Struggling to Pay Your VAT? Advice from an Insolvency Practitioner

March 9, 2018

Non-payment of VAT is a serious problem in the UK. HMRC has faced a significant level of criticism regarding the perceived low levels of tax recover and has recently adopted a more robust approach to non-payment of VAT and other taxes.

Struggling to pay VAT liabilities can be a significant problem for many businesses. This problem needs to be understood and managed correctly to allow the business to satisfy HMRC’s demands and continue trading without impact to its operation or reputation or, at least, managed in such a way as to prevent potential impact on a business owner’s personal assets and future.

In this article, I’m going to look at the reasons why a business might be struggling to pay its VAT, the actions HMRC may take to recover these sums from the business and/or the business owner and the steps we recommend taking if your business has been struggling to pay its VAT.


Why haven’t you paid your VAT?

Why haven’t you paid your VAT?

There are many reasons why a business won’t have paid its tax, ranging from the banal (my accountant forgot to click send) to the serious (my business is struggling to survive and has reached the limit of its banking facilities).

In this section, I will look at three of the most common reasons that may lead to a business having problems paying its VAT bill.

Forgetting to register for VAT

Businesses only have to register for and start charging VAT when they hit a certain turnover threshold. Currently, that threshold is £85,000 per annum. (The threshold may change so please check here for the most up-to-date information.)

As a fledgeling business grows, its directors will have a myriad of new tasks to look after and it's easy for them to not realise they have exceeded the VAT threshold.

However, this isn’t just an administration error and can have serious consequences.

The risk is that HMRC demands the 20% VAT on all sales after the threshold has been breached. This can quickly add up to a very significant amount of cash the business simply doesn’t have.

The good news is that there is often an easy solution to this problem. If your customers are VAT registered then, with their agreement, you can issue them with a corrected VAT invoice and have them pay you the VAT element, which can then be paid to HMRC.

Treating VAT as if it’s your money

When a customer pays your business, the money arrives in your account as one chunk. However, it’s not really one big chunk. It’s actually one sum for the goods or services and another sum for the VAT. The first belongs to you and the second belongs to HMRC.

But because the sums aren’t separated, it’s very easy for a business to see all the money and treat it like it’s all theirs.

This is a very common mistake and is easily done when a business is struggling.

We see many businesses which are struggling to pay their suppliers and employees use VAT money to cover these costs. Before they know it they’ve done this for more than just the most recent VAT quarter.

VAT inspection

Business owners generally do their best to calculate the VAT they owe and pay their VAT bills when they fall due.

However, business owners are rarely tax experts and often aren’t great at record keeping either. This inevitably leads to mistakes, which can result in under- or overpayment of VAT.

Unfortunately, if HMRC discovers a mistake that has resulted in an underpayment of VAT, they may open an investigation and demand significant sums of underpaid VAT.

Where a company has very poor accounting records, this can get even worse as HMRC may make a general assessment of what they think the unpaid tax is and demand that amount from the business.

It is then up to the company to prove this is incorrect, an impossible task if the accounting records are poor.


What can HMRC do?

HMRC recovery actions

HMRC can — and will — pursue businesses for non-payment of VAT. In fact, when struggling companies contact us, HMRC is often the creditor that is exerting the most pressure.

Unfortunately, it’s not only polite letters, emails and phone calls you can expect from HMRC. In this section, I will discuss the four actions or stages HMRC ticks through in order to recover unpaid VAT.


In the early stages, HMRC will attempt to work with a business when they first begin to struggle with paying their VAT liabilities.

At this stage (indeed at all stages) it is important to keep the lines of communication open with HMRC. Too many business owners simply ignore HMRC, which only increases the chances of action being taken and the demise of the business.

Repayment plans

It may be possible, at this stage, to agree to a repayment plan with HMRC. However, a business needs to ensure they are not entering an unrealistic repayment plan that is doomed to fail.

The risk is that HMRC will only agree to one repayment plan and if this is defaulted on, they will take legal action. Therefore, the business might only get one shot at repayment plan and will need to base their proposals on robust and realistic projections. For many businesses, this will need the assistance of their accountant.

We have seen many businesses who have successfully agreed to a repayment plan with HMRC who think too readily that they’ll get the same agreement the next year. In our experience, there is little chance of getting HMRC’s agreement two years running if the previous year’s plan has failed or not yet been fully paid.

Enforcement Team

We always ask clients whether they are still dealing their local HMRC person or whether they are now dealing with the Enforcement Team, which is based in Edinburgh.

If your case has been transferred to the Enforcement Team in Edinburgh, time is running very short. If HMRC has passed your case to the Enforcement Team, they will likely be considering legal action and the opportunity for agreeing any deal is rapidly diminishing.

A good rule of thumb is the full liability needs to be repaid in no more than six months to have much of a chance of being accepted.

At this stage, if your business is still struggling to pay its VAT bill, you should seek professional advice from either from an accountant or an insolvency practitioner.

Summary warrants

HMRC does not have to follow the same legal procedures as other creditors when taking recovery action. However, this isn’t widely known amongst business owners and their accountants, which gives businesses a false sense of security.

Other creditors usually go through a process of various threatening letters then sending letters through their lawyers and then a court action, which, if successful, allows the business to demand payment and take action.

This process can take months to complete and the debtor business is formally notified at every stage.

(Since correspondence goes to a company’s registered address, companies who may have moved premises can often be caught unawares by legal actions if they haven’t updated their registered office details and so do not receive these notifications. Either that or they have been ignoring their mail because of the level of creditor bills.)

HMRC can effectively bypass the vast majority of this debt recovery process and jump straight to a summary warrant and then liquidation with little or no notification requirements.

Very often, the first a business will know about this is when a Sheriff Officer turns up on their doorstep with a summary warrant demanding payment in full within 14 days.

There is no need for any prior notice and no earlier court hearing for the debtor business to argue its case. All too often, businesses who think they are still in repayment negotiations with HMRC receive a summary warrant, meaning they have no time to prepare, respond or negotiate.

Businesses need to appreciate the seriousness of a summary warrant and the severity of the timescales.

This is not just another creditor demand that can be ignored.

If an HMRC summary warrant is not paid in full within 14 days, it is highly likely the business will be forced into insolvency in a matter of weeks not months.

Investigations and assessments

HMRC is using more and more financial information held by third-parties and appears to be focusing on specific industries such as restaurants and fast food outlets. The main issue here is the underreporting of sales and VAT.

It may come as a surprise to some business owners but HMRC can access sales records held by third-parties like Just Eat and compare that to the businesses’ own tax returns.


What can businesses do?

What a business can and should do will depend on its individual circumstances but it is imperative to recognise the problem and take action as early as possible rather than sticking your head in the sand and hoping things will just get better on their own.

The earlier you seek help, the greater the chance you have of rescuing your business.

Make sure you are, at least, submitting accurate and timely VAT returns and have a dialogue with HMRC.
If you haven’t paid your VAT (for whatever reason) but you have available funds to do so, it’s usually advisable to repay HMRC as soon as you can to avoid any further action against your company.

However, if you haven’t paid your VAT because you don’t have the funds to pay your bill, it’s a different story. Take appropriate professional and regulated advice and get help as soon as possible.

Appointing an accountant

If you are beginning to struggle with VAT, it is always worth considering engaging the services of an appropriately-priced and hands-on accountancy firm to assist you with your financial record keeping, including attending to VAT matters.

An accountant will not only help you keep track of VAT but will ensure your business has accurate financial records across the board. This will, in turn, help you track what you owe to HMRC, avoiding any nasty surprises down the line.

Contact an insolvency practitioner

When you’re dealing with HMRC, it isn’t advisable to try and muddle your way through negotiations yourself.

Instead, we recommend contacting an insolvency practitioner (IP). An IP will be able to objectively evaluate your business, give you impartial advice on your situation and, if you wish, negotiate with HMRC on your behalf.


Are you worried about VAT?

If you are worried about VAT, please speak to a suitably qualified and regulated professional such as your accountant or an insolvency practitioner as soon as you can.

However, be aware that there are many unregulated and unqualified business rescue” advisers out there and we have seen too many business owners go to them for advice which later truly regret.

Often these advisers will promote themselves as having have gone through an insolvency, which somehow means they are qualified to advise on how to avoid it.

An analogy would be would you rather have your kids taught how to swim by a qualified swimming instructor or by someone who says they once almost drowned?

Another good rule of thumb is if the solution seems too good to be true then it is. Don’t believe an adviser who says for a fee he can help avoid having to pay any or all of the tax or an adviser who suggests he has a buyer lined up to purchase your insolvent business, which will leave you safe and free of all obligations.

Rescuing a struggling business or part of it is difficult and against the odds. To give your business the best possible chance of surviving there are two very important factors:

  • Time. The earlier you accept there are problems and take action and advice the better;
  • Appropriate advice and help. Ensure the advisers you seek help from aren’t just Yes Men who will just charge you a fee for simply agreeing with you.

If you’re worried about paying your VAT or know you are unable to pay your VAT, please get in touch with our team.

Call our office today on 0141 353 6203 or send us a message through our website. Our first meeting is always free and is completely confidential.

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