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Published on 15 October 2010 by Tony Groom

Dealing With VAT Arrears and PAYE Arrears

Owing Her Majesty’s Revenue & Customs (HMRC) more than £150,000 for overdue

VAT and PAYE when your turnover is less than £3 million is not uncommon in 2010.

A second, more extreme example of HMRC arrears was a labour services company

that owed more than £100,000 having taken on staff but failed to pay PAYE while it

grew to a turnover of £1 million. HMRC’s reliance on the P35 annual return to

reconcile their receipts with PAYE deductions has made it easy for companies to

build up PAYE arrears that eventually catch up with them.

The leniency of HMRC, whose light touch approach to collecting Revenue arrears

since the recession began has helped the cash flow of many companies, has also

made it easier for them to accrue both VAT and PAYE arrears. But the lack of a

recovery has left companies in arrears burdened with debt they can’t easily repay.

Companies in this position have a number of options, but a real challenge is when to

do something about it. If ignored, the liability can build up and the underlying

business problems can escalate to a point where the company can find it more

difficult to recover.

While directors are normally aware of the problems, and in particular of the liability in

respect of Revenue arrears, they may not be aware of their options, assuming: “I

know my business better than anyone else and if I don’t know the solution, then no

one else will.”

There are three financial solutions to consider when dealing with HMRC arrears. They

are immediate payment, a Time to Pay (TTP) arrangement or a Company Voluntary

Arrangement (CVA). However, all too often one of these is implemented without

considering other issues that perhaps need to be addressed at the same time.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

The build up of PAYE arrears and VAT arrears is an indicator that the business is no

longer profitable or that it doesn’t have sufficient working capital. The underlying

issues can be identified by a business review and preparation of forecasts. It is

obvious that an unprofitable company cannot achieve a payment plan while also

covering ongoing payments. Less obvious is the restructuring and reorganisation that

may be needed to achieve a viable business, one that is profitable with adequate

working capital and positive cash flow.

The solutions to the two examples at the beginning of this article were very different

and followed a business review that revealed factors that were not at first obvious

but had a bearing on the final rescue solution. The company turning over £3 million

was able to raise a modest loan that funded the purchase of cheaper stock from

overseas, which in turn increased profitability. A TTP was agreed with HMRC to repay

the £150,000 over 10 months.

The other company was in a more serious state as it was not profitable and it had

serious working capital issues with taking credit and factoring its book debts. The

terms of the factoring were so onerous that the annual fee was similar to the amount

borrowed. This company was cut back to a smaller company by withdrawing from

unprofitable customer segments. It was able to terminate its factoring arrangement

by removing the need for working capital by focussing on the domestic market with

payment on delivery. The creditors, who mainly comprised of the Revenue arrears,

agreed a CVA.

Surviving the pressure of PAYE and VAT arrears generally involves more than just fixing

the financial problem. Instead, with the help of a business rescue adviser, the

underlying issues were identified and workable solutions were put in place.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

We Save Businesses We provide experienced advice to directors

We negotiate with HMRC and creditors We are on your side

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Need Immediate Help – Call Tony Groom on 0844 8040 540