HMRC is one of the most common creditors of UK businesses as it is easier to delay paying VAT than not paying a supplier who you rely on. However, if you ignore the obligation to pay VAT on time the consequences can be severe for both you and your business.
Here, we’ll look at how you can get back on top of your VAT arrears, and continue to run a viable business.
What are VAT arrears?
VAT stands for ‘Value Added Tax’. It’s a consumption tax for the customer and applies to most goods and services that are sold or bought in the EU.
It’s an indirect tax as it is paid to the Government by the seller (business), rather than the person who must pay the tax (the consumer).
According to EU regulations, the VAT rate cannot fall below 15%. In the UK, it currently stands at 20%, although it’s possible to reduce rates on certain items.
However, if the annual turnover of your business does not reach the annual turnover threshold (currently £90,000), you will not have to pay VAT.
Equally, if you’re exporting items outside of the EU or selling them abroad, you may not need to pay VAT.
HMRC is the organisation that collects VAT for the government. In insolvency proceedings, it’s considered a creditor just like any other – even though it’s technically a Government department.
If your company has VAT arrears, it means you have not paid/cannot pay your VAT bill. This indicates severe cashflow issues, or that your company is insolvent.
What happens when you realise you have VAT arrears?
In the first instance you should contact HMRC to explain the situation to see if they can help by giving you extra time to pay. If they will not then you should seek professional insolvency advice as quickly as possible. In doing so, you’ll be presented with options tailored to your situation, to help you avoid VAT surcharges.
Take action early enough, and this will be proof that you acted appropriately as a director. This is important, as you could be held personally liable for company debts if you’re found to have acted outside of your creditors’ best interests or have taken part in wrongful or fraudulent trading.
HMRC takes late or non-payment very seriously, so you must pay attention to all communications it sends you.
Unlike other creditors, it does not need to prove validity of debts to take court action against you. This can result in a distraint order, which gives you five days grace to pay your VAT debt or your company assets will be seized.
HMRC could also try to close your company through a winding up petition and compulsory liquidation – a drastic and final move to close down a company.