What directors need to know
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.