Recent statistics suggest that HMRC has toughened its approach to tax avoidance as evidenced by the 12% increase in the number of winding up petitions served by HMRC on troubled companies for tax debt in 2016 compared with the previous year. The number of penalties issued by the taxman for “deliberately” underpaying tax has also risen dramatically. These measures are part of a government tax avoidance clampdown that aims to boost treasury coffers and close the budget deficit.
HMRC is consistently an aggressive creditor that takes serious action against a company to recover money owed. That said, the taxman is not unreasonable and will listen to you when you put your case forward. Therefore, it’s essential that you make contact with HMRC as soon as you know that you aren’t going to be able to pay your tax on time. In doing so, you will demonstrate that are taking a responsible approach and, more importantly, that you aren’t deliberately trying to avoid paying tax.
When a business is unable to pay its VAT, PAYE or Corporation Tax on time or can’t pay at all, this can be a warning sign that the company is in danger of insolvency. When this happens HMRC is a forceful creditor that turns up the pressure on the business, and being served a winding up petition becomes a daunting prospect. A winding up petition is a legal notice, which involves the creditor, in this case HMRC, petitioning the court to have the beleaguered business liquidated as a way of enforcing payment of tax debt as it believes the company is insolvent. The outcome is business closure and being struck off the register at Companies House.
Tax debts must never be taken lightly as they are a serious threat to any company. In this scenario, you must respond quickly and act responsibly to address tax arrears as if you fail to contact HMRC promptly, the chances of a positive outcome for the business are seriously damaged.
Late or non-payment of tax
Typically, companies that have cash flow issues and are in financial distress run up taxes, such as VAT and PAYE arrears. In this situation, it’s highly likely that the business hasn’t turned a profit so Corporation Tax arrears are less frequent. If the business has enough cash to pay its VAT or PAYE arrears, this should be done immediately as this will prevent HMRC from taking action later to recover the money that’s owed.
It’s worth noting that HMRC charges interest on VAT or PAYE arrears if the business fails to make its payments on time, particularly if the business has previously missed a payment. If you postpone payment for any reason, you could end up with large interest payments as well as the tax arrears. This is how your tax affairs can quickly spiral out of control.
Where the business can’t afford to pay its VAT or PAYE arrears, directors must talk to HMRC and put their case in writing. Demands shouldn’t be ignored as this is how penalties can mount up. In this scenario, HMRC may well agree to a Time to Pay (TTP) arrangement, where the business can pay off the arrears over a six to 12-month period.
Time to Pay (TTP) arrangements
A Time to Pay arrangement can cover VAT, PAYE or Corporation Tax arrears. “To negotiate this type of payment plan,” explained Mike Smith from Company Debt, “the taxman must believe that the tax arrears are caused by temporary cash flow problems and that you aren’t just trying to deliberately avoid paying tax. Your business must also have good compliance; abiding by both industry regulations and government legislation.”
Discussions with HMRC can be particularly stressful and if they aren’t conducted professionally and with an understanding of the taxman’s point of view on tax avoidance, they could lead to the closure of the company. With this in mind, you should try to arrange a meeting with HMRC as soon as possible to discuss a payment plan. If a meeting is not possible,you should speak to a tax inspector directly on the phone. If you’re unable to come to agreement regarding a Time to Pay arrangement with HMRC, the next stage is negotiating a settlement.
During this process, you will be asked a number of questions about the company’s financial situation, compliance, the company’s tax debt history, etc. It’s important that you give as much detail as possible as HMRC has to treat every case “reasonably”, so being prepared, having the appropriate paperwork and approaching the process positively can play a big part in achieving the best outcome for your business.
In addition to a payment plan or settlement, raising fresh finance to clear the debt can also protect a business from a winding up petition and compulsory liquidation. If the business already has significant amount of debt and would prefer to avoid adding any additional liabilities to its balance sheet, invoice finance (factoring and invoice discounting) is a way of raising capital quickly by selling unpaid customer invoices to a factor or discounting company. Alternatively, using capital from the business owner’s cash reserves or from friends or family is another practical way to pay off tax arrears and get the business back on track.
Underpaid tax and compliance checks
Compliance checks don’t always mean that the business has underpaid tax as a number of tax returns are selected randomly for investigation. However, once you’re informed that a compliance check is going to take place, it’s crucial that it’s taken seriously and that everything possible is done to provide a full answer to HMRC within the specified deadline. Here is a step-by-step guide to the process.
Step one – information notice
The taxman will send you an information notice to inform you that a compliance check will be carried out. A compliance check is a formal tax investigation, and HMRC will request to see certain information and/or documents within 40 days of the date the notice is issued. If you can’t meet the deadline, you should contact HMRC immediately.
You and/or your accountant should gather the information requested before responding to the taxman. If at this stage, you notice that tax has been underpaid, you should try to pay it immediately. The taxman will reduce penalties, depending on how helpful the individual has been in helping to establish the correct amount of tax owed. The largest reductions in penalties are for “unprompted disclosures”. So it pays to tell HMRC that you have made a mistake before the taxman tells you.
Step two – formal notice
In the case where information isn’t provided, HMRC will send a formal information notice, which could result in a fine of up to £300 for failing to comply. You may also be fined up to £60 a day up until HMRC receives the information requested. You may also be fined a multiple of the tax arrears if you deliberately withhold information and or conceal the tax owed.
In this situation, you will receive a letter or phone call, giving you seven days’ notice of a visit to your business premises, accountant’s office or home. The date and time of which must be agreed with HMRC. The visit is officially approved by a HMRC officer of tribunal. You can’t prevent HMRC from inspecting financial records or business premises. However, officers don’t have the right to enter a person’s home without consent unless business records are kept there.
These visits are never randomly selected, therefore, you should take professional advice before lettingofficers enter your home or business premises. In a similar vein to announced visits, the notice is approved and signed by an HMRC officer. It’s worth bearing in mind that you can’t be fined for refusing entry when the notice is signed by an officer. However, there is a £300 penalty if the notice has been signed by a tribunal and there is no “reasonable excuse” for not permitting entry. An accountant not being present is deemed a reasonable excuse.
Once the compliance check is complete, the taxman will send you a letter, stating whether tax has been underpaid. If this is the case, the additional tax must be paid within 30 days. You may incur a penalty for late payment as well as one for non-disclosure of taxable income or gain. Depending on the individual situation, they can exceed the actual tax payable.
Finally, tax is a fact of life, and dealings with HMRC for late, non-payment or underpayment of tax can be stressful. However, by maintaining solid financial records, managing a business responsibly and remaining professional and helpful in your dealings with the taxman, you have every chance of sailing through the process.