If your company is having HMRC VAT problems it is likely to be the symptom of a significant business issue.
If you’re the director of a limited company, not being able to make a VAT payment is a possible indicator that your company is insolvent and you should seek immediate, professional advice.
Continuing to trade whilst insolvent can make you personally liable for company debts, as per Section 214 of the Insolvency Act. Trusted Source – UK Government Legislation – Section 214, Insolvency Act 1986
This article will explain your options as director, the stages of escalation if you do nothing and the consequences of HMRC debt.
What Happens Next if My Limited Company Can’t Pay VAT?
If you can’t pay HMRC and are in arrears, you should be proactive in dealing with the issue and do not put your head in the sand.
Communicating with HM and Revenue should be at the top of your list, they are open to time to pay arrangements but respond poorly to being ignored.
HMRC has a refined and well-executed system of escalation for late payment of tax debts, which will begin with a letter and proceed to phone calls, HMRC field officer visits and, ultimately, a threat to wind up your company.
It’s worth pointing out that VAT is the tax HMRC pursue most aggressively. That’s because, unlike corporation tax, for example, VAT is money that was always the government’s, you’ve just acted as an unofficial tax collector on their behalf.
What is a VAT Notice of Assessment?
If you do not submit a VAT return, the first letter you’ll receive from HMRC is known as a ‘notice of assessment.’ Trusted Source – UK Government Legislation – Value Added Tax Act 1994, 23. Part IV
Essentially this document outlines how much they believe you owe them in tax debt, and you have 30 days to respond.
Even if you are having difficulties paying VAT, it is still worth submitting your quarterly VAT return as normal. This demonstrates you’re conforming to due process and will work in your favour when you come to speak with them, as opposed to simply not doing it at all.
Pay what you Owe in Instalments (Time to Pay)
You can request to pay outstanding VAT in instalments to HMRC over a 12 month period.
NB: these typically do not last longer than 12 months + HMRC will want to be confident your tax affairs are in good order before they agree to this.
If your payment history is already below par they will likely refuse. That said, they are showing more flexibility since COVID-19 so it’s worth seeing what they’ll offer.
HMRC also has a Business Payment Support Service that can be very helpful, so you should contact them to see if they can assist you.
HMRC Business Payment Support Service Telephone:
0300 200 3835
Before you contact the support services make sure you are prepared, as they will want to know the following:
- Why you cannot pay;
- What you are doing to raise the funds to pay the VAT bill that HMRC is owed;
- What, if anything, you can pay immediately;
- How long it will take to settle your VAT payment balance.
- Any reference number from communications they’ve sent you.
Three Options When You Can’t Pay Your VAT Bill
If you can’t pay your VAT, you have four options, as follows:
- Business Funding – Emergency financing may satisfy your cashflow requirements providing your limited company can handle the repayments.
- Rescue Options such as a Company Voluntary Arrangement, which is a structured repayment plan with creditors for a percentage of the debt, Administration may be another option, which protects limited companies from creditor pressure or legal action during a period of restructuring.
- Closing Your Company via voluntary liquidation if it has no viable future. This would be done by insolvency practitioners such as ourselves; you cannot liquidate a company yourself.
What are the Consequences of Not Paying VAT ?
If you choose to ignore HMRC’s requests to pay them, you will face a number of escalations as we explore below.
- Surcharges – If you file your HMRC VAT returns late and you are in arrears then you may receive a surchargeTrusted Source – GOV.UK – VAT Surcharges and Penalties which will increase the debt burden further. Clearly, higher business costs will be exactly what you don’t need if your cash flow is already problematic. The surcharge period lasts for 12 months.If several late payments are made, further penalty surcharges will be applied and the surcharge amount escalates the more times you are late in paying VAT and is calculated as an extra percentage based on the amount owed.
- Distraint – For those tax payments that are significantly overdue, HMRC may send a distraint order letter demanding immediate settling of the VAT owed. Keep all VAT rebates up-to-date to reduce any tax liability, particularly any bad debt claims. Distraint Trusted Source – GOV.UK – Debt Management and Banking Manual, Definition of ‘Distraint’ does mean things are escalating and you should take these communications very seriously, ideally contacting us as soon as possible. HMRC does seem to be using this type of legal action more frequently. Distraint can quickly lead to bailiffs at your business premises if you still don’t pay or your payment doesn’t reach HMRC in due time.
- Interest and Penalties – Interest charges may be added to any late tax liabilities and contacting HM Revenue and Customs quickly may prevent further penalties being applied. If you’re a company director concerned about penalty charges you should read our detailed article on vat penalties. If you suspect that your business is insolvent seek advice from an insolvency practitioner such as ourselves to see whether the business can be salvaged and can continue trading.
- VAT Security Bond – In some cases, where you have a bad record of paying VAT with previous businesses, or where HMRC suspect you are in financial difficulties, HMRC will send you a “Notice of Requirement to Pay a Security Trusted Source – GOV.UK – Securities in Respect of VAT at Risk against your VAT payment” . You do not have to agree to pay the deposit (bond) they are demanding. However, if you fail to agree and pay the amount, which is typically thed equivalent of 6 months VAT or projected VAT, HMRC are likely to take the strongest action available to them after any default. Receipt of one of these notices is something you should definitely discuss with your accountant, or an experienced HMRC mediator such as ourselves.
- HMRC Tax Debt Enforcement – HMC work with a number of external debt collection agencies they may resort to if you continually refuse their requests for payment. They have the power to remove assets in order to sell them and cover the debt. This process begins with a formal Notice of Enforcement, for which you’ll be charged £75.
- Insolvency – HMRC’s most serious course of action for non payment of debts would be to force the company into insolvency via the use of a winding up petition. They will only do this when they feel certain you are are insolvent and will not be able to pay them in the future; if they think you’re avoiding paying them for some reason; or if they think you could pay them but are choosing not to.
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