Taxation is one of the largest creditors any company can face, and a failure to deal with tax liabilities is one of the biggest causes of company failure in the UK.

It is always important to understand that tax is only ever collected on earned income, and never forms any direct cost to you or your company.

Taxes due on employee salaries are paid by the employees, taxes due on company profits are only paid out of the profit element and taxes due on sales income are payable by your customer in addition to the price agreed for the goods or services.

The difficulty for business owners, many of whom are often managing multiple demands for payment, is that tax is often not demanded immediately, does not (at least on a day-to-day basis) form a condition of continued trading and is often regarded as a secondary priority after all other creditors or trading costs have been paid. Below we set out some of the common problems faced by business owners/managers.

Types of taxation

Tax is due on every form of income delivered to any legal entity in the UK – whether it is corporation tax on profits generated by a company, income tax due on employees’ salaries through to income taxes charged on dividends paid to shareholders.

The most common form of taxes arising in a small or medium-sized company will be

  • PAYE and NI due on an employee’s salary (which the employer will normally have to collect and pay over to HMRC);
  • VAT (if registered) chargeable on a majority of goods and services and collected by the VAT registered supplier on behalf of HMRC; and
  • corporation tax which is chargeable on a company’s profits.

Advice on tax should always be sought from an accountant

In recent years many business owners have sought to wrapped up income received as a loan or via an unregulated pension in an attempt to mitigate these tax consequences. This disguised remuneration has been subject to various legal changes in recent years and loan charges implemented by HMRC to combat such perceived tax evasion.

Managing the payment of tax

Despite the fact that tax only derives from profits received (and is not a fixed cost of a business), it is nevertheless one of the most common causes of debt problems and company failure in the UK. HMRC petition for the winding-up of numerous companies every month for the non-payment of tax, most commonly VAT and PAYE/NIC.

As an involuntary creditor, tax should be considered as important as the demands of any trade creditor, and a term of continued trading. Trading in ignorance or avoidance of your company’s tax liabilities (both unpaid and accruing) is not in the public interest and may be a ground for a director to be personally liable for a breach of his fiduciary duties to a company, where it can be shown that s/he allowed the company to use the unpaid tax income to enable the company to continue trading.

Cash flow is often a problem in a small company and unlocking debt and releasing the income causing such tax liabilities is key to ensuring your company does not face solvency issues. One commonly used method is to seek early release of cash from your invoices, such that you do not have to wait until invoices to be paid once raised. We specialise in assisting companies with invoice discounting and other business funding queries.

Enforcement by HMRC

If taxes remain unpaid, HMRC will almost certainly take early steps before the problem escalates. The most common method of enforcement is to issue a winding-up petition, although HMRC can also seek other enforcement, such as distrain against goods for certain types of tax liability.

It is important, if you have a viable business, that you contact HMRC early. At Francis Wilks & Jones we assist individuals and companies to negotiate time to pay agreements whereby the tax liabilities outstanding can be repaid over a period of time, provided the business can afford this.

If a time to pay agreement is unavailable or not pursued then the only remaining option may be insolvency. Whilst HMRC will often wind-up your company without understanding the commercial benefit (to them as a creditor) of continued trading, there are insolvency processes or steps you can take to prevent HMRC from winding-up your company.

At Francis Wilks & Jones we have comprehensive experience in advising business owners of these type of risks and you will always speak to someone at a senior level who will respond to any query you have very quickly. Please call any member of our tax disputes team for your consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient to you.

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