Are you concerned about VAT Arrears?

To all intents and purposes the government uses businesses to collect VAT for them. As such, this money is always the property of HM & Revenue, despite the fact that it temporarily passes through private corporate bank accounts.

This is why HMRC are more aggressive about unpaid VAT than any other tax. They rightfully see it as their money and, where a business has spent it, they have a rigorous penalty and escalation system to get it back.

If you can’t pay VAT, find our your options in detail below.

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    What Happens if I Can’t Pay my VAT Bill?

    If HMRC doesn’t receive a VAT return payment from you on the agreed date, it will be assumed that you have defaulted.

    The initial letter you receive will be automated but, at a certain point beyond that, your case will be flagged for a manual review.

    Being unable to pay often sends directors into such a panic that they actually do nothing and put their head in the sand. Resist this temptation at all costs, whatever happens from this point forward you need to keep a clear head and take prompt action.

    VAT Surcharge Period

    You will therefore enter into an automatic ‘surcharge period’ for 12 months, which means you’ll be charged interest, in addition to your typical payments.


    Defaults within 12 monthsSurcharge for annual turnovers less than £150,000 or moreSurcharge for annual turnovers exceeding £150,000
    2nd
    No surcharge

    2% (no surcharge if this is less than £400)
    3rd
    2% (no surcharge if this is less than £400)
    % (no surcharge if this is less than £400)
    4th5% (no surcharge if this is less than £400)10% or £30 (whichever is more)
    5th
    10% or £30 (whichever is more)
    15% or £30 (whichever is more)
    6 or more
    15% or £30 (whichever is more)
    15% or £30 (whichever is more)

    Penalties

    If you can’t pay VAT to HMRC, you should expect a penalty, in addition to the surcharge, where the following conditions apply:

    • Careless or deliberate mistakes (up to 100% penalty)
    • Where HMRC sends you a VAT bill which is too low and you don’t report the fact (30%)
    • Where you submit a paper return rather than online (£400 fine, unless HMRC has officially told you you’re exempt from online returns)

    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 has VAT Arrears?

    VAT arrears may be an indication your company is approaching insolvency, or has possibly even crossed the line.

    Remember, one of the definitions of an insolvent company is being unable to pay bills when they fall due. This places you in a situation where you need to place the interests of creditors first or risk accusations of wrongful trading, so our advice is to go through your accounts carefully and make sure.

    If you’re in arreas you have several options:

    • 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. Time to Pay Agreements are your first port of call in this situation, although HMRC generally does not allow these where one is already in place.
    • Secure Finance – Ask us about finance options to tide your business over into cash flow settles down.
    •  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).
    • Consult with an Insolvency Practitioner about your options, which may include putting the company into voluntary liquidation.

    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.

    Can you pay VAT monthly?

    Yes. HMRC is more than happy for you to set up VAT payments via convenient monthly installments, over as 12 month period.

    While most directors who are unable to pay fear HMRC, they are generally reasonable and helpful. It is not in their interests to penalise companies too heavily when they’re already in financial trouble. If you keep in clear communication with them you’ll find they are keen for your company to thrive and will do what they can to help, within reasonable limits.

    Consequences of Non Payment

    Non payment of VAT is clearly a serious issue for any business owner and one which HMRC do not take lightly.

    Always keep in clear communication with them, and never consider putting your head in the sand.

    VAT arrears commonly leads to baliffs and/or winding up petitions which may mean your company is forced into compulsory liquidation. The ultimate consequence of not paying VAT will therefore be the end of your company, and on occasion HMRC will do this even at a cost to themselves (i.e. the limited compay has no money which liquidation will recoup for them) because they need to make an example.

    Talk to HMRC about paying in installments and, when you feel the debts are simply getting out of hand, consider speaking with an insolvency practitioner for advice on wider options to tackle your debt.

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