Being unable to pay VAT on time can often trigger other financial issues with your business and put it on the road to insolvency. Because of this, it’s important to act quickly if your company falls behind on its VAT payments.
Does your company have VAT arrears?
HM Revenue and Customs takes late or non-payment seriously, particularly if your business owes a significant amount of VAT. Serious VAT arrears and continual non-payment can result in the seizure of assets in order to repay your company’s VAT. If your company has significant VAT arrears that it is unable to pay, there is a high chance that it is insolvent. In this case, speak to an insolvency practitioner to learn which options are available to protect your company from the threat of liquidation.
Significant VAT arrears can result in HMRC a distraint order against your company; a notice that provides your business with five days to pay its VAT before assets can be seized in order to repay HMRC. It’s important to remember that HMRC is a creditor, despite it being a government department. In many cases, HMRC is the largest creditor for businesses that don’t have extensive external debt. Just like other creditors, HM Revenue and Customs can petition to have a company liquidated in the event that its tax arrears are significant. However, HMRC offers a range of payment options for companies with significant VAT arrears.
These include Time To Pay arrangements, which are special instalment plans that allow your company to make payments to HMRC over a specific period of time to repay its VAT arrears. Time To Pay involves HMRC assessing your company’s payment viability to see if regular payments can be made. If your company is financially viable, a scheduled payment plan of between three and six months is typically established. It’s important to note that Time To Pay is not available for companies with VAT or other tax arrears that are insolvent. Time To Pay arrangements are designed to let viable companies with cash flow issues manage and pay their VAT obligations.
Is your company late paying VAT?
Many companies plan to pay their VAT in full, but lack the cash to make payments to HMRC on time. Paying your company’s VAT bill later than the due date isn’t always a cause for alarm – in many cases, however, it is cause for a VAT surcharge. When your company fails to pay its VAT on time, it faces surcharges calculated that are calculated based on the severity of the late payment. VAT surcharges rise based on the number of missed or late payments from the second late payment onwards. Your company’s first late VAT payment is unlikely to attract a surcharge, unless you have repeatedly ignored HMRC’s warning letters.
The first communication from HM Revenue and Customs regarding your late payment is usually an instructive letter. This letter outlines the amount of VAT your company is required to pay. If you miss a second payment within 12 months of receiving a help letter from HMRC, you may face VAT surcharges based on the frequency of defaults and scale of your VAT bill. VAT surcharges vary based on the size of your company’s VAT bill, your company’s total turnover, the number of times your company has defaulted on VAT in the past and other factors. You can view a VAT surcharge table at the HMRC website.
In addition to facing penalties for paying VAT behind schedule, your company could face penalties of 15% to 100% of its total VAT bill for filing an inaccurate VAT return to HM Revenue and Customs.