Question: “I’m running a small business and unfortunately we had some urgent stock issues that took precedence and I ended up filing my latest VAT return a bit late.
“I know I’m likely to receive a fine but I’m not sure how much it will be and how long I will have to pay it.
“I’m also wondering whether there’s a chance I won’t be penalised as I’m only a small company.”
Answer: Gerry Myton, partner at Streets Chartered Accountants, responds, stressing the importance of communicating with HMRC and how to minimise potential fines.
“Failing to submit a VAT return, failing to pay a VAT return or receiving a VAT assessment is something a lot of people struggle with. There’s a host of reasons why, but the first thing to say is that simply ignoring the issue won’t make it go away.
“There are few certainties in this world, but one of them is definitely the fact that HMRC is one of the most dogged organisations when it comes to chasing down payments. It simply isn’t an option to bury one’s head in the sand.
HMRC fines
“Failing to submit or pay a VAT return may result in fines. HMRC operates a system called ‘default surcharge’. The purpose of this is to change behaviour through a graduated penalty percentage. It starts with a warning letter, followed by a 2% penalty if any return is late or unpaid in the next 12 months. This increases to a maximum of 15%. If you fail to submit a VAT return, HMRC will issue Central Assessments. Paying a centrally issued assessment that understates your liability can attract a penalty of up to 30%.
“If you have had the misfortune of an HMRC VAT inspection that unearths an error, you will receive a notice of assessment plus interest and potentially a civil penalty which can be anything from 0% to 100%. HMRC can, in certain circumstances, issue a suspended penalty.
Arrange a payment plan
“If you are unable to meet your VAT liability however it arises, we strongly recommend that you contact HMRC or have a professional contact them on your behalf. Time to pay arrangements can be negotiated but the earlier you engage HMRC in the discussion, the better. Our advice is always to be reasonable when suggesting a time to pay agreement. They usually allow six months but with careful negotiation, 12 months can be achieved.
“It’s all about management of debt, whether that’s for £1,000 or £100,000. Don’t leave the negotiation until the bailiff is at the door.”
Change on the horizon
“Times are also changing for those who owe money to HMRC as the upcoming Budget looks set to change the rules as to how HMRC is regarded as a creditor. At present, HMRC is not regarded as a preferred creditor, meaning that when a company or individual enters bankruptcy or administration, the listed preferred creditors are the ones that receive any payments or remains of assets that are left behind.
“When this rule changes, HMRC will be amongst the first in line to recover their debt. HMRC always pursues debts, but with the imminent changes to the rules, it means that they can claw back what is owed more easily.
“The rules will apply to VAT, PAYE (including student loan repayments), employee NICs and Construction Industry Scheme deductions. The preferred creditor status was removed from HMRC back in 2003, and it meant that HMRC was on an equal footing with all other creditors. The theory was that this would help those in debt to more easily get themselves out of debt. However, the upcoming changes and reversal to the pre-2003 position means that HMRC will have a stronger position when it comes to recovering debts owed to them.
What to do next?
“The main thing to remember is that arrangements can be made. Whether this is an agreement to pay off the debt at a reasonable rate with HMRC or to allow time to raise the necessary funds.
“It really is a matter of effective debt management in many cases. Sorting out which debtors need to be addressed first and moving towards becoming debt-free should be the priority.
“Cashflow can often be the key to getting on the right track. Starting on the right path to better cashflow can seem daunting, but is worth it in the long run when no gaps are evident in your business.
“Bookkeeping, although often an arduous task, is an area where small businesses sometimes trip up. Keeping on top of the books and records helps ensure you are claiming all the VAT you can, and also issuing invoices to customers. There’s lots of information out there on the initial start up costs of various businesses, but little about how many working hours an individual needs to put in for the first months and years of a startup. These can sometimes verge on the ridiculous.
“It is so important to put a few hours aside to work on your company rather than for your company. If you are experiencing cashflow problems then you are not alone. This especially rings true if businesses are still within the first few years of company incorporation. These first years tend to be a huge learning curve.
“As long as you are aware of these issues then you can tackle them head-on. Having these aspects under control means you can focus on what’s important: running your business, doing a great job and exploring new ways to diversify or innovate.
“The reality that businesses face if they do not keep up with HMRC payments can be dire. After all, having bailiffs appear at your business can never be good for reputation. Creditors will not be concerned if your key clients are visiting or that you have important meetings to attend. They just want their money. If things have gone this far then it really is time to start considering what to do and where to turn next.”
