VAT and Tax Debts
VAT and Tax Debt Issues

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The mention of Her Majesty’s Revenue and Customs (HMRC) can have the most seasoned company director running for cover. The best way to avoid unnecessary contact with HMRC is to pay what is owed on time and in full.   HMRC has strong powers which enable it to enforce payment, including:
  • Sending bailiffs to your company or home (if the business is not limited). They don't need the permission of the Court to do this and they can seize stock and assets. If you do not allow them entry they can apply to the Courts for a warrant. However, in such circumstances, HMRC are more likely to approach the County Court for a Judgement. If the business or company fail to meet the terms of the Judgement HMRC can apply to the Court again, this time for a Charging Order, which may mean that the debt is secured or may seek to wind up the company.
  • Passing the debt to a Debt Collection Agency. In these cases HMRC are signifying that they do not want the administrative burden of managing the debt and that after considering other options open to them have decided that appointing a Debt Collection Agency is the best way to recover the money owed.
Sending tax and VAT returns in on time and paying tax and VAT when it is due means fines for late payment and interest will not be incurred. Even if the deadline is missed and HMRC estimates tax, the return should be submitted as soon as possible because an accurate return may reduce the amount owed. Failure to pay taxes or paying them late signals to HMRC that your company is in trouble and this may attract greater scrutiny from them.
Companies in trouble
Unfortunately, when a company is experiencing financial difficulty, perhaps because business has suffered a downturn, customers are paying bills late, repayments to creditors are too high or there are other issues affecting cash flow, they will not be able to pay some or all of their tax and VAT debts. What is important is that they start to pay something as soon as possible even if it is only a small amount.
The behaviour of directors
Once a director becomes aware that the company is experiencing problems and there is a likelihood of it becoming insolvent they should take immediate action to protect the interests of creditors. Failure to do so will call into question the behaviour of the director and charges of wrongful or fraudulent trading which, if substantiated, could mean they:
  • Become personally liable for contributing to the assets of the company; and
  • Are disqualified from acting as a director for up to 15 years.
Contacting a Licensed Insolvency Practitioner
If a company of which you are a director is heading for trouble, and particularly if tax and VAT debts are owed to HMRC, the first thing you should do is discuss your options with a Licensed Insolvency Practitioner. Their advice will always be for the Company Board to take change of the situation and implement strategy that is in the best interests of all concerned before HMRC, or another third-party creditor removes the options from the company.
Ways to deal with Tax and VAT debts
A time-to-pay agreement allows a company to reschedule the debt owed to HMRC over a longer period. An Insolvency Practitioner can help to put together a budget which details income, expenditure, and debt, and shows how much the company is able to pay to HMRC over what period. An Insolvency Practitioner, acting on behalf of the company, can:
  • Contact HMRC’s Business Payment Support Service with the details of the company’s registered office address, telephone number etc;
  • Set out the debts owed to them;
  • Explain why debts have not been paid and what the company has done to try and raise the necessary funds; then, supported by the budget that has been drawn up
  • Make an offer of repayment.
Time-to-pay agreements, when the are granted, usually last for 6-12 months but HMRC can refuse them and, should they do so, and you think they have acted unreasonably, you can ask for the decision to be reviewed. Generally HMRC will expect current liabilities to be paid on the due date alongside a Time to Pay agreement for historic debts.

A Company Voluntary Agreement (CVA) can be arranged by an Insolvency Practitioner when a company is still able to trade viably but is being held back owing to high payments to creditors. Seventy five per cent of creditors have to agree to the CVA (secured creditors are not bound by the terms of a CVA). Once in place, the company makes a monthly payment to the Insolvency Practitioner who deducts an amount for their charges and divides the rest on a pro rata basis between creditors. CVAs generally last for between 3 and 5 years. After the arrangement has successfully completed any debt still outstanding is written-off, including debt to HMRC which does tend to look favourably on CVAs if they result in a better return.
Enter into Administration
This is a serious step; an Administrator will be appointed to wind down the company, sell the assets and, should their be any remaining funds after costs, repay creditors. When Administration takes place the behaviour of directors leading up to the Administration is scrutinised as in Liquidation.
Arrange a pre-pack administration
A pre-pack administration can be arranged by a company in trouble where a buyer has appeared. The buyer may be one or more directors or management from the existing company providing they have the capital to finance the purchase. These arrangements are made prior to an Administrator being appointed but will take place shortly after.

The Administrator will need to:
  • Satisfy themselves that a pre-pack administration represents the best option for creditors;
  • Confirm that the amount offered for the business and assets are representative of the market value;
  • Arrange a quick sale (of the business and assets - not of the limited company itself); to the buyer; and
  • Make a distribution to creditors of remaining funds.
Invoice Factoring
Invoice factoring is a way for a company in need of funds to raise money from an invoice factoring company on the basis of outstanding bills owed by customers. This is usually only available for business to business transactions.
How HMRC usually responds
HMRC can recover VAT debt in the same way as it recovers other tax debts, including issuing a winding up petition where the debt exceeds ₤750. The best advice is to keep on top of your VAT debts and settle them in full when they are due. HMRC will expect settlement of outstanding VAT in full before the next VAT return is due.
An offer of payment often helps
A VAT officer will examine the company’s previous history of VAT payments before agreeing to any offer of repayment. Nevertheless, even when an agreement has not been reached the company should pay something as soon as possible.
De-registration
If your company’s turnover drops below the VAT threshold, it may be worthwhile considering whether to deregister for VAT. If your customers are the general public the competitive advantage of a price decrease, or an increase in turnover if the price remains the same could outweigh not reclaiming VAT on supplies.

If you owe VAT debts at the point of deregistration you may find that HMRC will look more sympathetically on any agreement made to pay off the debt.
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