My company cannot pay its taxes

Company cannot pay its taxes

Written by scott291074

April 5, 2021

Introduction

What should I do if I find that your company cannot pay its taxes?
When you are a director and you are running your own company, it is your responsibility and part of your director duties are to ensure that you pay your company’s taxes in full. Besides this, you also need to ensure that you pay the taxes on time.

What you should consider from the outset   

It is essential to establish from the outset that the contractor and the company are two separate legal entities. When you are a company director, this also comes with specific duties. Indeed, one of these is to make sure that you set aside the company’s tax liabilities, and they are not drawn out by you. Therefore, your company’s funds are not your funds to do with as you please. As an individual, you have your tax liabilities. Likewise, your company has its company tax liabilities. Therefore, you should try and ensure that you do not get yourself into a position where your company can’t meet its liabilities. Claiming for all of your genuine business expenses helps to reduce your company tax bills and also ensures that you are reimbursed for any business expenses you have paid for personally.
When drawing dividends from your company, drawing too much will result in leaving your company short of its taxes. There are many aspects to paying dividends. These include when should I pay them, the timing of paying them, how much can I pay, the dividend allowance and illegal dividends.

I have detailed all of the filing dates that you may need to meet as both a company director and someone who files a Self-Assessment Tax Return. It is a good idea to make diary notes of these in order for you to track when payments are due.

Overdrawing from your company   

Those that overdraw from their company     

In real life, many contractors may draw out too much from their company. If you do this it the result will be that your company cannot pay its taxes. These fall into two main categories:
  • First, some contractors accidentally overdraw. These individuals generally do not realise that they have done so until it is too late. If you do this it could lead to a position where your company can’t meet its tax liabilities. Usually, if you do draw out too much, you will have time to put this right with your company. To correct this, you could make an actual physical repayment or reduce your future drawings. Furthermore, once you repay the loan, you can return to normal. Going forward, you can then ensure that you keep an eye on your company’s tax savings in the future. 
  • In contrast, there are a small number of contractors who treat their company’s bank account like their own to fund their lifestyle and they will find that their company cannot pay its taxes. These individuals may only receive the message that their company’s funds are not theirs once a bailiff comes knocking. As a result, if you find yourself in severe financial trouble and your company can’t meet its tax liabilities you need to seek the advice of an insolvency practitioner. The practitioner could help to set up a Time To Pay (TTP) arrangement. A TTP will assist in paying off any debts to HM Revenue & Customs (HMRC).  

Furthermore, of those whose company can’t pay its taxes, there are the ones who are guilty of serious wrongdoing and they can face Companies House winding their company. Indeed, in some cases, they can also possibly be disqualified from being a company director for some time. Finally, many banks will not allow directors who are disqualified from opening a company bank account. Therefore, in this case, the option of starting a new company falls by the wayside. As a result, the contractor may then need to work via an umbrella company where the take-home pay can be significantly less.

Taking too much drawings from your company

As time goes by, you could find that your company cannot meet its financial obligations. Also, there could be several reasons for this. As a result, you will need to consider the next steps that you should take here to remedy this.

The most common cause for finding that your company cannot meet its liabilities, is that the director has taken more than is legally allowed as dividends. Consequently, they will have inadvertently created an overdrawn director’s loan account. Therefore, the loan from their company will need repaying in the future.

What you should consider as you go along   

Saving your company taxes in a business savings account     

Importantly, a sensible way to avoid getting into a position where your company cannot pay its taxes, is to have a separate company Savings account. Going forward, every time you receive a sales invoice in your business Current account, you will need to save the tax elements. Therefore, you will make a transfer from your company’s Current account to its Savings account for the following tax savings:
As a result of doing the above, when the taxes become payable at a later date, you can then make transfers back in the opposite direction. You can then settle the liabilities from your company’s Current account.

Planning ahead

On an ongoing basis, you need to plan for ongoing costs and expenses when you work out what you can take from your company as dividends and ensure that you do not get into a position where your company cannot meet its financial obligations. The best way to do this is to have an ongoing view of how much profit is available. Furthermore, once you know the position here, it will become clear how much of the company’s funds you can distribute as dividends.
Please have a read of how much dividends can I take. Most important, this explains how you can calculate the profit in your limited company at any one moment in time.

Potential scenarios that could be responsible for finding your company can’t meet its tax liabilities

Even when you are diligent with regards to making company tax savings, it is still possible that you could make a mistake. Consequently, if this occurs, it is essential to correct it as soon as possible.
Indeed, it could be the case that you have been merely overdrawing each month without noticing this and this could lead to getting into a position where your company cannot meet its financial obligations.
Another reason could be that your contract work may have finished, and as you need income to live on, you may have continued to take funds from your company. As a consequence, you may have inadvertently being left in a position where your company cannot pay its taxes.
On the other hand, your client or agency may also be slow or late at paying. Indeed, if you find this happening, you will need to try and make provisions to cover this. This could lead to a position where your company can’t meet its tax liabilities. Furthermore, if this continues to occur, you could consider looking for a new contract elsewhere with a different client.

Other considerations   

Cash accounting basis     

As a suggestion, if you use the `cash accounting’ basis for VAT, it will help with your company’s cash flow. Indeed, when using the cash accounting method, you will only pay over the VAT on your VAT returns once your business receives its invoices. In turn, this will make sure that your company is not out of pocket. This situation may occur if your client is late at paying or does not pay for one reason or another.

Speak to you accountant     

Important to note, if your company your company cannot pay its tax bills, a good place to start would be to talk to your accountant.

Interest and penalties

If your company company cannot pay its taxes:
  • HMRC will charge interest on the late payment of CT. Similarly. penalties can also come into play when you pay the tax seriously late. 
  • HMRC will also charge interest on the late payment of PAYE/NIC. Likewise, penalties may also apply when payments are late. 
  • Also, HMRC charge fixed penalties on VAT if you have been consecutively late over four or five occasions within twelve months of the previous late payment/filing. 
Therefore, if your company cannot meet its financial obligations in full, when looking at which taxes you should pay first, it will be essential to focus on any that could be incurring interest.

Arrange an instalment plan with HMRC

If your company can’t pay its taxes, in order to assist in helping you pay off any old tax debts, you could talk to HMRC and arrange an instalment plan.
Indeed, the tax office will still charge interest even if you do have an instalment plan in place. However, if you do inform them of your intentions to pay a liability via an instalment plan, they will no longer send out reminder type letters with potential warnings.
What’s more, if your company can’t meet its tax liabilities, HMRC will not always agree to an instalment plan. However, if they view this request as `reasonable,’ they are more likely to do so. Please do not expect them to be generous. They will also require specific information before agreeing to an instalment plan. Finally, if your company can’t meet its tax liabilities and you are unsure what to say, please ask your accountant to help or do this for you.
Importantly, if your company can’t meet its tax liabilities, you should seek professional help.
Furthermore, if your company cannot pay its tax bills, the primary reason could be due to your director’s drawings from the company. Although your company has limited liability status, if the main reason for the shortfall is the director has drawn the funds for themselves, HMRC could still pursue you personally for those tax liabilities.

A worked example

To ensure you do not get into a position where your company can’t meet its tax liabilities, here is an example to show you how to save for your company’s taxes. We will start with an example invoice of £10,000 + VAT. The table below shows what you should save based on this.
To be transferred
to the company
Savings account
Invoice -£10,000 + VAT
         12,000.00
VAT -this will need saving so that your company does not find itself in a position where it cannot pay its taxes
           2,000.00
               2,000.00
Net sales invoice
         10,000.00
Average monthly expenses
        1,000.00
Salary
            720.00
Profit before CT
           8,280.00
CT at 19% –this needs saving so that your company does not find itself in a position where it cannot pay its taxes
           1,573.20
               1,573.20
Total that you should save out of the original £12,000.00
               3,573.20

Final thoughts

As a final note, when you are running your own company, it is easy to lose track when you are leading a busy life. It is important that you do not get into a position where your company can’t meet its tax liabilities. Indeed, the best thing to do as time goes along is to save company tax savings separately from its normal funds. You can make transfers from your Current account to your Savings account and keep a tab to ensure that you have enough saved as time goes by. Then, when payments become due, you can make transfers back in the opposite direction from the Savings account to the Current account. You can then make the relevant tax payments.

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

 

 

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