My company cannot pay its taxes

Introduction

What should you do if you suddenly find that your company cannot pay its taxes? Please note, this can occur in a variety of situations. Therefore, if it does, you should be aware of your options.

When you are a director and you are running your own company, it is your responsibility to make sure that your company is well run. In addition, it is one of your director duties to ensure that you pay your company’s taxes in full. Besides this, you also need to ensure that you pay your company’s tax liabilities to the tax office 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. Notably, when you are a company director, you have specific duties. One of these is to make sure that you set aside your company’s tax liabilities and you do not draw these out for yourself. Key to note, your company’s funds are not your funds to do with as you please. This is because your company is a separate legal entity in its own right. Therefore, as an individual, you have your own personal tax liabilities and your business has its own company tax liabilities.

When your company has its own liabilities, you should try and ensure that you do not get yourself into a position where your company cannot meet these. Key to note, claiming for all of your genuine business expenses helps to reduce your company tax bills. In addition, this also ensures that you are reimbursed for any business expenses you have paid for yourself.

When you draw dividends from your company, drawing too much will result in leaving your company short of its taxes. Please note, there are many aspects to paying dividends. Importantly, these include:

We 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. Therefore, it is a good idea to make diary notes of these for your own company. By doing this, you can track when any 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. Please note, when you do this the result will be that your company is short of its tax liabilities. Therefore, such shortages could include:

  • Corporation Tax arrears from the previous year or years.
  • Outstanding VAT from previous VAT quarters.
  • PAYE/NIC that is owed from previous periods.

Scenarios where this may occur

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

  • First, some contractors will accidentally overdraw. These individuals generally do not realise that they have done so until it is too late. As a result, when 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.
  • Secondly, there are a small number of contractors who treat their company’s bank account like their own to fund their lifestyle. As a result, they will find out in due course that their company will not be able to meet its tax liabilities. Notably, these individuals may only receive the message that their company’s funds are not theirs once a bailiff comes knocking. Consequently, 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).

Further thoughts

Of those whose company can’t pay its taxes, there are the ones who are guilty of serious wrongdoing. As a consequence of this, they can face Companies House winding down their company. Indeed, in some cases, they can also possibly be disqualified from being a company director for a period of time. Furthermore, 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. Indeed, 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.

Importantly, the most common cause for finding that a 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     

Please note, a sensible way to avoid getting into a position where you are short of your company’s taxes is to have a separate company Savings account. Key to note, you can use this to save your company taxes in, separate from the company’s Current 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:

  • The VAT element.

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. In due course, when your company’s taxes become payable, 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. As part of this, you need to ensure that you do not get into a position where your company cannot meet its financial obligations. Key to note, 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. Importantly, this article explains how you can calculate the profit in your limited company at any one moment in time.

Finding out that your company cannot meet its tax liabilities 

There are several potential scenarios that could be responsible for finding your company can’t meet its tax liabilities. Therefore, 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 this as soon as possible.

Indeed, it could be the case that you have been merely overdrawing each month without noticing this. As a result, it could lead to getting into a position where your company cannot afford to pay its current financial liabilities. Notably, this will include the company’s corporation tax bill and other company debt.

Another reason could be that your contract work may have finished. Day to day, as you need income to live on you may have continued to take funds from your company. As a consequence, you may inadvertently find yourself in a position where your company falls short of its tax liabilities.

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. Key to note, 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 cannot pay its tax bills at present, a good place to start would be to talk to your accountant. As a result, they should be able to help guide you in the right direction.

Interest and penalties

If your company cannot pay its taxes:

  • HMRC will charge interest if you pay your Corporation Tax bill for a previous accounting period late. On a similar note, penalties can also come into play when you pay the tax seriously 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.
  • HMRC will charge interest on the late payment of PAYE/NIC. Likewise, penalties may also apply when payments are late.

Therefore, if your company cannot meet its financial obligations in full, when looking at which

Arrange an instalment plan with HMRC

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. Key to note, 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 cannot pay their taxes, can contact HMRC’s Business Payment Support Services. As a consequence, they can arrange a payment plan to pay off any tax debts. As a result, HMRC will normally agree to a Time-To-Pay arrangement (TTP) that run over 12 months.

Meeting your repayments

Please note, 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 do view this request as `reasonable,’ they are more likely to do so. It is important to bear in mind not to expect them to be generous. Please note, HMRC will 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.

A worked example

To ensure that 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. Notably, we will start with an example invoice of £10,000 + VAT. Therefore, 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 VAT.
           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 Corporation Tax.
           1,573.20
               1,573.20
Total that you should save out of the original £12,000.00.
               3,573.20

Insolvency 

If your company will not be able to pay its liabilities in future you will need to consider insolvency procedures. Key to note, there is a cost for this procedure and you will need to appoint a firm of licensed insolvency practitioners.

Your company could also face a compulsory liquidation whereby company creditors can apply to the courts for a winding up petition followed up by a winding up order.

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 your company tax savings separately from its normal funds.

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

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/
Published On: March 6th, 2021 / Categories: Running Your Own Company /

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