Where a former company becomes insolvent owing money to HMRC, a director might setting up a new company might get served with a notice requiring that security for VAT an PAYE is paid. Our expert team can help advise what to do if you are served with a notice.
In the majority of company insolvencies, HMRC are owed unpaid VAT and PAYE.
Where a director or individual has had previous business failures that left HMRC unpaid and where HMRC suspect this failure to account may be repeated, HMRC can request that security be given to reduce HMRC’s exposure to further bad debt.
HMRC do this by issuing a Notice of Requirement.
HMRC and VAT losses
The VAT process is relatively straightforward but faces a number of risks and we find that in almost all insolvent situations a company will have large VAT arrears.
The immediate difficulty is that VAT is payable after the event and, as a result of low cash-flow, bad debts or high costs absorbing all available cash resources, there may be insufficient funds available to meet this liability. In summary, where a company or business is struggling, it is not unusual for the net VAT collected from customers (and which is payable to HMRC) to instead be used to fund the Company to continue trading rather than being paid to HMRC.
However, it is when the VAT system is subject to either reckless financial management or fraud that risks arise for HMRC and this may cause HMRC to take steps to reduce their exposure to future risk, by issuing a VAT Notice of Requirement.
Pay As You Earn (“PAYE”)
PAYE and National Insurance Contributions (“NICS”) are perhaps the most commonly understood taxes as they are imposed on employees by their employers, acting on behalf of HMRC. However, it is also a tax that companies often fail to pay, particularly when a company experiences difficult trading periods. PAYE is often unpaid in commercial insolvencies and therefore, from 6 April 2012, HMRC have been able to take steps to reduce their exposure to future risk, by issuing a PAYE Notice of Requirement.
Notice of requirement
HMRC may issue a Notice of Requirement for various reasons, including:
- where a director or individual has had previous company failures with VAT or PAYE debt:
- where a director or business has deliberately failed to pay VAT or PAYE:
- where a director or individual has a history of not paying VAT or PAYE on time:
- where a business is purchased via the pre-pack administration process:
A Notice of Requirement will be served on the company care of its directors and it will state the fixed sum required to be paid as security for future VAT or PAYE obligations. The Notice will also state how long HMRC wish to hold the deposit for.
In relation to VAT, this security is calculated on the basis of current estimated earnings and on the basis of the arrears due from the predecessor company, often meaning that the VAT Security required is very large and is often on the basis of a much higher level of trading by the predecessor company.
This security is normally held for a minimum of between 12-24 months and, once HMRC considers there is no ongoing risk, will be returned.
Consequence of failure to comply with a notice of requirement
In the event you do not respond to the Notice of Requirement, and/or do not pay the amount required as security, then HMRC may institute prosecution proceedings against the directors personally.
The prosecution may lead to a fine of £5,000 (under the tax legislation as of writing) for “each taxable supply”.
At all times we would recommend engagement with HMRC to discuss such issues as soon as possible and upon receipt of any warning letter received. In some instances, an appeal can be lodged and this needs to be made within 30 days of receipt of the Notice of Requirement. We would encourage early advice to identify whether a valid challenge or appeal can be raised with HMRC.
At Francis Wilks & Jones we have considerable experience of assisting Directors and business owners with dealing with VAT or PAYE Notice of Requirements. Should you require any assistance, please contact our Director Services team who can discuss such matters with you.
Andy Lynch at FWJ was literally a life saver for me. I ran in to some tax issues with HMRC and I suffer from mental health issues as well so I was a complex case. Andy took his time to professionally and accurately layout my case and assist me with finding a resolution. I researched a lot of tax advisers before making my decision and I am glad I did and relieved that I chose Andy and FWJ.Chris Kitchen