When a business starts up, there are a multitude of issues it must get to grips with: attracting customers/clients, obtaining premises, setting up a supply chain, and finding good employees, amongst others. But never forget the importance of the taxman and HMRC.
Whilst a business is up and running, again there are numerous issues that the company faces on a day to day basis, and when a company is in financial difficulties, those issues seem to magnify and take up all of the time of the officers of the company.
As soon as a company experiences cash flow difficulties, payment of tax is one of the first things that gets bumped down the priority order. This isn’t helped by the fact that tax is often not demanded immediately. When the taxman isn’t pressing on daily basis, but suppliers and other creditors are, the taxman is often an involuntary creditor to many companies.
However, the importance of maintaining and paying taxes cannot be underestimated, particularly during times of financial difficulties.
Types of taxation
Tax on employees’ salaries are paid through PAYE and NIC. VAT may also be due on sales income and although these will be payable by your customer, the VAT elements need to be dealt with and balances paid. There is also corporation tax to pay on the profits of the company.
- when directors draw money from the company during the year, they will often initially list these as directors’ loans and account for them at the end of the year as dividends, or a mix of dividends and salary.
- this is not illegal, as long as there is sufficient money after payment of all other creditors at the end of the year for the directors’ loan to be turned into a declared dividend and repaid.
If however the company enters an insolvency event and dividends cannot be declared, then as well as the tax obligations on the directors loan (which the company must pay), the director will also be personally responsible for paying back those monies ‘loaned’ by the company.
At Francis Wilks & Jones we highly recommend that advice on tax is taken from a recommended accountant as soon as you set up, and on an on-going basis, to ensure it is paid correctly, and on time. We are fortunate to work with a wide variety of experienced accountancy professionals. If you require a recommendation, please ask.
What happens if I don’t pay tax?
Failure to pay tax is one of the main components in company failure in the UK.
Companies in financial difficulties, particularly cashflow difficulties, tend to use the monies that should have been paid in tax as a method of funding short-term cashflow, but this inevitably catches up with them. HMRC have a strict policy on tax enforcement, and they regularly wind up companies for the non-payment of tax. For more information, you can read about enforcement by HMRC.
It may also may be a ground for a director to be personally liable to pay compensation for a breach of his/her fiduciary duties to a company, if that director allows the company to use the unpaid tax income to allow the company to continue trading, knowing this is unlikely to be repaid.
What can I do?
The most obvious step is to ensure that you meet all tax requirements as and when they are due, and that you don’t treat monies collected for tax as a form of short-term cashflow financing.
However, if you find that you are in difficulties and are unable to pay tax immediately, but you have a viable business, then you should contact HMRC early to discuss your position.
At Francis Wilks & Jones our team of experts frequently assist individuals and companies to negotiate time to pay agreements with HMRC. We also have many years’ experience of dealing with tax disputes.
If a time to pay agreement is not available, and there is no legitimate dispute but and your company is in difficulties, then you could consider options for wider company rescue. The earlier you contact an independent business rescue expert, the more options you will have to turn your company around, increasing cash flow to meet your tax and other liabilities.
At Francis Wilks & Jones we have many years’ experience in advising businesses on their tax position, acting in tax disputes, and negotiations with HMRC. We also have years of experience of the many ways to bring about a company rescue. If your business is experiencing financial difficulties, either short or long-term, speak to one of our friendly team today who can talk through the options with you, to help your company recover.