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Late Payment to blame for £2.6bn Overdue VAT

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Updated: 5th February 2020

Research suggests SMEs are struggling to pay VAT on time due to late customer payments

LDF, a leading finance provider, has claimed that UK businesses have some mitigation for the huge debt of almost £2.6bn owed to HMRC in overdue VAT. 

It stated that many businesses are facing cash flow struggles due to constantly late payment from their own clients.

The total owed to HMRC has risen slightly over the past year, going from £2.55bn in 2014 to £2.58bn in 2015.

Since the recession, research has shown how SMEs have consistently struggled with collecting payment on time with the knock-on effect culminating in late tax payments.  

It’s a complicated process but LDF explain that VAT is actually paid on the amount billed to clients, rather than a company’s actual revenues, whether they have been paid or not. On that basis if a client pays late, a business still needs to pay the VAT on the invoice, despite the fact that they may not have the immediate cash flow to do.

They further asserted that the rise in VAT, from 17.5% to 20% in 2011, brought VAT into increased focus for company directors who started to see VAT as a much larger tax consideration than before.

VAT bills, like any other type of bill, must be paid but in many instances businesses are holding back due to their clients letting them down and not paying on time.

Businesses need to be able to move forward with their investment and growth plans and as the managing director of LDF, Peter Alderson, said ‘Businesses need to plan ahead to make sure they know how their upcoming tax liabilities are going to be covered, allowing them to ring-fence the funds they use for growth.’

“This is a time when businesses should be able to make significant investments in staff and equipment as the economy grows, however late payment can make this difficult for a lot of SMEs,” he added.

Increasingly businesses are now choosing to pay VAT payments monthly rather than in four quarterly lump sums to reduce the impact on cash flow, LDF says.