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PAYE Arrears – What happens when my company has HMRC debts?

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We can help with serious company debts, HMRC and creditor pressure, VAT/PAYE/Tax arrears, cashflow problems and raising finance.

PAYE Arrears – What happens when my company has HMRC debts?

Reviewed: 18th March 2016

Under Pay As You Earn (PAYE), employers are required by law to set up a recognised payroll scheme that captures information on employee payments, including salary and wages, bonuses and statutory sick pay.

If you’re an employer, you must collect the correct amount of income tax and National Insurance contribution from their pay, sending the money to HMRC within a specified timescale.

If you pay late or send less than the full amount, you’ll receive a warning or financial penalty from HMRC. Responsibility for collecting tax and NIC, as well as liability for its non-payment, rests with you the employer, rather than the employee.

Notifying HMRC when you become an employer

Even if you’re the sole director of a limited company, you’ll still need to register as an employer because you are, in effect, an employee of your own company. HMRC will send out a ‘starter pack’ with a unique reference number to quote when sending payments, and to use if you have any queries regarding payroll.

The Real Time Information system, or RTI, requires details of each payment to be sent to HMRC at the moment it is made. Tax and NI contributions are usually remitted on a monthly basis unless the average total payment is less than £1,500, in which case you may be allowed to pay quarterly.

Falling into arrears with PAYE

Although the first late payment of PAYE is not regarded as a default, failing to make subsequent payments on time will result in financial penalties, with interest also being applied to the amount outstanding on a daily basis.

Penalties amount to a percentage of what is owed, based on how many times you’ve paid late within a tax year:

  • 1-3 late payments = 1% surcharge
  • 4-6 late payments = 2%
  • 7-9 late payments = 3%
  • More than 10 defaults = 4%

Even if you make a partial payment, you won’t escape these additional penalties:

  • 5% of any outstanding amount after six months
  • A further 5% for anything owing after 12 months 

As you can see, once you get into arrears with HMRC it is very easy to enter a downward spiral, even if the original debt was relatively small.  

What are your options if you have HMRC debts?

HMRC are relentless is pursuing monies owed, and it’s vital that you make contact with them as soon as you realise that you may have to pay late. In doing so you demonstrate responsibility, and that you’re not deliberately trying to evade payment.  

Several options exist if you’re struggling to pay HMRC, one of which is their Time to Pay (TTP) arrangement. This would only be a viable solution if your cash flow problems are temporary, however, and that given a little more time you would be able to meet the obligations in full.

If HMRC believes your cash flow problems are more serious, they could take immediate action to recover what is owed by closing down your business. This is why seeking the help of a finance professional is a good idea, as it will also help to ensure that you pay only what you can afford.

Real Business Rescue offers advice on dealing with PAYE arrears, and negotiates regularly with HMRC on behalf of clients.

How does a Time to Pay (TTP) arrangement work?

Time to Pay was originally introduced by the government to help businesses during the recession. The scheme generally offers an extended period of between six and 12 months to pay HMRC arrears, but in some cases the timescale can be longer.

Your company finances should be reviewed and assessed by an insolvency professional to make sure you don’t offer an unsustainable amount, and get further into debt in the long-term.

A proposal is then made to HMRC, accompanied by:

  •  various financial reports and forecasts for the following six months
  • a plan for how you will reduce outgoings to release more cash
  • an explanation of the circumstances leading up to your cash flow issues 

The input of professional advisors is very influential, and we can put forward a strong case on your behalf. If the proposal is accepted, you avoid having to enter formal insolvency, and stop any existing or planned legal proceedings against you.

It’s possible that you could also include VAT and Corporation Tax arrears in the extended monthly payment.

Other possible options to deal with PAYE debt

Invoice factoring

It may be worthwhile looking at your sales invoices to see if they could be ‘sold’ to an invoice factoring company. This type of finance could be suitable if your customer base pays on time in general, and you have a low level of bad debts. The financier takes over control of your sales ledger, which also gives you more time to focus on sales-generating activities.

Asset finance

Some businesses are cash-poor but asset-rich, in which case leveraging the value of those assets via standard leasing or a hire purchase arrangement may be a viable option.

Company Voluntary Arrangement (CVA)

If your company has other creditors demanding payment and you feel there is no way out, a Company Voluntary Arrangement could provide some breathing space to rescue or restructure. The advantages of this option are that you’ll halt all legal action against the company, and stop interest and charges being applied to the outstanding debt.

How we can help with HMRC arrears

We offer independent advice to businesses throughout the UK on cash flow issues and dealing with debt, and can negotiate with HMRC on your behalf. As part of Begbies Traynor, the leading business recovery practice in the UK, we have the professional expertise to find the best solution to your financial issues.

 Just call our team to arrange a confidential consultation free-of-charge. We will take some of the weight off your shoulders, identify the best way forward, and get the business back on track.


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