What to Do if Your Company Has VAT Arrears
If your business has fallen behind on its VAT payments, it could face severe legal pressure from HM Revenue and Customs (HMRC).
Dealing with HMRC can be a frustrating process, especially if your company has significant VAT arrears. HMRC is the most common business creditor in the UK and its methods of collecting on tax debts can be swift, persistent and aggressive.
In certain cases, HMRC may even seek a winding up order against your company, allowing it to close your business and liquidate its assets to recover unpaid VAT arrears.
Luckily, a range of options are available for dealing with HMRC and reaching an agreement for your business’s VAT arrears. We’ve explained these options below, with additional information on what you can do if your business has VAT arrears and is under pressure from HMRC.
What Are VAT Arrears?
Value Added Tax, more commonly known as VAT, is a consumption tax that’s levied on the vast majority of goods and services sold in the UK.
Currently, the VAT rate in the UK is 20 percent. However, certain product and service categories are subject to reduced rate or zero-rate VAT. As a UK-based business, you must pay VAT if your total annual turnover (gross revenue) is above the government’s £85,000 threshold.
If your business is legally required to pay VAT and fails to pay on time, it will fall into arrears with HMRC.
What Happens if Your Business Has VAT Arrears?
HMRC is the most common business creditor in the UK and has a range of effective processes for recovering tax debts. If your business has VAT arrears, you’ll likely face aggressive attempts from HMRC to collect on the overdue payment.
Typically, HMRC’s collections process begins with a series of letters notifying your business of its VAT arrears. These letters will communicate how much your business owes and the action HMRC may take in order to recover the money it’s owed.
If you fail to respond to a VAT demand letter from HMRC, your business may face legal action from HMRC in an effort to collect on your tax debt. HMRC may:
- Seize your business’s assets. HMRC can legally seize certain assets owned by your business in order to recover unpaid taxes. This is done via a distraint order, which lets HMRC seize business assets without needing to first petition a court.
If your business repeatedly ignores demand letters from HMRC, an HMRC officer may visit your business premises. During this visit, the officer may take inventory of assets owned by your business and issue a distraint order.
HMRC will provide you with approximately five days of warning before seizing business assets, allowing you to pay off your tax debts before facing business interruptions.
- Wind up (liquidating) your business. If your business ignores demand letters from HMRC and fails to pay its VAT arrears, HMRC may pursue your business in court and seek a winding up order.
If your business is subject to a winding up order, its assets will be sold in order to pay its creditors, including HMRC. The business will cease trading and you, as its director, may face charges if you failed to cease trading after the business became insolvent.
As you can see, HMRC has a significant amount of power to enforce its demands. Because of this, it’s essential that you seek out expert advice immediately if you have VAT arrears and are under pressure from HMRC.
If you’ve received a demand letter, been visited by an HMRC officer or have received a winding up petition, contact us. Our insolvency practitioners can provide free, private advice to help you make the best decisions for your business.
Your Options for Dealing With VAT Arrears
Dealing with pressure from HMRC over VAT arrears can be a stressful experience. Thankfully, a variety of options are available for your business, from negotiating with HMRC to using financing options to access cash and pay your business’s tax debts.
If your business is financially viable, you may be able to use financing to access cash and pay your tax debts, ending pressure from HMRC.
A variety of financing options are available for businesses with VAT arrears. In order to access financing, your business will need to be financially viable, meaning it has the potential to turn a profit once its VAT arrears and any other debts have been paid.
Financing options include secured loans, which may require your business to borrow money by offering equipement, real estate or other assets as security, and invoice financing options such as invoice discounting or invoice factoring.
Time to Pay Arrangement (TTP)
If your business can’t afford to pay its VAT arrears as a lump sum but generates sufficient cash flow for ongoing repayments, it may be able to negotiate a Time to Pay arrangement (TTP) with HMRC.
A Time to Pay arrangement is an agreement between your business and HMRC that allows you to pay VAR arrears over an extended time period, typically as monthly instalments.
Entering into a TTP will halt any legal pressure your business is currently facing from HMRC. If you fail to comply with the agreement, HMRC may restart its legal action against your business and, in some cases, could seize assets or seek a winding up order.
If you believe that a TTP could be a good solution for your business, contact us. Our team has helped hundreds of UK businesses deal with tax arrears and, if appropriate for your business, can negotiate a Time to Pay arrangement with HMRC on your behalf.
If your business is insolvent, meaning it lacks sufficient cash flow to pay its creditors (including HMRC) or is balance sheet insolvent, entering into an insolvency procedure may be the most effective way to protect your business against legal pressure from HMRC.
Common insolvency procedures include entering into administration or proposing a Company Voluntary Arrangement (CVA) to HMRC. These procedures will temporarily halt legal pressure from HMRC and other creditors and may be an effective option for your business.
In some cases, using the pre-pack administration process may be the best way to preserve and continue your business’s operations going forward.
If your business is insolvent and no longer viable, going into liquidation via a Creditors Voluntary Liquidation (CVL) allows you to shut your business while reducing your risk of facing charges as a company director.
Because every business is different, there’s no “best” insolvency procedure for dealing with VAT arrears. If you believe that an insolvency procedure may be a good choice for your business, it’s best to contact us and talk to our insolvency team.
Contact Us For Private Advice and Assistance
If your business has VAT arrears and is under pressure from HMRC, it’s important to speak to a professional as soon as possible. Failing to take action after receiving a demand letter or on-site visit from HMRC could result in your business’s assets being seized and/or legal action.
As experts in insolvency, we’ve helped hundreds of UK businesses in a large range of industries negotiate with HMRC regarding VAT arrears. Our insolvency practitioners can offer personalised and private advice to help you make the best decisions for your business.