I Can’t Pay VAT: What Are My Options?
Businesses that are unable to pay VAT can approach Her Majesty’s Revenue and Customs (HMRC) to request a Time to Pay (TTP) arrangement.
This enables the company to spread the repayment of its due taxes across instalments over a customary period of 12 months.
Additionally, companies may explore options for securing business funding or emergency finance to bolster their cash flow and meet urgent financial obligations.
Such measures can provide critical support in managing short-term financial hurdles while ensuring continued operation and compliance with tax liabilities.
Understanding Your VAT Obligations
Value Added Tax, or VAT, is a tax imposed on businesses operating in the UK with a taxable turnover of more than £85,000 in any 12 month period.
Companies of any size may choose to register for VAT, but it’s mandatory if your taxable turnover exceeds the £85,000 threshold. Understanding your VAT obligations is crucial to avoid penalties and enforcement actions from HMRC.
VAT is typically due by the end of the month following the end of the tax period, which is often a quarter.
Businesses can opt to pay monthly installments of VAT based on their estimated liability for the quarter or pay the entire amount of VAT due for the quarter by the end of the month following the end of the quarter.
It’s important to stay on top of your VAT payments to avoid penalties and interest charges.
Keeping track of your VAT obligations is essential, but sometimes, despite your best efforts, you might find yourself unable to pay. In such situations, you must address the issue promptly to avoid further complications, penalties and enforcement actions from HMRC.
The Implications of Unpaid VAT
Unpaid VAT can lead to serious consequences, including penalties, interest charges, and legal action.
HMRC may issue a VAT notice to inform the business of the outstanding amount and the need to address the issue.
It’s critical to take action as soon as possible to the tax debt and prevent these implications from escalating.
If you’re having difficulties paying your VAT, it’s advised to still submit your quarterly VAT return as normal.
If you receive a VAT notice of assessment, you should submit the completed VAT return and make the payment for the amount owed or notify HMRC within 30 days of receipt of the notice if the estimate is believed to be inaccurate, and provide a correct VAT return and payment accordingly.
Failure to pay immediately address unpaid VAT can result in late payment penalties, interest charges added tax due, and HMRC enforcement actions, which may lead to serious tax debts and potential legal consequences for your company.
Late Payment Penalties
Late payment penalties for VAT are calculated at 2% of the VAT that was outstanding at the end of the fifteenth day.
If the payment is made between sixteen and thirty days after the due date, the penalty remains at 2%.
Company directors should be aware of these penalties and ensure timely VAT payments to avoid additional financial burdens.
Accruing penalty points for late VAT payments may result in fines. A £200 fine will be issued upon reaching the threshold. If the next VAT deadline is missed, another £200 fine will be applied.
To avoid these fines, businesses can consider negotiating a pay arrangement with HMRC, such as a Time to Pay agreement.
Penalties may also be issued if a company willingly pays an assessment amount that is lower than required. Addressing tax arrears, including VAT, is crucial to avoid penalties and potential legal consequences.
HMRC Enforcement Actions
HMRC may take measures to hold a company accountable for unpaid VAT, such as appointing bailiffs, imposing restrictions, or initiating a winding up petition, which could ultimately lead to the company’s dissolution.
The most extreme course of action HMRC undertakes for non-payment of debts is to initiate a winding up petition against limited’ company directors, resulting in the limited company itself’s insolvency.
Disregarding communication from HMRC concerning unpaid VAT can lead to further action, such as sending a letter, making phone calls, dispatching a field officer, and eventually warning of the possibility of winding up the company.
The procedure for HMRC enforcement actions commences with a formal Notice of Enforcement, for which a fee of £75 will be incurred.
HMRC will take action when they are confident that the company is insolvent and cannot or unable to pay or unable to pay them in the future, if they suspect that the company is attempting to evade payment, or if they believe the company can pay but is choosing not to.
Options for Managing VAT Arrears
When faced with VAT arrears, you have several options to manage the situation, including Time to Pay arrangements, business funding, and formal insolvency solutions.
Failure to act quickly may cause financial difficulty or the situation to become unmanageable, so it’s crucial to seek professional assistance to prevent VAT arrears from escalating.
Let’s explore these options in more detail. It’s worth noting that dissolving a company with VAT debt is a process known as creditors voluntary liquidation and must be handled by a licensed insolvency practitioner.
Factors such as inadequate cash flow, unforeseen expenses, financial constraints, and disorganisation may impede businesses from paying their bills in a timely manner.
Time to Pay Arrangements
A Time to Pay arrangement is an informal payment agreement with HMRC, allowing a company to pay the amount due in installments. Understanding your cash flow situation is essential in determining what your options are and the most effective course of action.
Typically, Time to Pay arrangements are granted for up to 12 months, but HMRC may consider longer payment plans in certain cases.
These informal arrangements can provide businesses with the flexibility to manage their VAT payments without incurring the severe consequences of unpaid VAT, such as late payment penalties and enforcement actions.
Business Funding Alternatives
Business funding alternatives for unpaid VAT may include negotiating a payment plan with HMRC, short-term financing such as an overdraft facility or interest-free credit card, and tax or VAT loans.
Tax and VAT financing and alternative finance providers may also be available to help businesses manage their VAT arrears.
Business funding can offer immediate and convenient financing for companies struggling with VAT payments.
However, it’s important to weigh the benefits and drawbacks of business funding, such as high interest rates and fees, and the possibility of the loan becoming unmanageable if the business owner is unable to make the payments.
Formal Insolvency Solutions
Formal insolvency solutions may be deemed more suitable if VAT arrears constitute only a portion of the company’s overall unmanageable debts.
A Company Voluntary Arrangement (CVA) is a formal agreement between a company and its creditors to repay a percentage of the debt over an agreed period of time.
Creditors’ Voluntary Liquidation (CVL) is the process of closing a company via insolvency practitioners, which typically results in the termination of the company’s corporate debts.
Administration is another rescue option that provides limited companies with protection from creditor pressure or legal action while undergoing restructuring.
Consulting a licensed insolvency practitioner can help you explore these formal insolvency solutions and determine the best course of action for your business.
Communicating with HMRC
Communicating with HMRC is essential to explore your options and prevent further escalation of your VAT arrears situation.
The HMRC Business Payment Support Service is a service offered by HMRC to provide assistance to businesses facing difficulties in paying VAT.
Before contacting the HMRC Business Payment Support Service, it’s advised to have all the necessary information prepared.
If you’re behind on your VAT payments, it’s crucial to maintain open communication with HMRC and take proactive steps to address the issue.
Seeking help from the HMRC Business Payment Support Service can provide guidance and potential solutions for managing your VAT arrears.
Preventing Future VAT Issues
Preventing future VAT issues is possible by keeping on top of your finances and seeking professional advice. Failure to pay invoices on time can negatively impact your business’s reputation and may even lead to legal action.
If creditors are not adhering to the payment terms, it’s advisable to follow up on overdue invoices and evaluate the effectiveness of your collection strategy and payment terms.
If your company is facing short-term cash flow issues, pursue late payers and evaluate your collection strategy and payment terms to prevent future VAT issues.
Consulting a professional can provide businesses with an understanding of their VAT obligations and ensure that they remain compliant with applicable regulations.
Seeking Professional Advice
Seeking professional advice from licensed insolvency practitioners is highly recommended to explore your options and avoid legal action when facing VAT arrears.
For assistance, reach out to local accounting firms, tax attorneys, or HMRC’s Business Payment Support Service. Timely action is necessary to explore all potential solutions and ensure the best outcome for your business.
Remember, consulting a licensed insolvency practitioner can provide you with valuable insights and guidance, helping you navigate the complexities of VAT arrears, personal liability and possible insolvency.
Don’t hesitate to seek professional help when faced with VAT arrears or other financial challenges.
Frequently Asked Questions
Can VAT be paid in installments?
VAT can be paid in installments. Payment plans for the installment of VAT can be organised with HMRC or other payment plan companies trading other options are available such as Company Voluntary Arrangement (CVA) and Creditors’ Voluntary Liquidation (CVL).
HMRC will also allow you to make payments by way of monthly instalments over a maximum of 12 months, based on your annual VAT liability.
Can you choose not to pay VAT?
No, it is not possible to choose not to pay VAT if you are a trader who is required to be VAT-registered as your sales have exceeded the threshold.
However, traders whose sales are below the VAT threshold are not required to be VAT-registered and can opt out from paying VAT.
Can you pay HMRC in installments?
HMRC offers ‘Time to Pay’ arrangements to help taxpayers manage their tax payments.
This allows taxpayers to pay their tax bill in smaller, monthly instalments, over a period of time, rather than having to pay the full amount at once.
Summary
In conclusion, understanding your VAT obligations is crucial to prevent penalties and enforcement actions from HMRC.
When faced with VAT arrears, it’s essential to explore your options, such as Time to Pay arrangements, business funding alternatives, and formal insolvency solutions.
Communicating with HMRC and seeking professional advice can help you navigate this challenging situation and avoid further complications.
Don’t let VAT arrears derail your business’s success. By staying on top of your finances, seeking professional advice, and maintaining open communication with HMRC, you can overcome VAT arrears and continue to thrive in the world of business.