Corporation tax, VAT, PAYE and how HMRC handles collection and arrears.

As far as HMRC are concerned, the payments coming out of a business in taxes is as important as the money they take in in customer payments but can be far more complicated. 

It’s also one of those topics that is assumed that every director or small business owner should know inside out before opening their doors but with various rule changes and different payment requirements it can be tough to understand all the aspects of paying corporation tax, VAT, PAYE and the other essential levies a business has to pay to HMRC. 

So we’ll go through them all individually so you’ll have a better understanding of what each one is and how they should be handled. 

Corporation Tax

Being a company director isn’t just about having your own parking space, fancy title and the best chair in the office.  

There are certain statutory legal duties that have to be fulfilled including being legally obliged to pay certain taxes to HMRC beginning with corporation tax. 

The size of profits a company makes determines whether it pays larger or small company corporation tax rates.  Any business earning over £1.5 million is classified as large while smaller companies are those having annual profits of £300,000 or under.

The businesses themselves are responsible for calculating their own corporation tax liability and while the company accountant will establish this it is ultimately the company directors’ responsibility to make sure that it is paid on time and that accurate tax returns are filed.

The corporation tax return which is also known as form CT600 must be filed with the HMRC 12 months after the accounting period for corporation tax ends. 

This would usually be the same 12 month period as the company’s financial year that is covered by their annual accounts. 

Large companies paying corporation tax on profits of £1.5 million or more are allowed to make the payments in four instalments while smaller companies are required to pay owed corporation tax nine months and one day after the corporation tax accounting period ends.  As an example – a company with a tax year ending on March 31st would have to pay its corporation tax by January 1st. 

The current rate of corporation tax is 19%. 

VAT

All businesses, both big and small, limited companies, partnerships, limited liability partnerships (LLPs) or sole traders have to pay VAT if their income for any 12 month period exceeds the VAT threshold which is set at £85,000 for the current tax year.

VAT or value added tax is a tax charged on the sale of goods and services by UK based companies. The standard VAT rate is 20% although there are some derogations and some specific items are VAT exempt. 

All VAT registered businesses are legally required to keep adequate records so that their VAT can be accurately recorded and assessed. Once they are registered, all VAT businesses have to submit their returns online and also pay electronically on the day VAT is due. 

The deadline for submitting VAT returns is usually one calendar month and seven days after the end of their quarterly VAT period. 

PAYE and National Insurance Contributions

PAYE (Pay As You Earn) is the HMRC’s system to collect income tax and national insurance contributions (NICs) from paypackets as employees earn it. 

Self-employed sole traders are not affected by PAYE but if they run a limited company and draw a salary, they are classed as an employee and have to pay both PAYE and NICs.

All employers have a legal obligation to deduct PAYE and NICs from employees’ pay during every pay period. The amount of tax deducted will be determined by the employee’s individual tax code with all payroll data being submitted to HMRC electronically in real time rather than at the end of the month. 

PAYE bills have to be paid to HMRC either on the 22nd of the following month if it is being paid monthly or on the 22nd after the end of the following quarter if paid quarterly. 

Now every business is different but all encounter difficult periods from time to time when it can be hard if not impossible to make corporation tax or VAT payments when required by HMRC. 

This is why HMRC is the most common and often largest creditor for UK companies.

The first and possibly most important thing to do if you’re going to have trouble repaying is to get in touch with HMRC or respond to any correspondence from them promptly.  They will be more likely to look favourably on a business in arrears if directors demonstrate they are doing their best to reduce their debt quickly. 

Not responding or ignoring HMRC is possibly the worst thing business owners can do in this situation.

HMRC enforcement steps and responses

It can be worrying to receive a letter from HMRC as they are designed to encourage faster repayment of any owed debts. 

Acknowledgement of a letter will be a positive step and as HMRC will want to see action in trying to clear any arrears.  Making a nominal payment, less than the owed amount, would provide concrete evidence of this good will and would make the threat of legal action less likely as well as keeping them informed of efforts to reduce the debt. 

If a business doesn’t respond to HMRC in a timely manner or take any steps to reduce overdue debt then there are several steps HMRC can take to escalate matters. These can include: 

  • Sending an Enforcement Notice

An HMRC enforcement notice (also known as a distraint warrant) will be logged on their system and served if a business fails to make payments on an overdue tax bill despite previous correspondence, warnings and chances to make payments.  

The letter will be titled “Warning of Enforcement Action” and carries legal weight as seven days after the warrant is served, HMRC would be entitled to order bailiffs to seize any non-essential assets and sell them at auction to reduce the debt, although this would usually be at a lower price than could otherwise be obtained. 

If a business doesn’t respond to HMRC once an enforcement notice is issued, HMRC can take legal action against them for any unpaid corporation tax or VAT. 

This is most likely through the issuing of a statutory demand or taking the business to a county court to look to enforce payment.  

Both have potentially serious consequences for the business and there could be further sanctions imposed if HMRC believes the company is already insolvent. 

In this case they could ask for a security bond also known as A Notice of Requirement of Security (NOR) for outstanding VAT or PAYE. 

This would allow company tax debts to be transferred from the business to an individual director or other named individual which would see them made personally liable for future repayment even if the business is ultimately closed down. 

The final sanction available if a statutory demand or security request aren’t satisfied is a winding up petition where HMRC will ask the court to liquidate the business for non-payment of taxes. 

Potential solutions to tax problems 

Owing tax can be worrying no matter how much is owed but there are strategies and solutions to corporation tax debt and unpaid VAT and PAYE. 

  • Time to pay arrangement

Under certain circumstances a company can ask HMRC for “time to pay” off arrears through a specific arrangement which would see them paid back in regular instalments over time. 

This only applies to accrued debt at the time – any future tax demands will still need to be paid on time and usually in one sum. 

If the business can demonstrate good record keeping, has been in regular contact with HMRC and has a realistic prospect of paying back the owed amount within a 12 month period or 12 instalments then it will be considered. 

Failing to keep up with repayments will be considered a default as will non-payment of any other taxes. 

  • Company Voluntary Arrangement (CVA)

A company voluntary arrangement or CVA is a structured formal payment plan for companies that has to be arranged by a licensed insolvency practitioner.  

A proportion of total debts owed to HMRC and other creditors is written off in return for the business guaranteeing to repay the remainder in regular instalments usually over the period of five years or 60 months. 

HMRC can accept debts owed to them being included in a CVA and this solution has worked for many businesses with outstanding debts to multiple creditors.

  • Creditors Voluntary Liquidation (CVL)

If a company owes unpaid PAYE, VAT or corporation tax to HMRC, owes other creditors and realistically has no way of repaying all debt in future even if they are a viable business, then the best option might be for the owners or directors to place the company into liquidation themselves with a creditors voluntary liquidation or CVL. 

There are several advantages of voluntarily liquidating a company but it will generally see all outstanding debts written off at the end of the process – including debts owed to HMRC. 

One exception to this would be if it was found that directors deliberately acted in bad faith in the proceeding months leading up to this point. 

If this is proven then HMRC have specific powers to make individuals personally liable for unpaid tax debts. 

This is usually for the most serious offences such as deliberately withholding PAYE or national insurance contributions to preferentially pay other creditors or even themselves. 

Similarly, it could apply if they were found to have been criminally negligent in running the business or committed fraud that contributes to the non payment of tax.

Owing corporation tax, being in VAT arrears or not paying PAYE or NICs can seem like the end of the world if you’re a business owner or director. 

You might want to pay but simply cannot balance the books this month and to make matters worse, the HMRC have been in touch asking when they can expect you to make payment. 

The good news is that there is something you can do about it. 

We offer a free virtual consultation to anyone who’s concerned about their tax arrears or any other financial problems that could derail their business in the near future. 

Once our expert advisors have a clearer understanding of your position, then they can work with you to produce a range of options and actions you could take immediately as well as help the business in the short and medium term too. 

And once you have a roadmap to work from then you can start to follow the path back to profitability – but only if you make an important call first.