As a business owner, you will be aware of the necessary tax payments you need to make towards HMRC in order to operate legally.
If you are unable to pay your business taxes, it can be a stressful situation. However, it’s important that you are aware of the implications made if you are struggling to pay for your taxes.
What is the difference between VAT, PAYE and NIC?
The main difference between VAT, PAYE and NIC is that VAT is tax on the sale of goods and services, PAYE is the system that collects tax contributions from employers and NIC is the actual employee tax.
There are a few main taxes that businesses are required to pay to the HMRC:
Value Added Tax (VAT) is a tax charged on the sale of goods and services by companies in the UK. No matter what kind of business you run, such as a sole trader, partnership or limited company, if your income exceeds the VAT income threshold, you must register to pay VAT.
The standard rate of VAT is 20 percent, however, there are also reduced rates of 5 percent and 0 percent. Some items are also VAT exempt.
All VAT registered businesses are required to keep accurate records of their VAT and VAT businesses must submit online returns, and pay it electronically.
Pay As You Earn (PAYE) is the system HMRC uses to collect money from your income that goes towards paying taxes. The PAYE system is how you pay for your income tax and your National Insurance Contributions (NIC).
Everytime you are paid (or you pay your employees) employers have to send off tax and NIC to HMRC, meaning that staff don’t deal with PAYE systems.
NIC is a tax on your earnings which goes into the National Insurance Fund, which pays for various benefits.
These benefits include state pensions, maternity leave, statutory sick pay or any entitlement to additional unemployment benefits.
NIC is paid by employers, employees and self-employed workers.
Is there VAT on PAYE payments?
No, there is no VAT on PAYE payments. It is not trading income and therefore falls outside the scope of VAT.
How is NIC calculated for PAYE?
NIC is calculated based on your gross earnings and what is known as the earnings threshold. This is calculated before any tax or pension deductions.
There are 4 classes depending on what your income is. For 2021-22, Class 1 NIC has a threshold of £9,568 a year.
Employers will deduct Class 1 contributions from staff salaries, overtime, sick pay, maternity leave and any commissions or bonuses.
What happens if I don’t pay VAT, PAYE or NIC on time?
The HMRC charges penalties if VAT, PAYE or NIC is not paid on time. This means you will have to pay interest on the outstanding amount, and you may also be required to pay a surcharge too.
Businesses delaying payment will likely have a penalty to pay by the 19th of the month. The first penalty is 1 percent of the tax and will increase in stages to 4 percent.
If the tax is more than 6 months late, a penalty of 5 percent will be applied.
An enforcement notice, or distraint warrant, can be served if you fail to make tax repayments despite having prior warnings. This is known as a “Warning of Enforcement Action.”
A week after the HMRC Enforcement Notice is served, HMRC will be entitled to seize any non-essential items and sell them at auction. In order to prevent this, you should call HMRC as soon as you receive the enforcement notice. There is a set timeline of events that can cause HMRC Bailiffs to seize certain company goods to sell in order to settle debts.
If you are unable to pay your taxes on time, you should always contact HMRC first and inform them about the circumstances.
You should not ignore any letters you receive about late tax payments and HMRC arrears. Keeping them informed and up to date with any issues will provide them with more confidence in your company’s case file, especially if you can prove you are trying to clear tax payment issues.
It is also incredibly important you speak to an expert team of professionals who can advise you what to do before the situation is critical.
Here at The Insolvency Experts, we can provide specialist help and advice for any situation regarding tax arrears meaning you don’t have to deal with the stress of business tax payments alone.
What happens if you can’t afford to pay VAT, PAYE or NIC?
If you can’t afford to pay your taxes, a Time to Pay (TTP) Arrangement can be put in place with HMRC to outline a repayment plan for any outstanding taxes.
If your company has defaulted on the payment of VAT, PAYE and/or NIC, you can ask HMRC for additional time to pay. HMRC will usually agree that you can pay it back over 6-12 months.
Your application for a TTP Arrangement will only be accepted if the HMRC is satisfied that you’ll stick to the terms of the agreement and repay all your taxes in full.
You should put forward a reasonable proposal that outlines exactly what you can afford to pay. Your proposal can be rejected if you offer to pay more back than you can afford, meaning you could potentially end up in a worse situation.
Your proposal should include:
- Sales forecasts
- Convincing arguments to prove you will repay outstanding taxes
- Examples of how you will cut unnecessary costs
Will HMRC let me pay in instalments?
Yes, the HMRC will allow you to pay back your TTP in arranged instalments.
You will be able to spread your business repayments over a 6-12 month period, choosing how much you want to pay monthly, as well as how much you want to pay upfront too.
If you can’t keep up with your repayments, HMRC can ask you to pay everything you owe.
What should I do if I can’t pay VAT, PAYE or NIC?
If you don’t think you can pay back your taxes, the HMRC provides a Business Payment Support Service, which should allow you to arrange a TTP plan.
HMRC will want to know details about your company, including the tax reference number, the address and contact details and the company owners details.
They will also ask for the details on why your company can’t pay, what you have done to raise the money, how much your company can pay upfront and how long you think it will take to repay the debt.
Business Debt Support with The Insolvency Experts
If you are struggling with any issue relating to the payments of VAT, PAYE or NIC contact our expert team of professionals today. We can provide a helping hand for your company, and outline any necessary steps you may need to take.
You can email us at firstname.lastname@example.org, or call us on 01204 208183.