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Introduction
As a UK contracting professional, what should you do if you suddenly find that my company cannot pay its taxes (Corporation Tax, VAT or PAYE)? Basically, the scenario where a contractor cannot pay taxes can occur in a variety of situations. Basically, you could find that your contractor limited company cannot pay Corporation Tax by the tax deadline. However, it could also be the case that you find your company cannot pay PAYE or VAT by their respective tax deadline. Therefore, if this occurs as a limited company contractor or small business owner and your limited company cannot pay its taxes, you should be aware of your options.
When you are a director who runs your own contracting company, it is your responsibility to ensure that your company is well run. In addition, one of your director’s duties is to ensure that you pay your company’s contractor taxation liabilities in full. Besides this, you also need to ensure that you pay your company’s tax Corporation Tax liabilities to the tax office on time. Therefore, it is important that you do not get into a position where your UK contractor company cannot pay taxes in terms of what it owes for Corporation Tax, VAT or PAYE.
Initial thoughts
What to consider from the outset when my company cannot pay its taxes
From the outset, it is essential to establish that the UK contractor and the company are two separate legal entities. Indeed, when you are a company director, you have specific duties. What’s more, one of these is to ensure that you set aside your company’s tax liabilities and do not draw these out for yourself. Therefore, it is key to remember that your company’s funds are not yours to do with as you please. In fact, 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 company tax liabilities.
When your company has its liabilities, you should try to ensure that you do not get into a position where your company can’t pay its tax bills. Therefore, when you claim 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 yourself.
Other guides
When you draw dividends from your company, drawing too much will leave your company short of its taxes. Indeed, there are many aspects to paying dividends. What’s more, these include:
- The dividend allowance.
We have detailed all the filing dates you may need to meet as a company director and someone who files a Self-Assessment Tax Return. Therefore, making diary notes of these for your own company is a good idea. By doing this, you can track when any payments are due.
Take too much drawings which results in my company cannot pay its taxes
Those that overdraw from their company
Many limited company contractors may draw out too much from their company in real life. Therefore, as a limited company contractor when you do this, the result will be that your company is short of its tax liabilities. Certainly, 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 cannot meet outstanding VAT from previous VAT quarters.
- The company cannot pay PAYE/NIC that is owed from previous periods.
Scenarios where this may 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 the taxes that it owes. These individuals generally do not realise they have done so until it is 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 will have time to put this right with your company. You could make a physical repayment or reduce your future drawings to correct this. Furthermore, once you repay the loan, you can return to normal. In the future, you can ensure that 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 will find out in due course that their company will not be able to meet its tax liabilities. 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 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 around my company cannot pay its taxes
Those whose companies can’t pay their taxes (Corporation Tax, VAT or PAYE) 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 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 UK contractor may need to work via an umbrella company where the take-home pay can be significantly less.
The result of 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.
Notably, 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.
My company cannot pay its taxes -what you should consider as you go along
Saving your company taxes in a business savings account
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. Basically, you can use this to save your company taxes in, separate from the company’s Current account. Therefore, in the future, 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.
- The Corporation Tax (CT) element.
As a result of doing the above, you can make transfers 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.
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. Therefore, as part of this, you need to ensure that you do not get into a position where your company cannot meet its financial obligations. What’s more, the best way to do this is to have an ongoing view of how much profit is available. Furthermore, once you know the position, 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 your limited company’s profit at any moment in time.
Your company cannot meet its tax liabilities
If you find that your company cannot can’t pay Corporation Tax – what next? There are different options available to you and you can decide which is the best route to take. Therefore, what if my business discovers it company can’t pay PAYE to HMRC or I can’t pay Corporation Tax? In addition, 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?
Several potential scenarios could be responsible for finding your company can’t pay Corporation Tax or settle its other tax liabilities. Therefore, even when you are diligent about 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 a position where your company cannot afford to pay its current financial liabilities. This will include the company’s corporation tax bill and other company debt.
You have finished contracting
Another reason could be that your contract work may have finished. As you need income to live on, you may have continued to take funds from your company on a daily basis. Consequently, you may inadvertently find yourself in a position where your company falls short of its tax liabilities.
Your agency is slow at paying
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, you could consider looking for a new contract elsewhere with a different client.
My company cannot pay its taxes -other considerations
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 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 your accountant
It is important to remember that if your limited company cannot pay its tax bills (Corporation Tax, VAT or PAYE), the best 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 what it owes in taxes:
- HMRC will charge interest if you pay your Corporation Tax bill for a previous accounting period late. In addition, penalties can also come into play when you pay the tax seriously late.
- Also, HMRC charges 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 taxes you should pay first, it will be essential to focus on any that could be incurring interest.
What happens if a limited company cannot pay its debts
If a company cannot pay what it owes in taxes (and other debts) it really has two choices:
- Arrange an instalment plan(s) with HMRC and any suppliers.
- Look into insolvency procedures.
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 Corporation Tax, PAYE, VAT or tax bills, the primary reason could be due to your director’s drawings 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 cannot pay their taxes can contact HMRC’s Business Payment Support Services. Consequently, 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) that runs over 12 months.
Meeting 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 will no longer send out reminder-type letters with potential warnings.
If your company cannot pay its Corporation Tax, PAYE or VAT or 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. It is essential to bear in mind not to expect them to be generous. Furthermore, 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
As a UK contractor, it is important that you do not 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 will start with an example invoice of £10,000 + VAT. Therefore, 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 -this will need saving so that your UK 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 | 992.00 | |
| Profit before CT | 8,008.00 | |
| CT at 19% (this is the rate up to 31 March 2023 -see below) -this will need saving so that you do not find yourself in a position where your UK company cannot pay Corporation Tax. | 1,522.00 | 1,522.00 |
| Profit after tax | 6,486.00 | |
| The total that you should save out of the original £12,000.00. | 3,522.00 |
Note
The Corporation Tax rate is 19% up to 31 March 2023, however from 1 April 2023 companies with profits under £50K will 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 -insolvency
If your company cannot pay its liabilities in future, it will receive warning letters from HMRC for taxes. However, it could also receive a Statutory Demand from other creditors. Basically, a Statutory Demand from a creditor is a letter that states if you do not settle your debt or come to some other acceptable arrangement, they may start bankruptcy proceedings.
When you find you cannot meet your taxes or any other debts, you will need to consider insolvency procedures. When the director of the company applies for this themselves, the process is known as a Members’ Voluntary Liquidation (MVL). Certainly, there is a cost for this procedure, and you will need to appoint a firm of licensed insolvency practitioners. Furthermore, you could take a look online for a contractor MVL calculator to help give you additional information.
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. Basically, this process is known as a Creditors’ Voluntary Liquidation (CVL).
Final thoughts
Finally, when you run your own company, it is easy to lose track when leading a busy life. It would help if you didn’t get into a position where you find my company cannot pay its taxes. Basically, if you find yourself in a position where your limited company cannot pay Corporation Tax, VAT or indeed cannot pay PAYE this is 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 keep a tab of this to ensure that you have enough saved 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
