The coronavirus restrictions and the uncertainty it has caused has given many businesses a sharp income shock. But while revenues have plummeted, costs have remained at similar levels for many, with landlords, commercial lenders, suppliers and HMRC, among others, all needing to be paid. Unless you have substantial cash reserves in the business, making payments to creditors when your cash flow has been decimated is just not possible. One of the inevitable consequences for many businesses is that they are now struggling to make tax payments for previous periods that have been far more lucrative.
So, what can you do if you face bills for outstanding tax liabilities that you just can’t pay? Fortunately, there are several options available to you which we’ll cover in this article.
- Use VAT and self-assessment income tax deferments
As part of the government’s coronavirus support package, businesses were given the option to defer VAT payment and self-assessment income tax payments.
The VAT deferrals applied to payments made between 20 March 2020 and 30 June 2020 with no application or notification of HMRC required. Those businesses that chose not to make VAT payments during this time initially had until 31 March 2021 to pay the liabilities that accumulated. However, now businesses have also been given the option to pay their VAT liability in 11 equal instalments over 2021-22, without any interest or penalty charges being applied. Businesses will be able to opt in to pay their VAT liability in instalments when the new payment scheme launches in 2021. That could give your business the vital breathing space it needs.
Business owners and company directors were also given the option to defer their second payment on account of their self-assessment income tax, which was due on 31 July 2020. That must now be paid in full by 31 January 2021. However, if you’re unable to do so and owe £30,000 or less, you can set up a Time to Pay instalment arrangement online to pay the money you owe in monthly instalments without having to contact HMRC directly. You can do that using the information on the government website.
- Explore your alternative funding options
If your business is struggling to make payments, then although you’re unlikely to qualify for a loan from a bank, there are other types of funding arrangements that could be available to you.
If you sell your products or services to other businesses, then invoice finance could free up the money you need to pay your tax bills. All you need to do is to send invoices that you issue to your customers to your invoice finance provider. They will advance you up to 95% of the total value of the invoice within just 24 hours. They’ll then collect the balance from the customer when it is due and pay you the remaining 5-10%, minus their fee. Invoice finance is very quick and you do not need excellent financials or a perfect credit record to qualify, which could make it a viable solution for you.
Alternatively, if you sell directly to the public and take regular debit and credit card payments, a merchant cash advance could give you quick access to the cash you need to settle your tax liabilities. Well-suited to retail and leisure businesses, a merchant cash provider agrees to give you a lump sum payment in return for a percentage of your future credit card or debit card sales. That allows you to make tax payments to HMRC before late payment penalties and interest charges are incurred.
- Make a Time to Pay Arrangement
If deferring your VAT and self-assessment income tax payments is not enough and you are struggling to pay other outstanding tax bills such as corporation tax and PAYE, you could contact HMRC to try to negotiate a Time to Pay Arrangement. That will allow you to pay your outstanding tax liabilities in monthly instalments over a typical period of 6-12 months.
However, there’s no guarantee that you’ll be accepted for a Time to Pay Arrangement, as Tony Smith, the director of Company Debt, explains: “Before contacting HMRC’s Debt Management and Banking Team, you need to make sure you’ve done your homework. You should be prepared to explain the reasons why you can’t pay your tax bill and the steps you’ve taken to try and make the payment.
“You should also think about how much you will be able to pay towards the outstanding liability every month and how long it will take to clear the balance. HMRC is not in the business of giving out gifts, so it will need to be convinced that you genuinely cannot afford to pay and that the monthly instalments are affordable and realistic”.
- Enter into a Company Voluntary Arrangement (CVA)
A company voluntary arrangement or CVA is a formal insolvency procedure, so unlike the other options that we’ve discussed, it’s only available to insolvent businesses. A CVA must be arranged with the help of a licensed insolvency practitioner. They will provide assistance putting the proposals together and supervise the arrangement once it is in place.
As well as tax debts, a CVA can include all other unsecured debts the business has that it is unable to pay. If the proposals are agreed by the creditors, the business will repay its debts, in full or in part, by way of monthly instalments that are made over a period of between two and five years.
Once the CVA is in place, no more interest or charges can be added to the debts and the creditors cannot take legal action against the business as long as all of the monthly payments are made. That makes a CVA a potential solution not just for business tax payment problems, but also for outstanding debts owing to suppliers, landlords and commercial lenders.
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