Common causes of Tax Arrears
Tax can be complicated and to all but a few, a relatively unappealing or inaccessible area of your business affairs. Nevertheless, the reality is that HMRC expects you as a business owner or company director to take responsibility for knowing what you owe and making sure that payments are made on time. If this doesn’t occur, HMRC will penalise your business.
Some key mistakes that we come across in tax arrears are:
- Not registering for VAT: a general rule of thumb is that if your company has sales of more than £83,000 in a 12-month period, then it needs to be registered for VAT. As you would expect, it is more complex than this but this is a helpful starting point. Make sure you know where your company stands. If you go over the threshold, or you know that you are going to go over the threshold, you need to register. If you don’t get it right, you will be liable to make payments in arrears.
- Late registration for VAT: similar to above, as soon as you know that you are going to go over the threshold, you must register for VAT.
- Filing late returns: if you file a late return, but make your payment on time, HMRC won’t penalise you. However, if you file late and miss the payment deadline, you will be liable to HMRC’s surcharges, as above.
- Paying the wrong rate of VAT on goods and services: again, the complexities of VAT rates are many, but if you do get this wrong and HMRC thinks that you have underpaid, you will be required to make payments in arrears.
- Cash-flow problems and not managing cash-flow effectively: when things are tight, it is often necessary to divert funds into other channels in an attempt to buy time, but then what happens when the time comes to pay HMRC and you don’t have the funds available?
Any one of these problems almost always has a dramatic impact upon business cash-flow. This is the crucial question for many businesses facing tax arrears: what can I do if my payments are due and I don’t have the money to pay?
HMRC defaults. What will HMRC do if you default on your VAT or PAYE contributions?
In the first instance, HMRC will send regular letters and demands to advise you that you owe money, usually with fairly tight deadlines. If it doesn’t receive payment by the deadline, it will record a ‘default’ on your record.
If this is your first ‘offence’, HMRC will not start to add interest on the money you owe until 12 months after the initial payment due date. Depending on your business turnover, it will then start to add surcharges that range from 2% to 15% on late payments thereafter. You can find detailed information on HMRC late payment surcharges here but in general, the best advice is to make payment as soon as possible and to keep HMRC advised of your progress.
If you don’t, the next step may be to send a field officer out to your business to gather information and find out why you haven’t made your payments. At this stage, you are not obliged to let an HMRC officer into your premises, however, if you don’t, the officer may be more inclined to assume that your intentions are to avoid paying the money that you owe and escalate the process.
After that, HMRC is entitled to issue you with an Enforcement Notice. This means that you have 7 days (excluding Sundays and bank holidays) to settle the debt. Then it will either send a bailiff or an Enforcement Officer to your premises to collect payment, or goods in lieu of payment that can be sold off to cover your debts. You can find more information on this process here.
Failing this, as a last resort, it may initiate winding-up proceedings against your company.
We can’t stress this enough. If you owe HMRC money there is unlikely to be any way round it. If, however, HMRC feels that you are trying to avoid paying tax, or that your company is insolvent, it has a strong arsenal of enforcement procedures, from adding interest to your payments, to seizing assets and / or winding-up your company, that it will not hesitate to trigger against you.
Essentially, if you are struggling to pay, HMRC knows it and will track it. It is therefore vital that if you owe money, you make a plan and communicate it to HMRC at the earliest possible opportunity. The message is a simple one, make sure you are either on top of your payments to HMRC or that you keep in contact to manage and rectify the situation.
If you are at all concerned about your business finances and you have other debts as well as tax, it is worth getting overall financial advice. Have a look at some helpful topics, such as:
Or if you would prefer to talk this through with one of our business rescue experts, use our booking system to set an appointment for a meeting or contact one of our business rescue experts directly.