other indicators of businesses health that you need to be equally adept at interpreting.
Cash flow forecasts and figures, sales forecasts, debtor reports and bank reconciliations will give you a broader understanding of where your business is and where it could be going in the coming days, weeks and months.
As a director, you need to be able to access this up-to-date information, whenever you need to if you are able to make business decisions with full confidence. Without a clear view of what you owe and are owed, you may be blinded to any unforeseen consequences of your choices. For instance, if you offered over-generous flexible payment terms to secure a new contract, this could end up working against you if you then discovered you need quicker payment.
Reaching the credit limit in any account can happen, that’s why they have them, but if it happens regularly and/or with more than one account then it’s another warning signal.
Other factors could include being refused extensions to credit limits or extra credit and lenders requiring personal guarantees for finance or charges on assets. All of these could be additional signs of trouble, especially if you don’t have assets which can be used against loans.
Constantly being chased for payment isn’t a good look for any business. If you receive a Statutory Demand from a creditor because of unpaid bills, then you could be liable to face a winding-up petition if this demand can’t be settled.
This would put a company in significant danger of closure. Also once instructed to pay by way of a formal court order, there could be substantial late payment fees added to the amount making the situation worse still.
As we’ve discussed, businesses can go through peaks and troughs and you may occasionally have a customer or client who pays late or misses a payment schedule entirely. While none of these occurrences are your fault, they can become a problem for your business.
If you aren’t being paid, then you won’t be able to make your own payments. We’ve covered this previously in a post about how to manage cash flow when clients pay late which gives some tips on what to do to recoup these amounts.
Being a Director isn’t just a great job with a fancy title, a parking space and a bigger paypacket - it involves statutory responsibilities for you to execute on behalf of staff, creditors and shareholders.
If you’re seeing any of these individual issues occur regularly or altogether then it might be a good time to get some professional advice. Any one of these could be due to any internal or external factor such as inefficient business functions, staff absence or mistakes or they could be symptoms of a wider weakness within the business as a whole.
Business Rescue Expert are an experienced, qualified team who are on hand to help determine the root cause of your business issues and can provide you with the help, advice and solutions to diagnose and fix the problems and help you keep your business lively and alive.
Insolvency is never a certainty. The earlier the possibility is acknowledged, the more options and alternatives are available for you to explore and implement to avert the eventuality.
If a business is at risk of insolvency then the simplest way to alleviate that pressure is to increase incoming cash. Like blood in the human body, cash flow is the circulation that keeps a the heart of a business beating strongly. The stronger the flow, the more resistant to external problems and pressures.
Some simple tweaks to regular business operations can improve things. Processing invoices and payments when they occur rather than waiting until the end of the month; staying on top of debts owed to you and collecting frequently; not allowing excess stock to build up and keeping an accurate forecast of all cash flow based on existing in and out payments to ensure that every decision is evidence based on existing circumstances.
A petty cash box is one thing but regular business expenditure is another. Develop a system and discipline of logging each and every purchase so you can clearly see if there are any regular and unnecessary costs that aren’t benefiting the business. These can include membership and licence fees for services you no longer use. Studying them can give you an insight into where efficiencies and savings can be made.
Even small reductions in expenditure can add up to a big impact over time, especially if they are implemented company-wide.
Banks are only one option when it comes to business financing. Depending on your situation and asset base, there are other choices including factoring agreements to help you secure payments.
For example, this option will help you maintain a cash flow by sacrificing a small percentage of your costs to obtain it. This must be preferable to incurring further debt with lenders or existing creditors.
Maintaining a regular dialogue with creditors is essential in straitened financial times. One of the biggest and avoidable mistakes is to close down communication with creditors in difficult times. You might save face and pride but you will raise red flags on their behalf, exhaust any goodwill and the benefit of the doubt and make it more likely that they will resort to formal legal methods to obtain their owed debts.
Creditors will appreciate knowing in advance if your payment is going to be late and will be more likely to work with you and negotiate on payment dates and terms if you give advance notice and a clear indication of when and how you’ll be able to clear any debts. After all, they’re in business too and understand fluctuations in fortune and circumstances.
Building and maintaining a good relationship with creditors is essential in reducing the risks of insolvency especially when a winding-up petition can be brought against a company owing as little as £750.
Despite taking the proper decisions and right actions, sometimes it’s not enough and a business will become insolvent. There are still actions that a director has to reasonably take and will help them personally and professionally in the long run as the process follows its due course.
Here are some steps to help maintain your reputation and fulfill your legal duties to help insolvency practitioners work through their tasks efficiently and easily:
Honesty is always the best policy, especially when it comes to dealing with creditors. Letting them know the situation and that you will do your utmost to secure their funds will do a lot to cementing goodwill and building trust with them. Depending on how the situation unfolds, you may need to rely on the better angels of their nature and having a good relationship with them in advance is one less variable to complicate matters.
Keeping up-to-date, clear financial and business records should be a standard business practice but is utterly essential in any insolvency situation. Records of meetings, available information and decisions made on that basis will allow insolvency practitioners to understand the timescale of what happened, when, where and why and prove that you did your best to monitor issues and implement correct solutions wherever possible.
If you already have excess debt then it can be tempting to assume that taking on a little more at this stage won’t make any difference, especially if it allows you to make one more payment and buy a little time so that things might turn around.
Don’t. The more debt you accrue means the more you will have to pay back later and your business has already reached the end of the line. Taking on more funds now not only won’t help but could cause legal issues when you’re unable to pay and investigators look into the circumstances surrounding the new debt.
The business assets you own and control are your most important advantages now and have to be protected and insured correctly. They can be presented as a means of payment to creditors if they are willing to accept them and will help your case.
Do not be tempted to sell these assets to gain additional funds as investigators usually consider this wilful misconduct at best.
Events might seem stressful and overwhelming but this is because you are not used to insolvency. The experienced team at Business Rescue Expert have been through hundreds of processes and will have dealt with every eventuality and circumstance you can imagine, and more you can’t.
The need for transparency and accuracy now is critical, just when you are at your limits. There are significant legal complications that can arise if mistakes are made in the process, even accidentally.
If your business is at the point of insolvency or by reading this article you realise it is closer than you thought then you need to take action. Call in the professionals and get some specialist advice to see if your business is recoverable, what steps need to happen to achieve this or whether insolvency procedures need to begin.
Fortunately the first step is the easiest.
Business Rescue Expert offers a free initial consultation to talk through your business’s unique circumstances and give their opinion based on the facts.
Get in touch today and take charge of your businesses destiny again. Email us at firstname.lastname@example.org or use our contact form here.
As mentioned above, there are penalties you could face if you do not stay on top of your VAT returns. We will aim to outline the potential consequences, with options for those already struggling.
Preparing VAT returns is critical to the longevity of your business, particularly if you fall into tax arrears and do not have the resources to pay the fines. The deadline for VAT returns is one calendar month, and seven days after the accounting period. Without a good excuse VAT returns must now be filed online via the HMRC portal. While HMRC may offer ‘grace’ for companies if it is their first late payment within 12 months, you will still, likely, receive substantial fines.
While smaller businesses - those with a turnover of less than £150,000 - do face tax penalties, larger corporations face more pressing consequences. With the first default, no surcharge is made, but the second, third, fourth, fifth and six will incur financial penalties. You can read more on the tax arrears fines here.
There are many reasons you could face these penalties, including:
If you do suffer the latter, you must contact HMRC immediately and negotiate a time to pay arrangement.
As mentioned above, not registering for VAT is a reason your business may incur charges. Many smaller businesses do not register, simply as they believe their company will not perform well enough to qualify. However, this excuse is not valid with HMRC, and they will continue to calculate your bill and place it into arrears.
To avoid any surprises and potential/ increasing debt, you must get in touch with HMRC and discuss the following:
It’s important to note that sole traders must still submit quarterly VAT returns, and any debt will be considered personal. Therefore, the debt is subject to potential seizure and, in the very worst case, a winding up petition.
Companies must file accurate VAT returns, and you can do so with the aid of your accountant or an in house bookkeeper. Most accounting software will prepopulate your VAT returns to make this task much simpler. However, if you still struggle, we highly recommend speaking to an accountant for those unable to file the returns, as the wrong information could also incur penalties or trigger a tax inspection. Those that are suffering from severe cash flow issues may do best to seek insolvency advice in an attempt to rescue the business.
There are tips, however, to staying ahead of the deadline for VAT returns:
Ensuring that you charge the correct rate of VAT on goods and services is vital. The standard VAT rate for the UK is 20%, and will be charged on most goods. As mentioned earlier, there are exceptions to the rule, such as those goods outside of the scope of the UK and assets that qualify for lower VAT. However, this is a general rule of thumb, but you can find more information on VAT rates here.
You can pay VAT liabilities via a number of methods, but you must choose the correct method to ensure you stay on top of the returns.
Keep a record of all VAT paid and charged, and every three months this will be used to calculate your returns to HMRC.
This scheme is available for businesses with a turnover of less than £1.35 million. Only one annual VAT return is submitted. From there, your company will then make quarterly interim payments on the estimates you owe.
The choice for most smaller companies with a turnover of less than £150,000. You pay a percentage of your turnover to cover any tax liabilities. VAT is still charged on invoices, but it is not required to keep records on all VAT transactions.
A cash accounting scheme involves paying VAT on sales when the customer pays, and reclaiming VAT on purchases when paying suppliers.
If you are unsure of which scheme to choose, seek advice for guidance on preparing the VAT returns. If you continue to miss payments, you will receive surcharges.
All businesses should keep accurate VAT records for at least six years, and you must ensure they are meticulous and readable. The best thing you can do to protect your company is to accurately record all sales and purposes. Should you ever require insolvency advice or face the prospect of liquidation, these records will help show you acted in the best interest of the company.
If there’s one piece of debt management advice you must take away, it’s to pay your VAT returns through direct debit. HMRC will automatically take the correct amount from your bank within three working days of the deadline, ensuring your VAT bill is always paid. You will still need to submit your quarterly returns, however, and late filing will mean the payment is delayed.
You can also ask for reminders when logging into your online account to make sure you never miss a deadline. For those that are struggling to pay their bills and suffering from serious cash flow issues, we recommend seeking insolvency advice at the earliest possible moment. Our business rescue experts can work with you and your business for the best possible solution for survival.
The GAAR panel is a group of 10 tax experts appointed by HM Revenue & Customs from different areas of direct expertise. Their role is to provide advice on tax arrangements being looked into by HM Revenue & Customs, or to provide an opinion on tax arrangements being proposed by enablers of these schemes. In their assessment of the tax arrangements, they will make a decision whether the scheme amounts to tax avoidance, meaning it is outside of the scope parliament gave to the legislation when it was created.
On receipt of a referral, a sub panel of 3 of the members, based on their specific expertise, is created to review the topic and provide their opinion. A decision will be provided within 111 days of the referral initially being received. These opinions are then published on the Gov.uk website for access by the general public. As can be seen from this example, the full decision document is published along with a brief summary as to whether the tax arrangements are appropriate.
It is important to remember that the GAAR panel is an advisory position. Any decision they put forward is an opinion and not a judicial decision. HM Revenue & Customs do not have to follow their opinion if they disagree with the panel’s decision. However, it should not be treated lightly. It should also be noted that there is no right of appeal against a decision made by the GAAR panel itself.
Before enforcing on what it considers an abusive tax arrangement, HMRC must first obtain an opinion for the GAAR panel on the tax arrangement. This only needs to be obtained once for a defeated tax arrangement and can be used against multiple parties all using the same tax arrangement. Obtaining the opinion first also ensures that HMRC has its evidence in place in advance and is not pursuing genuine tax arrangements which are in line with parliamentary intent.
Once a decision has been obtained, HMRC can make adjustments to the tax arrangements and impose penalties, formally treating them as tax avoidance schemes. Whilst the GAAR panel’s decision cannot be appealed against, a tax appeal can be brought against HMRC on the decision to enforce on the opinion. An appeal should only be brought where you have strong grounds for believing the decision is incorrect. Whilst it is not binding, the GAAR panel decision will form a part of the evidence presented by HMRC, and will carry weight with the court.
Once a referral is made to the GAAR panel, notice will be given to any businesses or tax scheme enablers that an opinion is being sought in relation to. On receipt of this notice, a period of 21 days is granted to provide written representations to the GAAR panel. This is to justify why they believe the tax arrangements are appropriate. This time period may only be extended at the discretion of the GAAR panel on receipt of a written request for the same.
These representations must be made to both the GAAR panel, along with the designated officer at HM Revenue & Customs who is dealing with the case. The designated officer will also be able to provide their own comments on the representations, which have been made to the panel.
When considering tax arrangements, the published decisions of the GAAR panel must be taken into account. The most recent decisions can be found online. Along with this, the GAAR panel has maintained a tax avoidance guidance document. This compiles the findings of the previous opinions of the GAAR panel. Also, the general position on tax arrangements which have been deemed to be inappropriate and abusive.
The penalties for entering into a tax arrangement which is similar to one which has already been found against are significant. The penalties applied can amount to 60% of the tax due. This is along with having to pay the tax balance after adjustments have been made by HM Revenue & Customs.
If the GAAR panel finds your tax arrangements are inappropriate and abusive, the matter will be referred back to the designated officer in HMRC enforcement. The enforcement team will then use the powers available to them to collect the debt. At worst, this could be a winding up petition against your business or bankruptcy petition against you personally.
HM Revenue & Customs’ main aim is to collect the largest amounts of tax possible against the debt. Their early estimates are that around 50% of users of tax avoidance schemes will be balance sheet insolvent. Therefore, early engagement with HMRC is key where you are in a position to make payments, even if it is not for the full amount. If you are unable to come to an agreement, it may be time to consider your formal insolvency options. Our business rescue experts can take you through these options and help you take control of the situation.
According to the Companies Act 2006: ‘a dividend or distribution to shareholders may only be made out of profits available for the purpose’. For the distribution of dividends, company directors must refer to:
We do recommend preparing up-to-date interim accounts for greater confidence in distributing the company dividends. It’s important to note that your dividends do not need to be filed, but public companies will have to do so with Companies House before distributing.
The formalities regarding unlawful company dividends are strictly enforced, and can even result in personal liabilities for directors. In the case of insolvency, they will be extensively scrutinised by the liquidator or administrator. You may even be found liable for declaring an unlawful dividend if profits were found elsewhere in the company. Similarly, even a ‘technical’ error can result in the declaration, so you must take the considerations into account before taking remuneration.
There are several types of dividend. The most common form is the cash dividend. However, another type of dividend is the transfer of a company asset, known as distribution in specie. In some cases, many directors may not realise the same rules apply to the company asset where it has a book value and, therefore, fall foul of the Companies Act 2006. If you do happen to take a salary through a regular dividend, you must ensure the profits can support this. If not, you may be liable for National Insurance and other tax.
Before we begin, we advise seeking professional guidance before declaring a dividend. Simply using an incorrect figure when calculating the payment can result in an illegal payment. Stating that you were unaware of the rules regarding dividends is also not a reasonable excuse, and you may still be held responsible for director liabilities.
There are several circumstances in which a payment may be made unlawfully:
When declaring dividends, it’s no longer necessary to hold a board meeting. However, this is solely dependent on your company’s Articles of Association. If allowed, directors can declare interim dividends without the need to consult the board. Generally, however, dividends are only payable when passed by the company shareholders. The board meeting minutes must be recorded to demonstrate the agreement, also detailing the members present and amount. Similarly, the following details must be included on the dividend vouchers for shareholders:
Directors must refer to the ‘relevant accounts’ to determine existing and supporting profits. These will be the last statutory accounts for the period immediately preceding the distribution. However, as mentioned above, you may need to prepare interim accounts. The legality of your dividend is dependent on the accuracy of these calculations. Therefore, it may be worthwhile to have an accountant check the validity.
In the case of company insolvency, issuing unlawful company dividends is particularly problematic. Doing so places directors at serious risk of personal liabilities. While those in receipt of the payments may not know it is unlawful, the directors will shoulder the responsibility for issuing the payment.
During insolvency procedures, the liquidator or administrator must scrutinise all payments made to shareholders. They will be appointed to collect and recoup company assets for creditors, and they will look to identify any illegal payments. Similarly, directors could be at risk of breach of director duties. The role of a director is to promote the success of the company, and making illegal payments could be seen as in the interest of the directors, rather than the business.
Remedying the payment of an unlawful dividend can prove costly and time-consuming. In the case of insolvency, the likelihood of shareholders required to repay the dividend is greater. Shareholders for smaller companies should, typically, know if there are sufficient profits, making it slightly easier to gain a repayment.
However, if the shareholder is not obliged to repay, it’s likely the directors will be personally liable.
Paying unlawful dividends can lead to significant consequences for directors - especially if HMRC believe the payment should be treated as salary. If you require advice for issuing the declarations or even believe your company may be heading to insolvency, our business rescue experts can provide helpful and knowledgeable advice.