My company cannot pay its taxes

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Introduction 

What should you do as a UK contracting professional if you suddenly discover my company cannot pay its taxes? The scenario where a contractor cannot pay taxes can occur in various situations. You may find your contractor limited company cannot pay Corporation Tax by the tax deadline. However, it could be that your company cannot pay PAYE or VAT by their respective tax deadline. Therefore, what should you do if you’re unable to pay your taxes (Corporation Tax, VAT or PAYE)? As a UK contractor, you should be aware of your options if your limited company cannot pay its taxes.

When you’re a director running your own contracting company, you must ensure your company is well run. One of your director’s duties is to ensure you pay your company’s contractor taxation liabilities in full. You should also ensure you pay your company’s tax Corporation Tax liabilities to the tax office on time. Therefore, you mustn’t get into a position where your UK contractor company cannot pay taxes regarding what it owes for Corporation Tax, VAT or PAYE.

Initial thoughts

First thoughts on my company cannot pay its taxes 

From the outset, it’s essential to establish a UK contractor and their company as two separate legal entities. Indeed, you have specific duties to adhere to when you’re a company director. Moreover, one is to ensure you set aside your company’s tax liabilities and don’t draw these out for yourself. Therefore, it’s key to remember your company’s funds aren’t yours to do with as you wish. This is because your company is a separate legal entity. Therefore, as an individual, you’ve your own personal tax liabilities, and your business has its company tax liabilities.

When running your own company, you should ensure you don’t get into a position where your limited company cannot pay its tax bills. Therefore, claiming for your genuine business expenses helps to reduce your company tax bills. What’s more, as part of this, you can ensure your company reimburses you for any business expenses you pay yourself.

Other dividend guides

When you draw dividends from your company, drawing too much will leave your company short of its taxes. There are many aspects to consider when paying dividends. What’s more, these include:

  • How much can I pay?

We’ve detailed all the filing dates you might have to meet as a company director or someone who files a Self-Assessment Tax Return. Therefore, it’s a good idea to make diary notes of these for your own company. This way, you can track when any payments are due.

Taking too much drawings results in my company cannot pay its taxes 

Those who overdraw from their company & what to consider if you do this? 

Many limited company contractors may draw too much from their company. Therefore, as a limited company contractor, when you do this, your company is unable to pay its tax liabilities. Indeed, such shortages, which may result in my company cannot pay its taxes, could include:

  • The business cannot pay Corporation Tax arrears from the previous year or years.
  • A company can’t meet outstanding VAT owing from previous VAT quarters.
  • The limited company cannot pay PAYE/NIC owing from previous periods.

It would be best to avoid all the above wherever possible, as owing tax can cause further issues such as potential interest and penalties.

In which scenarios does drawing too much occur?

There are two main scenarios when UK contractors and small business owners overdraw. Therefore, these are:

  • First, some contractors will accidentally overdraw, and, as a result, their company can’t pay the taxes which it owes. These individuals don’t realise they’ve done so until it’s too late. As a result, doing this could lead to a position where your company can’t meet its tax liabilities. Usually, if you do draw out too much, you’ll have time to put this right with your company. You could repay the company or reduce your future drawings to correct this. Furthermore, once you repay the loan, you can return to normal. As a result, in the future, you can ensure you keep an eye on your company’s tax savings.
  • Secondly, a few contractors treat their company’s bank account like their own to fund their lifestyle. As a result, they’ll find out their company won’t be able to meet its tax liabilities in due course. These individuals may only receive the message their company’s funds aren’t theirs once a bailiff comes knocking. Indeed, if you find yourself in severe financial trouble and your company can’t meet its tax liabilities, you should seek the professional 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).

Further thoughts on my company cannot pay its taxes

Those whose companies can’t pay their taxes (Corporation Tax, VAT or PAYE) are guilty of serious wrongdoing. Because of this, they can face Companies House winding down their company. Indeed, in some cases, they can be disqualified from being a company director for a certain length of time. Furthermore, many banks won’t allow disqualified directors to open a company bank account. Therefore, in this case, starting a new company falls by the wayside. As a result, the UK contractor may have to work via an umbrella company where the take-home pay can be significantly less.

The result of overdrawing from your company 

As time passes, your company may be unable to meet its financial obligations. Indeed, there could be several reasons for this. As a result, you should consider steps to remedy this.

The most common cause for finding a company can’t meet its liabilities is that the director has taken more than is legally allowed as dividends. Consequently, they’ve inadvertently created an overdrawn director’s loan account. As a result, the loan from their company requires repaying in the future.

My company cannot pay its taxes & what should we consider going forward? 

Save your company taxes in a business savings account 

A sensible way to avoid getting into a position where you’re short of your company’s taxes is to have a separate company Savings account. Basically, you can use this to save your company taxes separately from the company’s Current account. Therefore, in the future, every time you receive a sales invoice in your business’s Current account, you can make a transfer from your company’s Current account to its Savings account for the following tax savings:

  • The VAT element.

After doing the above, you can transfer funds back in the opposite direction when the taxes become payable later. In due course, when your company’s taxes become payable, you can settle the liabilities from your company’s Current account.

Take time to plan ahead 

On an ongoing basis, you must plan for ongoing costs and expenses when you work out what you can take from your company as dividends. Therefore, as part of this, you should ensure you don’t get into a position where your company can’t meet its financial obligations. Moreover, the best way to monitor this is to have an ongoing view of how much profit is available. Furthermore, once you know the position, it becomes clear how much of the company’s funds you can distribute as dividends.

Please have a read of how much dividends I can take. Importantly, this guide explains how to calculate your limited company’s profit at any moment. 

Your company can’t meet its tax liabilities 

What to consider first?

If your company has difficulties paying HMRC and can’t pay Corporation Tax, what next? Also, what if my business discovers it can’t pay PAYE to HMRC, or I can’t pay Corporation Tax? Further, what if my limited company cannot pay VAT? If your company is struggling to pay Corporation Tax or other company tax liabilities, what should you do? Basically, there are different options available to you, and you can decide which route to take. 

Several potential scenarios could result in your company finding it cannot pay PAYE or VAT, can’t pay Corporation Tax, or even settle its other tax liabilities. Therefore, even when you’re diligent about making company tax savings, it’s still possible you could make a mistake. Consequently, if this occurs, it’s essential to correct this as soon as possible.

Indeed, you could’ve been overdrawing each month without noticing this. As a result, your company could not afford to pay its current financial liabilities, which include the Corporation Tax bill and any other company debts.

You finish contracting

Another reason could be that your contract work may have finished. As you require income to live on, you may have continued to take funds from your company regularly. Consequently, you may inadvertently find yourself in a position where your company is unable to pay its tax liabilities.

Your agency is slow at paying

On the other hand, your client or agency may be slow or late paying. Indeed, if you find this happening, you should try to make provisions to cover it. If late payment continues, it could lead to a position where your company can’t meet its tax liabilities. Furthermore, if this continues, you could consider looking for a new contract elsewhere with a different client.

My company cannot pay its taxes & other aspects 

Cash accounting basis 

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

Speak to your accountant 

It’s important to remember if your limited company cannot pay its tax bills (Corporation Tax, VAT or PAYE), the best place to start is to talk to your accountant. As a result, they should be able to help guide you in the right direction.

Interest & penalties 

If your company can’t pay what it owes in taxes:

  • HMRC will charge interest if you pay your Corporation Tax bill late for a previous accounting period. What’s more, penalties can come into play when you pay the tax seriously late.
  • HMRC charges VAT penalties and interest if you’re late filing or paying VAT.
  • HMRC charges interest on the late payment of PAYE/NIC. Likewise, penalties may apply when payments are late.

Therefore, if your company can’t meet its financial obligations in full when you look at which taxes you should pay first, it’ll be essential to focus on any that could be incurring interest.

What happens if a limited company cannot pay its debts? 

The choices available 

If a company can’t pay what it owes in taxes (and other debts), it has two choices:

  • Arrange an instalment plan(s) with HMRC and any suppliers.
  • Look into insolvency procedures.

How can you arrange an instalment plan for outstanding taxes with HMRC? 

Importantly, if your company can’t meet its tax liabilities, you should seek professional help.

As we mentioned earlier, if your company can’t pay its Corporation Tax, PAYE, VAT, or tax bills, the primary reason could be your director’s drawing from the company. Therefore, 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.

Many companies registered in the UK who run into issues where they can’t pay their taxes can contact HMRC’s Business Payment Support Services for help and advice. As a result, they can arrange a payment plan to pay off tax debts. As a result, HMRC will generally agree to a Time-To-Pay arrangement (TTP), which runs over 12 months.

Meet your repayments 

The tax office will still charge interest, even if you have an instalment plan. However, if you inform them of your intentions to pay a liability via an instalment plan, they’ll no longer send out reminder-type letters with potential warnings.

If your company can’t pay its Corporation Tax, PAYE, or VAT liabilities, HMRC will sometimes not always agree to an instalment plan. However, if they view this request as `reasonable,’ they’re more likely to do so. Indeed, it’s essential to remember that you shouldn’t expect them to be generous. Furthermore, HMRC will require specific information before they agree to an instalment plan. Finally, if your company can’t meet its tax liabilities and you’re unsure what to say, please ask your accountant to help or do this for you.

A worked example 

As a UK contractor, you must ensure you don’t get into a position where my company cannot pay its taxes. Therefore, here is an example to help demonstrate how to save for your company’s taxes. We’ll start with an example invoice of £10,000 + VAT. The table below shows what you should save based on this.

Transfer to the company savings account
Invoice -£10,000 + VAT 12,000.00
VAT -you should save this so your UK company doesn’t find itself in a position where it can’t pay its VAT. 2,000.00  2,000.00
Net sales invoice 10,000.00
Average monthly expenses 1,000.00
Salary 992.00
Profit before CT 8,008.00
CT at 19% (assuming your annual profits are under £50K -see below for the CT rates) -you should save this so you don’t find yourself in a position where your UK limited company cannot pay Corporation Tax. 1,522.00 1,522.00
Profit after tax 6,486.00
The total you should save out of the original £12,000.00. 3,522.00

Note

From 1 April 2023, companies with profits under £50K pay tax at 19%. Meanwhile, companies with profits over £250K will pay 25%. Further, companies with profits between £50K and £250K will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.

My company cannot pay its taxes & company insolvency 

If your company can’t pay its liabilities in the future, it’ll receive warning letters from HMRC for taxes. However, it could also receive a Statutory Demand from other creditors. A Statutory Demand is a letter that states that if you don’t settle your debt or come to some other acceptable arrangement, they may start bankruptcy proceedings.

If all else fails, you could consider insolvency procedures when you can’t meet your taxes or other debts. When the company director applies for this themselves, the process is known as a Members’ Voluntary Liquidation (MVL). Indeed, this procedure has a cost, and you can appoint a firm of licensed insolvency practitioners. Furthermore, you could look online for a contractor MVL calculator to help give you additional information.

If your company has difficulties, it could face compulsory liquidation. As part of this process, company creditors can apply to the courts for a winding-up petition followed by a winding-up order. This process is known as a Creditors’ Voluntary Liquidation (CVL). 

Final thoughts

When you run your own company, it’s easy to lose track when leading a busy life. Therefore, it would help if you didn’t get into a position where you find my company cannot pay its taxes. If you find yourself in a position where your limited company cannot pay Corporation Tax, VAT or indeed cannot pay PAYE, it’s not good. Indeed, the best thing to do as time passes is to save your company tax savings separately from its regular funds.

You can make transfers from your Current account to your Savings account. As a result, you can monitor this to ensure you’ve saved enough time as time goes on. Then, when payments become due, you can transfer back in the opposite direction from the Savings account to the Current account. Once the transfers have been made, you can make relevant tax payments to the tax office.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Running Your Own Company /

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