VAT is a tax added to products and services that are sold by VAT-registered businesses, but what happens if you can’ pay your VAT bill?
Many businesses struggle to pay the value-added tax (VAT), which can be a significant financial burden.
In some cases, the VAT can make up a large percentage of a business’s total expenses. This can be especially difficult for small businesses, which often have tight budgets and can’t absorb unexpected costs.
There are a few ways to reduce the VAT burden, such as claiming deductions and exemptions.
However, ultimately, the best way to manage the VAT is to plan for it in advance and factor it into your budgeting. By being prepared, you can avoid the financial stress that comes with trying to pay an unexpected tax bill
What happens if I am unable to pay the VAT my company owes?
If you are unable to pay the VAT your company owes there are a number of things you can do:
1) Time to Pay arrangement with HMRC (TTP). This will allow you to settle your outstanding VAT payments to HMRC through monthly instalments across a maximum of 12 months.
2. Business Funding – Emergency financing may satisfy your cashflow requirements providing your limited company can handle the repayments.
3) Closure options – If you feel that there is no viable future for the business you can carry out a Company Voluntary Arrangement (CVA) or Creditors’ Voluntary Liquidation (CVL).
4) Enter Administration or Pre-Pack Administration. You can rescue the business from insolvency by appointing an insolvency practitioner.
What is VAT and do I have to pay it?
VAT is a value-added tax that is levied on most goods and services in the European Union. The standard VAT rate is 20%, although there are reduced rates for certain items such as food and books. VAT is applied to the sale of goods and services at each stage of the production process, from the purchase of raw materials to the sale of finished products.
Businesses can recover the VAT they have paid on their purchases by charging VAT on their sales. This system is known as “VAT offsetting”. businesses must register for VAT if their taxable turnover exceeds a certain threshold.
They then charge VAT on their sales and pay it to the government. businesses can reclaim any VAT they have paid on their purchases, so they only pay the net amount of VAT to the government. This offsetting system helps to ensure that businesses only pay tax on the value they have added to a product or service.
Companies trading in the UK whose taxable turnover exceeds, or is anticipated to exceed £85,000 in any 12 month period is required to register for VAT.
How often do I have to pay my VAT bill?
If you’re registered for VAT, you must pay any VAT you owe to HMRC by the end of the month following the end of the ‘tax period’. Your tax period is usually a quarter (three months).
You can choose to:
– pay monthly instalments of VAT due, based on your best estimate of your VAT liability for the quarter – you’ll still need to make a balancing payment if your estimate was too low, or you’ll get a refund if it was too high
– pay the full amount of VAT due for the quarter by the end of the month following the end of the quarter.
If you don’t think you can pay your VAT bill in full, contact HM Revenue and Customs (HMRC) as soon as possible. They may be able to agree a time to pay arrangement with you. You must keep paying any VAT due during this arrangement.
Penalties can apply if you don’t pay on time or disagree with an HMRC decision and don’t let them know or appeal within 30 days. The sooner you contact HMRC, the lower the penalties are likely to be.
My accountant has calculated my VAT return incorrectly – do I still have to pay?
It can be frustrating when you feel like you’ve been overcharged, especially when it comes to something as important as your taxes. However, it’s important to remember that errors do happen and that they can be rectified.
If you’re certain that your accountant has made a mistake on your VAT return, the first thing you should do is contact them and explain the situation. They may be able to give you a refund or adjustment.
If not, you may still have to pay the full amount, but you may be able to claim it back later. In any case, it’s always best to speak with your accountant and get their professional opinion before taking any further action.
What happens if I do not submit my return or pay my VAT bill on time?
If you do not submit your return or pay your VAT bill on time, you may be charged a penalty. The amount of the penalty will depend on how late you are and whether you have been charged a late payment penalty before.
If you are more than three months late, you may be charged an additional 10% of the tax due. If you are more than six months late, you may be charged an additional 5% of the tax due. In addition, interest will accrue on any unpaid taxes. So it’s important to submit your return and pay your bill on time to avoid penalties and interest charges
The surcharge period lasts for 12 months, and while you will not be issued with a penalty fine for your first default, further failures to pay in full and on time, you will be issued with a surcharge, this is typically a percentage of the outstanding VAT amount.
This percentage will increase steadily with every default that is incurred, while the 12 month surcharge period will be extended each time.
| Number of Late Payments | Turnover below £150,000 | Turnover above £150,000 |
|---|---|---|
| First | No Penalty | No Penalty |
| Second | No Penalty | 2 percent of unpaid VAT (unless below £400) |
| Third | 2 percent of unpaid VAT (unless below £400) | 5 percent of unpaid VAT (unless below £400) |
| Fourth | 5 percent of unpaid VAT (unless below £400) | 10 percent of unpaid VAT |
| Fifth | 10 percent of unpaid VAT | 15 percent of unpaid VAT |
| Sixth and Subsequent | 15 percent of unpaid VAT | 15 percent of unpaid VAT |
What happens if I am unable to pay the VAT my company owes?
If you are unable to pay the VAT your company owes, you may be subject to interest and penalties. In severe cases, you may even be prosecuted. Therefore, it is important to keep up with your VAT payments and file your returns on time.
Should you find yourself in a position where you cannot pay, contact HMRC as soon as possible to discuss your options. There may be a payment plan available, or you may be able to negotiate a reduced amount. HMRC is typically willing to work with companies that are having difficulty paying, so it is always worth contacting them to explore your options.
Consider the reasons behind your inability to pay
Many businesses are struggle to pay their bills on time, and there can be a number of reasons behind this. One common reason is simply not having enough money within the cashflow cycle.
With the cost of materials and wages rising, businesses are reluctant to increase their prices. Another reason why businesses may struggle to pay their bills is unexpected expenses.
There can be many reasons why a business has an inability to pay invoices on time. It could be that the business is facing financial difficulties and is struggling to make ends meet.
Alternatively, it could be that the business is disorganized and doesn’t have a good system in place for managing its finances. Whatever the reason, late payment of invoices can be detrimental to a business’s reputation and may even result in legal action being taken against the company.
In order to avoid these problems, it is essential that businesses keep on top of their finances and make sure that they are always up to date with their payments.
Conclusion
Business are being squeezed for every penny, more so in 2023, ensuring that your debt are paid on time is fundamental to the survival of any business, issues can arise when you can’t pay vat the bill, HMRC are starting to pressure businesses to settle their VAT accounts in full, these include making companies that are unable to pay their vat bill from quarterly returns to monthly.
If your business is struggling to pay VAT, contact us today to see what your options are, simply complete the online enquiry form or contact us on the above numbers and one of our VAT specialist will talk you though your options.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.