VAT Arrears – a problem that won’t go away but can be managed
It’s when a previously overlooked and unpaid bill appears at precisely the wrong moment and can lead to a lot of trouble as a result.
This nightmare might become a reality for many small businesses this autumn as HMRC begin their attempts to recoup as much VAT arrears as they can.
As part of the response to the Covid-19 pandemic and subsequent lockdowns, businesses were allowed to defer VAT payments from between March and June 2020.
These payments are now overdue and if no payment arrangement has already been made with HMRC then they will have an additional 5% penalty or interest added in addition to any outstanding amount owed.
This is in addition to businesses in certain sectors such as hospitality seeing their reduced VAT rate of 5% during the pandemic rise this month to 12.5%. It is scheduled to rise again to the full 20% on March 31 2021.
HMRC confirmed that in September 156,000 of the 590,000 that had used the VAT deferral had not been in touch with them regarding repayments.
Collectively they owed £2.7 billion of which 9% was made up of deferred VAT arrears or approximately £17,302 each.
What happens if you can’t repay VAT arrears?
Before the pandemic, if a business was more than seven days late in repaying then they would begin to receive letters demanding the money.
HMRC works through a systematic process of escalation with letters being the first stage.
After this they could move through to personal visits from their officers, additional fines and further penalties with the ultimate sanction being winding the company up and putting it into liquidation.
You can buy time to pay
There is a way to tackle your VAT arrears in a more manageable way – it’s called a Time to Pay (TTP) arrangement.
Time to Pay is a formal legal agreement between the business that owes money and the HMRC.
They agree to pay off the debt in regular instalments over a predetermined time scale – usually between six or up to 24 months and if the repayment schedule is adhered to then HMRC will waive any late payment penalties.
Each case is judged on its own merits by HMRC but the main elements they look at when deciding whether to grant TTP or not are:
- Duration – usually the shorter timeframe the better but remember that any late tax debt has to be repaid alongside current debts too. TTP would be unlikely to be granted if more debt is going to be generated in place of the amount being paid off.
- Interest and other charges – a TTP does not mean that any incurred interest on the debt will be waived but any additional penalties and surcharges normally added to late payments won’t be counted
- Eligibility – while any business with arrears can apply for a TTP arrangement it is entirely down to HMRC whether they choose to accept, reject or negotiate an offer based on their own criteria
What are HMRC looking for in TTP criteria?
Always keep in mind that Time to Pay arrangements are designed to be a one off solution to a temporary problem. They are not meant to be a regular late payment fix or way to keep an insolvent company trading.
In order to be accepted a business has to convince the HMRC that their business is viable and can make a profit in the medium to long term but is experiencing temporary short term cash flow problems that it needs help with.
A business will also need to satisfy HMRC that they will be able to manage regular repayments as breaching the agreement will likely see HMRC demand repayment in full.
Other factors they will take into consideration include previous compliance – making sure the business has tried to repay tax within the previous year.
They will also look at if you’ve been in touch with them to let them know you would have problems repaying the amount and that all financial statements made to them have been accurate. If there are any discrepancies then HMRC will reject the proposal straight away.
When making the application the best thing to do is to keep things simple.
Have a clear, explanatory story of why the business was unable to repay the debt and how it will meet the TTP payments with supporting, up to date financial information including profit & loss accounts and cash flow projections.
Any letters of support from an accountant or funder would also be useful but the agreement should also be realistic – HMRC will not renegotiate a TTP if payments are missed so make sure repayments can be met under all circumstances.
Owing VAT, PAYE or Corporation Tax shouldn’t really come as a surprise to a business owner or director who has a firm hand on the finances of their business.
But even if you’re not receiving letters and communications from HMRC asking where their money is – if you know repayment could be a struggle then you should get some impartial professional advice as soon as you can.
Our free initial consultation will give you the chance to go through any other issues your business is facing and together we can work on an efficient, effective plan to tackle them in order of severity and impact.
Not all creditors are created equal and HMRC are one you really should look to keep on the right side of at all times.
Getting in touch before you need to could be the first step in the right direction for you and your company.