Value Added Tax or VAT is levied on companies, with a taxable annual turnover of more than £85,000. To submit a VAT return to HMRC, the company has to be registered in the first instance.
VAT returns are normally submitted electronically every quarter — also known as the accounting period. To file VAT returns manually, the company must have special dispensation to do so from the tax authority, and without its prior permission the company will incur a £400 fine.
A quarterly VAT return records the following information:
· Total sales and purchases
· The amount of VAT owed
· The amount of VAT to be reclaimed
· The total value of the VAT refund from HMRC.
VAT returns must be filed within one calendar month and seven days of the end of an accounting period. The deadline for making a full VAT payment is on that same date.
Accountancy Errors are not Considered a Valid Excuse for VAT Arrears
Even though an accountant may have been brought in to manage the company’s finances, company directors are still ultimately responsible for making sure that the VAT returns that are submitted to HMRC accurately represent the company’s tax affairs. In the scenario where an accountant has made a mistake, company directors will still be held responsible for the VAT bill, including any missed previous payments or under-payments. HMRC doesn’t consider an error on the part of the accountant as a valid excuse for late or non-payment of VAT liabilities.
What happens if the company doesn’t pay VAT?
When a company is VAT registered, it’s required to submit a VAT return to HMRC even if there isn’t any VAT to pay or to reclaim. If the company fails to submit its return or make full payment of the VAT due by the deadline, the tax authority will consider the company to have defaulted on its VAT bill. The company will enter what is known as a ‘surcharge period’, which is a 12-month period where the company will be charged an additional fee on top of its VAT bill based on its annual taxable turnover and past non-payment history.
Any company that goes into VAT arrears can expect a fast and aggressive response from the tax authority, which will often take action through the courts. Companies that file an under-stated VAT return intentionally risk being given a penalty of up to 100% of the amount of VAT that the company owes; essentially doubling their VAT bill.
What happens if the company has VAT arrears?
When companies that don’t pay their VAT, they run up tax arrears. The tax authority always follows up on non-paying companies to find out why they haven’t paid; whether it stems from a shortage of funds or a deliberate attempt at VAT avoidance.
The tax authority will get in touch with companies that have fallen behind in their VAT payments. When payment is extremely late, the company will receive a ‘distraint letter’ from HMRC, demanding the immediate payment of VAT arrears. In these circumstances, companies should try to secure emergency financing to settle their seriously overdue VAT bill immediately to avoid legal action.
What other options are available to companies?
Companies that are experiencing cash flow problems and can’t afford to settle their VAT bill immediately, should remain calm as there are a number of options open to them.
· Negotiate a Time to Pay arrangement with HMRC to create a payment plan of affordable instalments that won’t have an impact on company cash flow
· Enter into administration to protect themselves against legal action and give them the opportunity to restructure the company and potentially get back on track with the guidance of an administrator (a licensed insolvency practitioner).
Whatever the circumstances, directors must always take prompt action to resolve their financial problems to protect creditors and the company. Enlisting the help of a professional as soon as possible will prevent VAT arrears from spiralling out of control.