Rick Smith: Don’t get pressured by tax arrears

It may only be February, but for many business people in the county thoughts are turning to tax already. As the new tax year looms, it might be the time to perform a preliminary review. Do you owe HMRC? Are your affairs in order? Simply put, are you about to be caught out?

It might sound obvious, but every limited company has a responsibility to keep up with their tax payments to HM Revenue and Customs in order to conduct a legal and viable business.

There are a few core types of tax that are essential to pay:

  • Corporation tax
  • PAYE
  • National Insurance
  • VAT

If a company is unable to pay these taxes it builds up arrears, which could result in financial penalties and possibly legal action. This may seem like plain advice to most, but you’d be amazed at how many businesses get caught out.

However, there are several ways to deal with arrears…

Act early

If only one VAT payment has been missed, act quickly to avoid knock-on effects to your business. If the bill is cleared with HMRC within 12 months of its due date, no extra fines are accrued. In cases where previous action has been taken, VAT surcharges are increased, and the company’s annual turnover will be affected.

Pay if possible

If your business has enough cash to pay its HMRC arrears, you should deal with them as soon as possible to prevent accumulating fines. For example, if your VAT or PAYE balances remain unpaid they will accrue interest, especially payments made late in the past.

LOC (Line of Credit)

If your business simply doesn’t have enough cash to pay what is owed, one option is to use an LOC. This is a loan from the bank which may only be used for a specific purpose, and interest is only paid on the amount of money withdrawn.

Using a LOC is not often advised, but in some cases where HMRC is beginning to become aggressive in its attempts to recover money, this may be the most effective way of allowing breathing space.

CVAs (Company Voluntary Arrangements)

In situations where arrears have been accumulated, it is likely money is also owed to other creditors. When these debts cannot be paid and the company is insolvent, a CVA could be proposed. This creates an agreement between the company and its creditors, resulting in an environment in which none of the creditors can chase you for payment or propose a winding up of the business.

This option relieves pressure on a company but is only possible if the firm has significant financial problems and is not solvent.

Use personal finances

In cases where the business is trading well and – while suffering a temporary cash flow set back – is still viable, one option could be to inject your own personal funds (or additional funds from investors) into the company to pay the arrears. However, a significant cash reserve is required.

TTP (Time to Pay) arrangements

Ultimately, HMRC wants your company to succeed and would prefer companies to pay their tax rather than cease trading.

If the business is struggling to pay the full amount, you may be able to propose a TTP and are likely to be given six to 12 months to pay the arrears in instalments.

Administration

In the case of a business that is insolvent (unable to pay debts it owes) and has no access to emergency funds, entering the company into administration may be the best way forward.

This path prevents the company being liable to legal action, as a third party is appointed to manage the company in the interest of creditors.

This process can be expensive. but when managed in the correct way it can ultimately save the company substantial amounts of money.

The best advice to take is to err on the side of caution. Make a start today – it could mean there is still a company left tomorrow.