19 May 2021|Latest Posts, Legals & Compliance, Money
Every limited company, and that includes start-ups, have a responsibility to keep up with their tax payments to HM Revenue and Customs (HMRC) in order to conduct a legal and viable business. However, sometimes these taxes can build into an unmanageable amount. Rick Smith, MD at Forbes Burton, takes a look at what you can do if this is the case.
Starting off in business can be tough, especially as there are a great number of overheads that many do not anticipate from the off. There are a few core types of tax that are essential for companies to pay. It may seem obvious, but all of these do bare repeating:
Corporation tax – a percentage of your startup’s profits.
PAYE (Pay as You Earn) – a percentage of your employees’ income.
National Insurance– deduction from employees’ income to fund state benefits such as the NHS.
VAT (Value Added Tax)– this is the tax on consumption of goods, although Capital Allowances may apply on more expensive items, on which the VAT can be spread against company profits over a number of years.
If your startup is unable to pay these taxes, you build up the aforementioned HMRC tax arrears, these could result in financial penalties and possibly legal action if they continue to go unpaid.
However, there are several ways to deal with these arrears in order to avoid these penalties and ensure that you can continue to trade:
Act as early as possible
If only one VAT payment has been missed, it is advisable to act as quickly as possible to avoid various knock-on effects to your business. If the bill is cleared with HMRC within 12 months of its due date, no extra fine is accrued.
On the other hand, in cases where previous action has been taken, VAT surcharges are increased, and the company’s annual turnover will be affected.
Pay your arrears if at all 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, particularly if payments have been late in the past.
A LOC (Line of Credit) can be used to pay HMRC arrears
If your business simply doesn’t have enough cash to pay what is owed to HMRC, one option is to use a LOC.
This is a loan from the bank which may only be used for a specific purpose, and is slightly different to a typical bank loan due to the fact that interest is only paid on the amount of money that is withdrawn.
A LOC is usually secured by a business asset to lower the interest rates on the money borrowed. 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 you some breathing space.
In circumstances where the director of a business doesn’t want to affect the end of year balance sheet liabilities, invoice factoring or discounting may be a more viable option to raise funds quickly.
A CVA (Company Voluntary Arrangement) may be the best option
In situations where HMRC arrears have been accumulated it is likely that you also owe money to other creditors.
At a point where it has been established that these debts cannot be paid and you are therefore insolvent, a CVA could be proposed.
CVAs create an agreement between you and your creditors, resulting in an environment in which none of the creditors are able to chase you for payment or propose a ‘winding up’ of the business.
This option relieves the pressure on a company, but is only possible if the firm has significant financial problems and is not solvent.
Personal finances could be used
In cases where your business is trading well and simply suffering a temporary cash flow setback, providing you are still viable, one option available could be to inject your own personal funds (or additional funds from investors) into the company in order to pay the HMRC arrears.
Where this is possible, it can be a quick way of returning the business to a profitable position and ensure stable operations. However, this is obviously not always an option, as a significant cash reserve is required.
Also, you should be very careful about using your own funds; should the company eventually fail you are likely to leave yourself personally liable for the company’s debt when using this method. This should only be an option used when it is certain the company is in good health.
A TTP (Time to Pay) arrangement could be negotiated
It is important to remember that while HM Revenue and Customs can become aggressive when trying to recover debts, ultimately they want your company to succeed and would prefer your tax payments to be paid off rather than your company ceasing to trade.
If the business is struggling to pay the full amount as a bulk sum, you may be able to propose a Time To Pay Arrangement and are likely to be given 6-12 months to pay the arrears in instalments that are agreed with HMRC.
This option reduces the pressure of the debt by spreading it along a viable timeline but won’t reduce the amount of money you need to pay.
Administration may be the best option
When a business becomes insolvent (unable to pay the debts it owes) and has no access to emergency funds, entering the company into administration may be the best way forward while leaving the possibility of a turnaround.
This path prevents you from being liable to legal action, as a third party is appointed to manage the company in the interest of its creditors.
This process can be expensive and sometimes can feel like failure but often, when managed in the correct way, it can ultimately save the company a substantial amount of money.
Whatever you choose to do, keeping ahead of HMRC payments is the sensible option. It can seem tough at times, but there are always ways to bridge the gaps or find solutions that work for you.