Small Business Guide to VAT and Payment Problems

As we all have to pay VAT on services and goods, businesses do too. It’s a part of business tax we have to pay to HMRC - if we don’t, we will receive penalties and fines.

It’s the business owner’s responsibility to pay VAT payments when they fall due, however sometimes this tax can be left until last if suppliers, contractors, employees etc, haven’t been paid.  If the business is struggling to keep up with VAT payments, it could be sign it is insolvent.

There is always the risk of creditors, like HMRC, issuing legal action if you don’t pay up, for example distraint (where they remove and sell goods to recover debt) or a winding up petition, which is often the very last resort as it can cause irreversible damage to the business.

Options if you can’t pay

A Time to Pay deal (TTP) - You can ask for a time to pay deal with HMRC, which lets you pay back debt over a few months to a year. Be realistic about what you can afford to pay back – if it fails, they could issue legal action.

Company Voluntary Arrangement (CVA) – this is a long-term formal deal with creditors, like HMRC, which protects your business against legal threats while you pay back a proportion of debt over a few years. A CVA also lets the business exit expensive contracts and leases, a great aid to cost cutting.

Bear in mind, it must be a viable business with a team committed to its success to ensure it chance of survival.  Over 75% of creditors (by value) must approve the arrangement to go ahead – that said HMRC favour these types of arrangements.

Pre-pack administration or administration

If the business can’t afford to pay back debt and is being threatened legal action by creditors, administration may be the best way forward. It stops any further legal action and provides an administrator to review the business, looking at the restructure or sale of the assets. Usually in a pre-pack administration (which happens upon appointment of administrators), the company or business is bought by a new company or third party, often saving all jobs. Employment contracts can be transferred over from the old company to the new company.

Creditors Voluntary Liquidation

If the business is no longer viable and there is no future in the business, liquidating can be an efficient solution. If you feel this is best for your business, you must speak to shareholders who can then ask creditors to appoint a liquidator.

The best advice for any business falling behind with tax payments is to contact HMRC as soon as possible. You may be able to negotiate a repayment plan that will benefit both you and them. Don’t leave it to the point of no return – there can be effective ways out there to save the business!

Claire Moore is a Marketing Executive in London. Claire has a passion for business and finance and enjoys writing about these subjects. You can follow Claire on Twitter @ClaireKSA

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