If you do not pay your tax on time, you’ll probably have to pay interest on the outstanding amount. You may also have to pay a penalty or surcharge. If you’re struggling to pay your tax bill, you should speak to HMRC straight away – you might be able to delay your payment.
Ask to talk about a ‘time to pay agreement’. An agreement will give you either more time to pay, or a schedule to pay your tax in instalments. This lets you spread the cost of your tax bill by paying what you owe in instalments. How you do this depends on whether you’ve received a payment demand. If you’ve received a payment demand, like a tax bill or a letter threatening you with legal action, call the HMRC office that sent you the letter.If you’ve not received a bill or letter, call the Payment Support Service (PSS).
It’s usually easier to get an agreement before the deadline rather than after you’ve missed it. You might still be able to get one after the deadline, so it’s always worth calling HMRC.
HMRC begins with the below process for non-payment of taxes:
1) HMRC will Begin With Threatening Letters
Receiving a letter from HM Revenue and Customs is a frightening experience. The letters are threatening in tone as they are intended to goad you into action.
2) HMRC Will Appoint a Debt Collection Agency
Most HMRC Debt Collection is now outsourced to 3rd party agencies. One of these may contact you on HMRC’s behalf and this of course baliff proceedings are a stressful process
(3) HMRC May Send You An Enforcement Notice (Distraint Warrant)
An enforcement notice (distraint warrant) will be logged and served if you fail to make payments on your tax bill, despite previous warnings. Often the first letter is entitled ‘Warning of Enforcement Action.’
(4) HMRC May Take Legal Action Against You for Unpaid Tax
HM Revenue and Customs will then either take your company to the county court or issue a statutory demand. These options depend on the amount, history and lateness of your payment – in either case you will be given a deadline to respond to the claim.
5) HMRC Security Bond (NOR)
If HMRC believe your company is insolvent, they may want security. The security bond is a very serious legal instrument and in some cases more serious than a winding up petition. A Notice of Requirement (NOR) of Security is used for VAT and PAYE.
(6) Winding Up Petition
If you’re failing to respond to the tax debt collection or security request, HM Revenue and Customs they will ask the Court for a hearing and serve a winding up petition. Typically, you will have seven days from the date the petition is served to satisfy HMRC enough to stop them advertising it in the London Gazette.
Be aware HMRC are responsible for more winding up petitions than everyone else put together
If you have a significant debt which you can’t pay, your options are as follows:
Organise a Company Voluntary Arrangement – this is a structured payment plan for companies, arranged with the assistance of an insolvency practitioner. HMRC will accept these in the right circumstances providing it is well thought through and presented to them correctly.
Raise Finance – If you have the option to raise finance, this might be a preferable course of action to the kind of escalation which will entail if you don’t pay HMRC.
Put the Company into Voluntary Liquidation – If you can’t pay your bills and are facing threats from HMRC, taking control by voluntarily liquidating the company might be the best option available to you. If this needs to be done, our focus is on keeping the proceedings as stress free and smooth as possible for company directors.
My Ltd Company is Insolvent and I Can’t Make My Tax Payment. Does This Matter?
Finding yourself in the situation where you cannot pay corporation tax debt may be a particularly relevant warning indicator for insolvency, along with failure to pay PAYE or being unable to pay VAT arrears.
HMRC have specific guidelines for investigating the remuneration of directors, and their salary, especially where directors have taken dividends when the company is insolvent.
The fact that you are having problems paying corporation tax may indicate that you have taken excessive dividends and HMRC may have the view that the money you paid yourself is, in fact, owed to them.
If you need to close down the company then there may be personal implications that need checking, such as an overdrawn director’s loan account. You should a licensed insolvency practitioner first to get free advice on your unique tax debt situation.
There is no set criteria but you must have a convincing argument for why you can’t pay your tax bill on time, and how you are going to pay them back during the agreement. They will want to see evidence of your ongoing expenses, as well as projected income. Ultimately, they want to hear commitment and determination on your part to paying them back in full. They will certainly insist on a direct debit for your monthly instalments.
If you have had a Time to Pay Arrangements TTP arrangement in the past this does not preclude you, but it does make you less likely to be accepted. Only Agree to Installments that are manageable. Do not be pressured into agreeing a monthly amount that you simply cannot fulfil in your time to pay HMRC agreement. Make sure that they understand this – HMRC will have less confidence in you if you simply agree to whatever they suggest and default a month or so later.
This is where some time should be spent making sure you can afford to pay the ongoing repayments of tax owed.Inform HMRC that you do not want to let them down by committing to something that you cannot maintain and that you are seeking professional help and advice.
Let them see that you are taking matters seriously as the tax arrears belong to the public purse as HMRC see it.
What about HMRC Time to Pay Arrangements for VAT, Corporation Tax or PAYE?
HMRC can offer you up to a year to pay back your VAT, Corporation Tax or PAYE arrears in instalments, though no longer than this except in exceptional circumstances. Be aware HMRC may want the arrears repaid in a shorter period.
Any Time to Pay arrangement must include assurances any taxes due within the payment term can be paid.
Can I pay Corporation Tax in Instalments (Time to Pay Arrangement?)
It’s possible that they will accept a corporation tax time to pay arrangement, but you will be expected to demonstrate that the company can afford to repay the tax over a maximum of twelve months along with any other tax debt or tax liability that will be due within this taxable period.
Your company’s cash flow and financial status will also be considered before any payment plan is considered.
Be aware that if you have an overdrawn director’s’ loan account they will want this repaying immediately before any time to pay arrangement, or instalment payments, would be considered.
Creditor pressure can be unbearably stressful. Trying to make ends meet when your business is struggling is financially and maintaining a healthy level of cash flow are common challenges faced by directors. Limited access to funding can further compound your problems, making it increasingly difficult to run a business effectively.
If your business is unable to make payments to its creditors, the reality is that the pressure will intensify until the payments are made.
This article will explain your options.
Who is a Creditor?
A business creditor is someone who has supplied goods, services or a loan to you, whom you have not yet paid.
Creditors have a number of tools at their disposal to recover the money they are owed. This ranges from charging interest on late payments or even employing a debt collector, to pursuing legal action such as statutory demands and County Court Judgements (CCJs).
The consequences of legal action can be serious and ultimately the company’s liquidation a real possibility.
Ofcourse all creditors are different. HMRC is the UK’s biggest creditor and perhaps the one to be most wary of. They will wind up a company simply to make an example. In the case of most other creditors, they must consider it financially in their interests to do so.
Pressure from creditors can be extremely hard to deal with. You can avoid emails and phone calls from your suppliers, but this is not a problem that will simply go away. A difficult situation can be made worse if you’re dealing with a particularly aggressive creditor like the tax man. HMRC has a number of serious methods of recovering lost payments from your company.
In all cases, maintain clear lines of communication with those you owe money to. Show them you’re not ignoring the problem but doing your best to make ends meet.
What are the Options to Stop the Creditor Pressure?
If you choose to deal with the situation head on, there are a number of options available to you to cease creditor pressure.
Your options depend on the nature of your cash flow problem and the amount of debt your company owes. However, you must face up to the problem quickly. The earlier you act, the sooner you’ll be able to stop the creditor pressure.
(1) Negotiate with Creditors
Many small businesses experience short-term cashflow problems that are resolved when a substantial payment is received. If you’re awaiting a payment of this kind, you could try to resolve the issue by explaining your predicament to the creditor. Late payments are a huge problem for UK small businesses, and most creditors will have some sympathy in this situation. Perhaps you could reach an agreement to pay the amount you owe over a longer period of time?
(2) Find Alternative Funding Options
If your attempts to negotiate have been unsuccessful, there may be alternative funding options you can use to pay your debts. In some cases, the company might have tangible assets on the balance sheets, or due invoices, that can be used to generate the money you need. Invoice financing has become an increasingly popular method of improving cash-flow for SMEs.
Another option could be to refinance the assets you have. Typically, this kind of loan is used for urgent borrowing requirements such as settling unpaid tax liabilities. The point is that there are a number of finance options available that could provide the essential assistance you need.
(3) Pay Arrears in Instalments via a Company Voluntary Arrangement (CVA)
If the company is still viable, you could consider entering into a company voluntary arrangement (CVA). A CVA is a formal repayment plan that once agreed with your creditors, will give you more time (up to five years) to pay. Entering into a CVA allows you to keep trading, and as long as you keep up with the repayments, the CVA will protect you from further creditor pressure or harassment.
(4) Choose Voluntary Liquidation (CVL)
If you think the extent of your cashflow problems are such that the business is simply not viable anymore, you may consider a creditors’ voluntary liquidation (CVL). In this case, the business will cease trading and an insolvency practitioner will be appointed to raise money to repay your creditors by selling off company assets. Once the company’s assets have been sold, it will be struck off the Companies Register and will cease to exist.
Do You Need Help with Creditor Pressure?
If you’re experiencing constant creditor pressure as a result of cash-flow issues, we can help you assess your situation and explore the potential solutions available. It is even possible to stop a winding up petition with the right defence. We can negotiate with HMRC on your behalf and look more closely at alternative funding options. For a free, no-obligation consultation, please contact us today.
It is possible for ‘a close company’ (i.e. a company with fewer than 5 participators) to write-off a directors loan, assuming that director is also a participator.
In this situation, the director’s loan must be treated as a distribution of profits. If the recipient of the loan is not a participator, the outstanding amount must be taxed as employment income. The director would then have the responsibility to mention this on his/her individual tax return within the ‘additional information’ section.
In some cases there are legitimate reasons for being able to reduce any personal liability from a director’s loan, where expenses are due for mileage, assets bought for the company with your personal money and other expenses.
If your director’s loan account becomes overdrawn, it is important to prepare your company tax return to show the amounts owed and your company must pay tax on any amount you haven’t repaid prior to nine months after the end of your Corporation Tax accounting period. This will entail a charge of 25% corporation tax on the amount left unpaid.
Directors often overlook the fact that as a director of a company, you must manage any loan account very carefully, making sure you include all entries accurately and on time. Be aware that HMRC can, and often will, question you about any director’s loan account as part of any Corporation Tax compliance check at any time, in order to ensure their calculations are accurate.
From 20th March 2013 several adjustments were introduced to the S455 tax charge to help prevent using close company loans to avoid tax.
What happens to an Overdrawn Director’s Loan Account during Liquidation?
Although over 70% of all directors in the UK have owed their company money at some point, serious problems can arise from this if you are unable to repay the loan and the company becomes insolvent.
At this stage you should stop trading and seek professional insolvency advice, immediately.
In liquidation, the overdrawn directors loan becomes an asset which the insolvency practitioner will have a duty to try and realise on behalf of company creditors.
How Does the Insolvency Practitioner Recover the Overdrawn Loan Amount?
If your loan account is still outstanding at the point of liquidation, the Liquidator will seek to recover this debt for the benefit of the creditors. The Liquidator will need to bring the books and records of the company up to date and establish what monies were taken out by way of dividends, salary or as a loan. The Liquidator will need to ascertain your personal means. This could include the equity in your matrimonial home or other assets you may own.
Insolvency is a very sensitive area for many directors and rightly so. For a lot of directors their company has emotional ties and simply shutting it down at the drop of a hat can seem drastic. Even having to consider some sort of rescue package can seem bit much for some directors. When you spend years building up a business, often investing your own personal money and time into making sure that it becomes a success, it is only natural that you have an emotional connection with the project.
Even though it may seem difficult to consider any insolvency solution, it is always best to find out as much as you can about the insolvency processes well before you actually need them. An example of this would be getting the necessary information on a voluntary liquidation solution such as a creditors’ voluntary liquidation as opposed to leaving it so late that one of your company’s creditors is petitioning for a winding up petition to force the company into liquidation. When this happens the official receiver is appointed by the secretary of state and instructed to get the best return for the company’s creditors and investigate the directors. The intention of the investigation is finding out why the company has been put into compulsory liquidation as opposed to going through the preferred route using a voluntary liquidation tool.
With this in mind would you rather be ‘in the know’ or ignorant about insolvency? Knowledge really is power and knowing how to use it is just as important. We don’t believe that there is ever a ‘perfect’ time to carry out a insolvency solution, however, the earlier you address the issue the better. Don’t get too hung up on specific timing, just get in touch with a professional insolvency consultant as soon as you feel concerned about your cash-flow problems.
Statutory demand against a company is a formal, legal warning from a creditor, that is sometimes used as a key part of a serious debt claim.
Any legal court judgement can be used as evidence of insolvency and this means that a creditor may be able to pursue a bankruptcy petition against the individual in question, or a winding up petition for a company.
If your company has been served a statutory demand, you need to take it seriously. Prompt action and clear communication with creditors may prevent the situation escalating.
What’s the Statutory Demand Process?
The minimum amount for a statutory demand debt must be at least £750 or more, as laid out in Section 123 (1) (a) of The Insolvency Act 1986.
Once served, it will show the contact details of the person to contact if the debt is to be paid or the person to contact if you dispute the debt in the first instance. Where a company contests the ‘demand’ the company and or solicitor should contact the court denoted on the demand and an injunction should be made to stop the statutory demand.
Can You Set Aside a Statutory Demand Against a Company
There is no specific law for setting aside a company statutory demand but they are allowed to contest the debt the same as any individual. You will need to prove it is a genuine dispute and not a delaying tactic and you are likely to need a lawyer to have the statutory demand set aside.
In principle if the company is successful in having the statutory demand set aside then the creditor will have to pay the court fees. Alternatively if the company fails to have the ‘demand’ set aside then the company will pay the courts costs.
How Long do you Have to pay?
Once 21 days have passed from the date of the statutory demand the amount claimed should be paid in full or within 18 days of the date the debt should be settled or contested.
What happens if I Don’t Pay
The failure to pay the debt is significant as it is evidence that the company is indeed insolvent as it cannot pay its bills when due. This means the company can be legally wound up and forced into compulsory liquidation.
Must a Creditor always use a Statutory Demand to claim a Debt?
No. A creditor could have already proven the debt in law by having a claim proved in court such as a county court judgement or other court order. The creditor could simply ask the judge to enforce the original debt order. As long as the creditor is owed more than £750 the company can be wound up and forced into a compulsory liquidation.
Legitimate Reasons for Reversing a Statutory Demand
WHAT ARE YOUR OPTIONS?
(1) Pay the Debt in Full
This is obviously what the statutory demand is intended to provoke, so if you can pay the debt, you should. The law is there to help creditors escalate their debts until they get paid so if you ignore it, you might find yourself at the receipt of a winding up petition, which could force your company into liquidation.
(2) Negotiate a Payment Plan with Creditors
By accepting your responsibility to pay the debt, while explaining your inability to settle it all at once, many creditors are open to a payment in instalments.
(3) Consider an Insolvency Proceeding such as:
Company Voluntary Arrangement – A Company Voluntary Arrangement is a process whereby an IP helps you negotiate a long term payment plan with creditors, while protected from further creditor action by a legal ring-fence.
Administration – Administration allows larger companies to be restructured by an Insolvency Practitioner, while protected from legal action, with the goal of turning the businesses fortunes around.
Voluntary Liquidation – If the statutory demand brings with it the realisation that your company is insolvent, you may wish to voluntarily liquidate while you still can. Once a winding up petition has been delivered, this possibility will have vanished and you will have even less control over your future.
The moratorium has the effect of pausing all insolvency proceedings and legal processes that are being taken against the company in question. It also means no other legal processes can be commenced without the consent of the administrator or permission of the court.
In most circumstances, this will lead to winding up petitions against the company being dismissed. This gives the company the breathing space it needs and allows the insolvency practitioner to plan a rescue or restructure without having to deal with constant creditor pressure.
One of the main reasons companies choose to enter into administration is to benefit from the moratorium, which is triggered automatically as soon as an application to the court for an administration order is made.
What are the benefits of a moratorium in administration?
Once a company enters administration it is given the benefits of a moratorium, a powerful legal ringfence which prevents legal action being taken against the company. This means creditors of an insolvent, or financially distressed, company cannot initiate further recovery action including petitioning the court for the company to be wound up.
What is the purpose of a moratorium?
The important thing to note with a moratorium is that it is a temporary measure. It is not a get out of jail free card; instead it gives the company a chance to sort out its issues, safe from the threat of legal action. Creditors still retain their rights and the claim over the money they are owed; however, they are temporarily stayed while the moratorium remains in place.
The administration must serve a purpose; a company will not be allowed to stay in administration forever simply delaying the inevitable. Instead a company must use this opportunity, and the protection provided by the moratorium, to put plans in place with its creditors to achieve the statutory objective of the administration and for a decision to be reached as to the future direction of the business. During this time the creditors’ interests need to take priority over those of the company’s directors and shareholders.
How long does a moratorium last?
An interim moratorium is granted once the company files a notice of intention to appoint an administrator. The appointment of an administrator must be made within 10 business days of filing the notice of intention in court and, immediately on appointment, a second moratorium is given. This moratorium lasts until the company exits administration.
How does a company exit administration?
There are several ways a company can exit administration with the most appropriate route being determined by the company’s financial position and viability as a going concern.
In some cases, the breathing space provided by the moratorium may be enough to allow the company to overcome its challenges and come to an agreement with creditors. If this is the case, the company would exit administration, the administrator would hand back control of the company to the directors, and the company would continue to trade.
In many cases, however, a further insolvency process is often required in order to resolve the problems the company is facing.
Other exit routes
Should the company have a realistic chance of becoming successful again in the future but requires an element of restructuring in order to do so, a recovery procedure such as a Company Voluntary Arrangement (CVA) may be recommended.
A CVA involves negotiating with creditors in order to come up with a mutually agreeable payment plan; some debt will be written off, with the rest being paid back over the course of the CVA which typically last between two and five years.
The administrator will draw up a CVA proposal to present to creditors and, if this is accepted, the administrator would then hand back control of the company with all parties henceforth being bound by the terms of the CVA. Contracts (including leases) can be renegotiated while unprofitable arms of the company can be closed down in order to maximise the chance of the company recovering.
In some cases, it may be decided that the company’s problems have reached such a level that it has no viable future as a successful trading entity and creditors would gain more by the company being closed. If this is deemed to be the case, the company will be placed into a voluntary liquidation procedure known as a Creditors’ Voluntary Liquidation (CVL).
Alternatively the administrator may have sold the business and assets in the administration process and simply need to move to CVL to facilitate a distribution of funds to creditors. A CVL may otherwise achieve alternative objectives, such as enabling the liquidator to disclaim onerous property or complete more time-consuming investigations into conduct or claims against third parties.
Seek qualified advice and support
If your company is dealing with financial distress and you are considering administration, liquidation, or any other insolvency procedure, contact the experts at Middlebrooks. You can arrange a completely free no-obligation consultation with a licensed insolvency practitioner at a time and place to suit you.
What are Bounce Back Loans?
As the name suggests, Bounce Back Loans are designed to help Britain’s SMEs weather the current government-imposed restrictions on business, and give them the resources to ‘bounce back’ quickly once trade is permitted to resume.
Aimed at small businesses, the BBLS give companies access to loans worth up to 25% of its turnover, up to a maximum of £50,000. They are provided interest-free for the first 12 months, with a competitive rate of 2.5% levied afterwards and fixed for up to six years. The government provides security for 100% of the loan amount, lowering the risk to lenders.
The government is providing 100% security to the banks for loans taken out under the BBLS, however, it is the responsibility of the business to pay back the loan once monthly repayments begin following the initial 12-month grace period.
As the government is providing the banks security for the full loan amount, this means that company directors will not need to provide a personal guarantee to underwrite the borrowing.
Not having to provide a personal guarantee becomes extremely valuable if the company is unable to recover from the impact of Covid-19, or otherwise finds itself in financial distress at a later date. If the company becomes insolvent and subsequently enters a formal insolvency procedure, such as Creditors’ Voluntary Liquidation, then responsibility for repaying the Bounce Back Loan will remain solely with the company and liability cannot and will not be transferred to directors or other shareholders provided they comply with their statutory and fiduciary duties as a director. This means there is no risk to a director’s personal assets or individual credit rating should their company not be in a position to repay the loan.
Struggling to access a Bounce Back Loan?
One of the challenges is that only a small number of banks have been authorised to issue Bounce Back Loans, and those that have are choosing to prioritise their own business customers. This is leaving tens of thousands of small businesses unable to apply for a Bounce Back Loan even if they otherwise meet the lending criteria.
While over £2bn worth of Bounce Back Loans were secured within the first 24 hours, this represents just 53% of the 130,000 initial applicants.
Bounce Back Loans qualification criteria
With this in mind, however, businesses do have to agree to a set of standard declarations before taking out the loan and it is vital that directors are aware of exactly what these are and what they are agreeing to before signing on the dotted line.
As these loans are a direct response to the current coronavirus pandemic, businesses must confirm that they have been ‘adversely impacted’ by Covid-19 and also that their company was not ‘in difficulty’ prior to 31st December 2019. ‘Difficulty’ is defined in a number of ways including being in bankruptcy, liquidation, or undergoing a process of debt restructuring.
Businesses that were in difficulty as of 31st December last year may still be eligible for a Bounce Back Loan, although this is likely to be a reduced amount and it may come with added restrictions on how the funds can be used.
What can a Bounce Back Loan be used for?
The loan must be used in a way which will provide an economic benefit to the business. This could include boosting working capital and improving general cash flow. The loan can be used to pay salaries; however, it cannot be used to increase them, nor can it be used to pay dividends unless there is adequate profit showing on the balance sheet.
Understanding Preference Payments
The loan can also be used to refinance existing borrowing, although caution needs to be exercised if you are planning on doing this. Take for example a company which has a significant amount of existing debt which is owed to a variety of creditors. Some of this debt is personally guaranteed, the rest is unsecured.
In this example, if the director chooses to pay off only that debt which is personally guaranteed – and therefore that for which he or she would be personally liable for if the company was to be liquidated – leaving unsecured creditors unpaid, then this is likely to be seen as an act of misfeasance through the making of a ‘preference.’
Suspension of wrongful trading
Wrongful trading provisions have been temporarily suspended; however, this is not a get-out-of-jail free card for directors thinking of making a preference payment to minimise their future personal liability.
The current relaxation of wrongful trading rules allows directors to continue trading even if their company is financially distressed and at risk of insolvency, without the threat of becoming personally liable for the business’s debts. The ultimate aim is that this should reduce the number of companies heading into liquidation, instead giving viable businesses the chance to trade through the current challenging climate and recover once ‘normal’ trading conditions return.
However, while wrongful trading rules may have been momentarily suspended, this does not include the rules surrounding preference payments or misfeasance, both of which still apply. This means that directors could face possible personal liability for repayment of a Bounce Back Loan should this not be used in accordance with the declarations made during the application process, or if directors utilise this borrowing to clear personally guaranteed debt at the expense of other creditors, thereby creating a preference.
If you are considering taking out a Bounce Back Loan, particularly if you are intending to use these funds to pay back existing borrowing, it is important to take advice from a licensed insolvency practitioner beforehand to remove the risk of inadvertently falling foul of the rules surrounding preference payments.
You need funding but you don’t want to take out a loan
When obtaining borrowing for your business you should be clear with yourself what the money will be used for. This will not only ensure that you obtain the right amount of funding, but it will also help you select an appropriate type of funding.
While loans are useful in many instances, some companies may find more benefit in exploring alternative avenues of funding. Companies who have a ledger of invoices which have gone unpaid may be better suited to invoice discounting or invoice factoring, which will give them access to a percentage of the money the company is awaiting. This can help ease money worries now and also in the future, giving an element of certainty to directors and allowing for better cash flow management. This type of funding is extremely flexible and unlike a Bounce Back Loan, it can be turned off once the need for it has passed, rather than the company being tied to the agreement for six years.
If you have been declined for a Bounce Back Loan, or feel this is not the most suitable form of funding for you company, contact Middlebrooks office, who can provide the specialist help and advice you need to fund your business during these challenging times.
If you are facing pressure from HMRC regarding your company’s tax liabilities, it is reassuring to know that options are available to steer you through this stressful time. You may have become delinquent on payments due to a downturn in the market, the loss of a key customer, or an inability to collect your own debts on time.
The introduction of HMRC’s Time to Pay arrangement indicates an understanding of the problems facing limited companies in this challenging economy, and a willingness to assist businesses facing genuine cash flow problems. A TTP arrangement can be implemented to cover a variety of tax arrears including VAT.
This formal agreement with HMRC allows you extra time to pay your tax bill, with certain caveats:
An extended payment period of up to a year is common with a Time to Pay arrangement, and although the overall debt is not reduced, this added time relieves some of the pressures on a company that is already struggling.
It should be noted that a failed Time to Pay arrangement can be disastrous for a debtor, often leading to HMRC attempting to close the limited company in order to recoup its debt. This is why you need to ensure that no payments are missed or late for the entire term of the arrangement.
Do you Qualify for a Time to Pay Arrangement?
A cash-flow forecast will be needed to prove that the company can afford the vat arrears as well as any taxes that may arise as part of any proposal.
In addition, HMRC will assess:
Middlebrooks can contact HMRC on your behalf. We have local offices and an excellent history of successful negotiations.
As the UK’s largest creditor, HMRC have efficient and sometimes quite intimidating methods in place to recoup what is owed them.
The main advice is to act quickly. If you fail to contact them about your situation the chances of a successful outcome are significantly reduced, but negotiations can be difficult if you do not understand how they operate.
Can’t Pay VAT? What Happens Next…
If you’re in arrears, and unable to pay HMRC the tax they’re owed, you should be efficient and practical about your options. 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.
It’s worth pointing out that, of all the things you can owe money to HMRC for, VAT is the one tax they pursue most aggressively. That’s because, unlike corporation tax, for example, VAT is money that was always the governments, you’ve just acted as an unofficial tax collector on their behalf.
Four Options When You Can’t Pay VAT
What Can you do about HMRC VAT Arrears?
HMRC takes VAT more seriously than some other forms of tax debt, so if you are behind with your payments the suggestion is to act promptly to ensure the situation doesn’t escalate. Significant VAT arrears is a notable indicator of insolvency also so bear in mind that problems in this area may prompt HMRC to probe deeper into your company’s tax affairs.
Many companies experience VAT issues due to tax inaccuracies, specifically as they reach the VAT threshold. Sometimes Accountants do not register the business for VAT when they should or equally do not deregister when the business’ turnover drops below £83,000. This can cause issues with the amount of VAT that is expected from HMRC and the amount that the business is aware it owes.
What you can do: VAT Arrears is best tackled head on, by keeping clear lines of communication with HM and Revenue and negotiating where possible. Negotiating with HMRC is something we’ve been doing for many years, so it may help your case to have us doing so on your behalf.
Is it a Criminal Offence to not pay VAT?
Being late or in arrears with VAT is not a criminal offense. You simply need to get in touch with HMRC as soon as possible so that they’re aware of your circumstances and don’t feel the need to escalate things.
In some cases, when arrears reaches a certain point, HMRC will send you a ‘ Notice of Requirement to Pay a Security against your VAT payment .’ This means you now owe them so much that they’re insisting on some kind of security to cover the debt. A security bond comes with a 30 day payment term and if you do not pay this, it IS a criminal offence.
Failure to pay an HMRC security bond will likely result in HM & Revenue pursuing you in court.
Receipt of one of these notices is something you should definitely discuss with your accountant, or an experienced HMRC meditator such as ourselves.
What are the Most Common VAT Payment Problems?
Failure to Register
Believe it or not, the most common mistake when businesses cannot make their VAT payments is not registering for VAT itself, due to having underestimated the performance of the business when trading in its early years.
Unexpectedly Large Bill
Unfortunately, the shock of a relatively large and unexpected HMRC VAT bill can cause huge problems to the company’s cash-flow as HMRC will want the VAT calculated retrospectively.
Forgetting to Deregister for VAT
Another common error is not de-registering for VAT for whatever reason. In such circumstances, the tax burden when the company’s revenues are falling can be dramatic.
Any one of these ‘mistakes’ can result in a compliance visit from the VAT investigations team to complete an audit check of what is being asserted.
Can HMRC Write off Debt?
The only way HMRC would do this is if they were presented with a proposal for a Company Voluntary Arrangement, by an insolvency practitioner such as ourselves.
A Company Voluntary Arrangement is a structured repayment plan for companies in debts, for a percentage of what they owe. Once an insolvency expert has assessed how much the company could afford and over what time frame, he/she makes a forma proposal to creditors (which may include HMRC) about what is possible.
Creditors need to vote to approve this but, if it goes through, the rest of the debt will be written off.
If you can’t pay your corporation tax bill, or are in arrears with your payment, the fundamental piece of advice is to maintain regular communication with HMRC.
What happens if I Can’t Pay My Corporation Tax on Time?
If you or your accountant has already spoken to HMRC, what follows will depend on how much confidence they have in your ability to pay and the status of your cash flow.
In other words, if this is the first time you’re late then they may react differently to how they would with a ‘repeat offender’.
It’s important to note that a ‘repeat offender’ may not just be related to company tax, but can also be affected by personal tax, such as income tax, or be relevant to the same taxable period as the corporation tax liability.
For ‘repeat offenders’, it’s important that you call the office that contacted you – there’s no point in contacting the HMRC Business Support Service now. If all communications with HMRC have been exhausted and you have tried a time to pay arrangement then you need to seek specialist, professional help.
We can help with this situation by providing expert advice on all varieties of corporation tax liability and tax debt.
Are There Any Fines or Penalties if I Can’t Pay Corporation Tax?
Yes, there are fines for not paying corporation tax. Make sure you file your company tax return on time even if you can’t make the full corporation tax debt that is due.
If you don’t file your return on time you may be charged a fine or penalty.
Will HMRC Wind Up My Company for not Making My Company Tax Payment?
Yes. HMRC has a duty to collect tax debt for the UK government. HMRC are also responsible for more winding up petitions than almost everyone else put together, so it’s important to keep this in mind when considering your intentions going forward.
Can Bailiffs Seize My Assets?
Yes. HMRC can seize assets, and because they do not have to prove the tax debt via the normal legal channels they can process this much faster.
This will never happen out of the blue, however, you will have received clear letters beforehand warning you of the escalating situation.
These will mention ‘Taking control of goods (distraint)’ or ‘Enforcement action’ both of which are HMRC’s terms for seizing goods in order to recoup money owed.
When you speak with HMRC about having problems paying PAYE, the level of faith they have in your company will largely be dictated by your tax history. If this is the first time that you’re having trouble paying PAYE, HMRC will react differently than if they were dealing with a company that has missed payments repeatedly.
HMRC do have the right to pursue directors personally for failure to pay PAYE tax arrears and/or National Insurance Contributions under the Social Security Act and usually by way of a Personal Liability Notice (PLN), however, this is usually only in the following circumstances:
What Happens if you Don’t pay PAYE?
If you don’t have the money, your first concern is going to what happens next?
In the first instance, you will receive an automated letter reminding you to pay. The letter will explain that you need to pay immediately and outline the ways you can do.
Following on from this, HMRC will begin to escalate the situation. Initially, they will charge penalties for late payment. The amounts of these – detailed below – depend on how often you have defaulted.
If you simply cannot pay at all, their stance will slowly grow tougher. Expect to receive increasingly threatening letters followed by legal action.
Ultimately, HMRC has the power to force your company into liquidation for non payment for debt via something called a Winding up Petition. HM and Revenue issue more of these per year than any other creditor.
The key thing to remember is that putting your head in the sand is the worst thing you can do. Whether you’re having cash flow issues, or even if the late PAYE is a symptom of more serious financial issues within your company, you need to keep in touch with them.
What are your options for HMRC Tax Help if Your Business is facing PAYE/N.I. Tax Bill Problems
Although limited companies protect a director’s personal assets, this does not apply in PAYE or National Insurance cases where the director is proven to be criminally negligent. Although unusual, this is becoming more common and directors should seek professional insolvency advice immediately if significant sums are unpaid.
Trading while insolvent and showing preference to one creditor over PAYE or NI – for example, if employees are not paid, but company directors pay themselves – can prompt them to take a more serious look at a company.
What are Your Options for Paying PAYE Arrears?
We have a great deal of experience helping companies with HMRC and PAYE arrears issues.
As well as being experienced negotiators with HM and Revenue, we can advise you of the full range of options available for someone in your situation. With PAYE specifically, these include:
HMRC may accept a Time to Pay Arrangement, which is an agreed payment plan.
In order to qualify you will be expected to demonstrate that the company can afford to repay the PAYE over a maximum of twelve months, along with any other taxes in the tax return that are due for the tax year.
For many companies with tax issues with PAYE, corporation tax arrears and VAT debt; HMRC arrears can be a symptom of a larger problem.
If other creditors are threatening, a Company Voluntary Arrangement (CVA) can offer a better solution than a Time to Pay Arrangement. You can delay tax and creditor payments for up to 5 years, and the debt itself can be discounted!
Although a CVA is considered an insolvency procedure it does not mean the company goes bust but is a rescue mechanism which can help a company get back on its feet. In the right circumstances, the CVA can be a formidable company rescue tool.
Invoice or asset based finance is the ability to sell unpaid due invoices. Unlike traditional finance which can be impossible to reach for businesses with less than perfect credit, invoice finance lenders assess the credit of the company against which the invoice has been raised.
This is a powerful form of alternative finance which can radically improve cash-flow in the right situation.
A winding up petition is a legal notice issued by a creditor like HMRC with the intention of forcing a company into closure. The petition is presented at court where a judge will hear the case.
Often preceded by a Statutory Demand, it is amongst the most serious pieces of legal action any limited company can face and you should act immediately if you have received one.
If the debts remain outstanding, the creditor (often HMRC) will make an application to the courts to have the company compulsorily wound up.Winding up Petitions cannot be issued for debts of less than £750. There is no maximum threshold.
Once the Winding up Petition is advertised, banks will automatically freeze company bank accounts meaning you will no longer be able to run your business. You must act promptly if your business is going to survive.
How can you stop a Winding up Petition?
Whether this is possible depends on multiple factors, including how quickly you take action after receiving it. There are certain actions that can be taken within the first seven days of receiving a winding-up petition that may help:
If you are successful in the dispute, the creditor will be found to have abused the court application process, which is very serious. Read a full article here on stopping a winding up petition.
After the seven day period has elapsed and the winding up petition becomes an Order, it’s increasingly difficult to rescue the company. Without intervention it is likely that the court will appoint an Official Receiver to wind up the company.
How does the Process or Procedure Work?
After the petition has been issued, the debtor has 7 days to respond, before the Petition can be formally advertised and this will alert the banks to freeze the company’s accounts. (NB, this can be undone using a validation order under under section 127 of the Insolvency Act 1986, assuming there is good evidence)
This brief 7-day window is often the only time that directors have to prevent compulsory liquidation so, if an alternative solution is to be found, the directors will need to respond swiftly.
It is possible to rescue a ‘business’ or a company even at this late stage, but the more time that passes beyond the advertising stage the more difficult it becomes.
Once the order has been issued, the court will appoint an Official Receiver which may be an appointed Insolvency Practitioner.
The Appointed Liquidator then liquidates the company assets and distributes the proceeds to its creditors such as HMRC.
How Long Does it Take to Wind up a Limited Company?
Typically, from serving the winding up petition to the Court hearing and serving a Court Order usually takes 4-6 weeks, but depends on how busy the Courts are.
The time of year will also impact as the Courts are closed in Summer and over the Christmas period.
A winding up order is the court order that follows a successful winding up petition and it is this procedure that places a limited company into compulsory liquidation.
As soon as the Order has been issued, the Official Receiver will commence the process of winding up your company.
A winding up order is a court order which will instantly force your company into liquidation. It is the result of a judge ruling against the debtor upon a winding up petition by a creditor, such as HMRC.
In this situation, your options have run out, and the court will appoint an Official Receiver (OR) to liquidate all of your company’s assets.
It means the end of a limited company, the sale of any assets, and its eventual dissolution at Companies House.
Who Can Issue the Winding up Order?
Only the judge can make the final ruling, but a creditor can instigate the process by issuing a winding up petition.
This is preceded by statutory demand against your business for an unpaid debt in excess of £750. If the debt remains unpaid after 21 days then the creditor can ramp up the pressure by issuing the winding up petition, which is the most serious threat any creditor can make.
At this point, you have just a few days to settle the debt or take other action to remedy the situation. Fail to do so and the winding up petition will be heard by the court and a winding up order can be made to force the business into compulsory liquidation. A liquidator will then be appointed to sell the business’s assets and close it down.
What can you do if a Winding up Order is Made Against Your Business for Non-Payment of Debt?
Once the court has made a winding up order, there’s very little you can do to prevent the liquidation of your business. If you want to save your business then you have to act earlier.
The court must review and approve the petition before it is issued to the insolvent company. After receiving the winding up petition, you then have seven days before a winding up order can be made. That gives you a window of opportunity to take one of the follow actions:
How do I Stop a Winding up Order?
Your options are very limited after a winding up order has been made. However, there are still a few avenues you could explore:
(a) Have the winding up order rescinded or dismissed
You can apply to the court to have the winding up order rescinded within seven days of the order being made. To be successful, you will have to show that the court did not have all the facts or the circumstances of the company are now materially different than when the order was made.
(b) Apply to have the liquidation proceedings stayed
An application to temporarily or permanently ‘stay’ the liquidation proceedings can be made by a creditor, a shareholder of the company, an appointed liquidator or the official receiver.
(c) Appeal the winding up order
It is possible to appeal the winding up order. However, this remedy is limited and can only take place on the basis that the decision was wrong or unjust due to serious procedural or other irregularities.
How Long does Winding up a Company Take?
From the moment of receiving a statutory demand, the business has 21 days to pay.
Once that period has passed and the debt remains unpaid, the creditor can ask their legal team to apply for a compulsory winding up order. From that point, it generally takes around 28 days to wind up the company.
The winding up petition is sent to and reviewed by the court. If it’s passed, it’s then sent to the insolvent company. The company then has seven days to act. If it fails to act or runs out of time and the court approves the winding up order, the liquidation process will begin. The winding up petition will be advertised in the London Gazette and the company’s bank accounts will usually be frozen.
What Happens after a Winding up Order is Granted
Once the judge has granted the winding up order, the director’s powers cease. The court will appoint an official receiver to take over. Their role will be to communicate with the directors, secure any company assets, and make staff redundant.
In time, a licensed insolvency practitioner may be appointed to take over from the Official Receiver to complete the corporate liquidation.
In order to assist us in helping you, please get in touch with a Middlebrooks team member.
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Claire Middlebrook, Scott Bastick and Katie McLachlan are authorised to act as insolvency practitioners in the UK by the Institute of Chartered Accountants of Scotland
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