If you are approached by HMRC to provide security for future taxes, our expert team can assist. It is vital to deal properly with a notice of requirement. Our team is led by accountant and lawyer Stephen Downie and assisted by Andy Lynch formerly 18 years working for the investigations team at HMRC. Don't settle for second best. Call us today.
In the majority of company insolvencies, HMRC are owed VAT and PAYE.
Where a director or individual has had previous business failures where HMRC were left unpaid and where HMRC suspect this failure to account may be repeated – HMRC may request that security be given to reduce HMRC’s exposure to further bad debt. HMRC do this by issuing a notice of requirement.
VAT can never form a direct cost to a business or company. Indeed, for some businesses, their VAT registration makes the cost of sales less expensive, as they can reclaim the VAT charged to them on purchases.
- where your company or business reaches a certain income threshold, registration for VAT is compulsory;
- before that threshold is met, for very low turnover companies and businesses, the burden of VAT registration, collection and payment is not required (although it remains an option for those intending to only reclaim VAT on purchases).
Where you are VAT registered, there is a requirement to file regular returns and account to HMRC for all VAT chargeable on turnover and purchase costs for that period. This return should provide a net sum of VAT which is either payable to HMRC or reclaimable from HMRC.
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 or business.
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.
The prosecution may lead to a fine of £5,000 (under the tax legislation as of writing) for “each taxable supply” meaning that this could be for every VAT invoice issued.
Options available to you
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.
Delay in responding is often a pre-curser to much more serious problems.
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.
“FWJ did precisely what it set out to do. I am extremely grateful for its assistance.”
A client who had received a Request for Security from HMRC for a sum that would have caused their company severe financial difficulties. We helped them to have the entire bill withdrawn