VAT…Value Added Tax. This is an indirect business tax paid to HMRC. Ultimately, it is paid by the consumer as it is added to the price of the good or service they are purchasing from your company. You are in effect collecting the tax on behalf of HMRC and then you need to pay it over to them. You can of course claim back VAT that your company has paid for its own good’s and services.
When your company can not afford to pay over the VAT to HMRC, for whatever reason, then a debt accumulates. It is important to do all you can to avoid owing VAT
If you need help understanding the VAT system or paying the tax then read on.
Do I need to register for VAT?
Not all companies need to pay VAT and neither do all goods and services attract it. As a director, it is your responsibility to be aware of whether your company is liable or not.
Legally, you are to register for VAT when your company has a turnover of over £85,000 across any consecutive 12-month period. If you fail to do this, failure to notify and late registration penalties will be issued.
Once registering, VAT must be charged on all of your goods and services sold, as well as claimed back on any business purchases. The buffer between the VAT charged on your goods and services and the VAT you have paid, is how much you must pay HMRC or reclaim.
Ensure you get the rates right
Currently, the standard UK rate is 20% (for clothing, takeaways etc) though some goods have a small rate of 5% (i.e. home energy), if not being zero-rated (water, basic food, newspapers etc).
Note: ZERO RATED DOES NOT MEAN NO VAT. Zero rated sales should still be recorded and acknowledged on your company’s VAT return.
Note: Due to coronavirus, the Government had temporarily reduced VAT for certain supplies of hospitality, hotel and holiday accommodation and admissions to certain attractions, to 12.5 %. This has now come to an end.
Have you been issued a penalty for late payment?
This is of course, something you wish to avoid. However, if you do become subject to a penalty, there are different categories for your fine to fall in to. Ultimately, it depends on the amount of times you have fallen behind on your payments and the company turnover. See the table below:
|Number of Late Payments||Penalty for companies with turnover up to £150,000||Penalty of companies with turnover in excess of £150,000|
|Two||None||2% of unpaid VAT (or £400 whichever is highest)|
|Three||2% of unpaid VAT (or £400 whichever is highest)||5% of unpaid VAT (or £400 whichever is highest)|
|Four||5% of unpaid VAT (or £400 whichever is highest)||10% of unpaid VAT|
|Five||10% of unpaid VAT||15% of unpaid VAT|
|Six+||15% of unpaid VAT||15% of unpaid VAT|
A daily interest rate of 2.75% will be charged on to the balance of any late payment, so be warned. Until you can pay off the debt, this will continue being charged.
Late payment alerts financial problems
If you are in this position and your company has hefty VAT debts, it really does paint a poor financial image. Take advice from licensed insolvency practitioners, like ourselves, who can help explain the options you have and talk you through the best way forward.
Other options exist…it doesn’t automatically mean closure!
What are the options to help my business pay the VAT?
Apply for a time to pay arrangement with HMRC
This is a short-term solution (typically one year) to give you some time to pay off your tax debt. Remember, HMRC just want to receive their payment at the end of the day, so they are not too concerned if this means arranging a payment plan to get their tax debt paid. Be reasonable with them and do not be afraid to ask or negotiate. Do bear in mind that this will require the outstanding HMRC payments as well as current and future tax payments, being paid.
Increase your cash flow so that you can pay VAT
VAT charges are hidden within the price of a good or service charged to a customer. The company then usually use the money collected to help with daily running costs of the business. When this happens, little to no money is left for HMRC.
Seek for alternative options to improve your cash flow. Some ideas include:
- Assessing your business spending – where is your companies capital going?
- Thinking if there are any free tactics you can implement to improve your sales
- Cutting unnecessary costs
- Looking into alternative sources of finance or funding
Contact us today for more helpful advice.