There are few feelings in business worse than receiving a VAT bill and not having the working capital to pay it. HMRC is not known for its patience in dealing with late payers, though it may be possible to negotiate a payment arrangement in certain circumstances. However, there are steps you can take before going to HMRC, cap in hand, requesting time to pay.
What is VAT and when do you need to pay it?
Let’s start with the basics: VAT, or Valued Added Tax, is a tax on goods and services, currently levied at a standard rate of 20%. If your business turns over more than £85,000 and operates in a sector that attracts VAT, it is a legal requirement that you charge your customers VAT, hold the money on HMRC’s behalf and pay it forward four times a year. You should always think of the money as HMRC’s rather than yours: once you treat the VAT you’ve collected as additional working capital, you’re at the start of a slippery slope that could cause you real problems.
However, there’s a strong upside to being VAT-registered: you can claim back the VAT you spend on goods and services, or (depending on your turnover and sector) may find it advantageous to register for the flat rate scheme. This prevents you from claiming back VAT on sums under £2000, but also gives you a standard discount on the amount of VAT you need to forward to HMRC, allowing you to keep the balance to reflect the VAT on your purchases.
Your quarterly VAT bill is potentially your most important
You should always think of your quarterly VAT payment as the most important you will ever make. Other creditors would need to take you to court to obtain money if you’re late in paying, but HMRC has wide-ranging powers to recover whatever it is owed. Do not be tempted to go to the wire on your VAT payment, as HMRC can very easily wind your business up.
So, what happens if, despite your best intentions, you have a VAT bill and you don’t have the means to pay it?
How to negotiate a payment plan with HMRC
If you’re struggling to pay but you have never defaulted before, there is a good chance that HMRC will be willing to work with you. You should contact HMRC as soon as you recognise that there could be problems paying – don’t wait until near the due date. It’s also important to remember that even if you can’t pay in full, you have a legal requirement to send your VAT return and declaration in on time.
Once you have indicated that there is a problem, and offered to pay some portion of what is due, HMRC will consider whether it is appropriate for you to enter the Time to Pay (TTP) scheme. If they accept you, then your outstanding payments will be spread over 12 months. Do not, in any circumstance, default on any of those payments, as the arrangement will be withdrawn and you will find yourself facing the full payment immediately. Also, do not expect to be offered a second TTP arrangement.
If all else fails, it’s time to borrow
An alternative to a TTP arrangement – or a solution if you’ve entered one and are still struggling to make the payments – is to take out business finance to pay your VAT bill. Of course, not all lenders will be willing to work with you, as inability to pay VAT is often the sign of a company heading into serious financial problems – which makes you a bad credit risk.
At Cashsolv, we apply different criteria from a bank when considering applications and are more interested in your growth and your potential than your credit score and your cash flow difficulties. What’s more, we can advance finance for all kinds of tax bills – not just VAT, but also corporation tax and employers’ national insurance (PAYE).
There are a number of finance options open to you, depending on your precise needs. If things have gone down to the wire, and you have to pay immediately or face serious consequences, then your lifeline will be an emergency loan. With this type of finance, we have a streamlined application and decision-making procedure – in fact, we can have the money inside your account in under 24 hours, so your business can pay its VAT and live to breathe and trade another day.
Alternatively, if you have a little more breathing space, then we can arrange asset-based finance on your behalf. As the name suggests, this involves using a business asset – which could be your premises, your plant or your equipment – as collateral. Of course, this increases your risk, as you could lose the asset if you fail to make the repayments, but reduces our risk – so you stand a higher chance of acceptance and will benefit from a lower rate of interest. With this type of finance, we work with panels of lenders, so we can find the finance partner that is most in tune with your business sector and willing to offer the most advantageous deal.
Introducing invoice factoring and discounting
However, if you have ongoing cash flow problems – but a fundamentally profitable business – then invoice factoring and discounting can tame your cash flow forever. These innovative financial solutions allow you to borrow against the value of your invoices, the instant you issue them – so it’s like getting paid immediately.
At Cashsolv, we’ll lend you up to 85% of your invoices’ value, with repayment being made when your customers pay you. Opt for factoring, and we’ll assign experienced credit control professionals to deal with your customers – negotiating diplomatically but tenaciously to secure early payment, thus minimising the amount of interest you will pay. This solution is ideal if you’re running a smaller business, as it means you no longer need to employ an accounts receivable team or divert people away from revenue-generating activity to chase unpaid bills.
Alternatively, if you have an established accounts team and prefer not to have your customers dealing with a third party, then you can choose invoice discounting and manage your own accounts payable. The choice is entirely yours. Either way, late payers will no longer be able to disrupt your cash flow, and work billed will effectively become cash in the bank – yours to use for paying your VAT bill, your corporation tax, your PAYE, your rent and utilities bills, or simply to reinvest in business growth, thus creating a virtuous circle.
A VAT bill you can’t pay doesn’t have to spell disaster
Receiving a bill you can’t pay is always frightening – particularly when it’s from HMRC. However, the last thing you should do is panic. The first thing to do is talk to Cashsolv – we’re the experts in business finance and we will find the solution you need. To discover what we can do for you, please visit our business finance page.