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Understanding HMRC security bonds for VAT, PAYE, and NI
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When will HMRC request a tax deposit or security bond?
A security bond is a tax deposit requested by HMRC to settle any tax liabilities that may arise in the future if you are at risk of entering financial difficulty. If you need to provide a security deposit, you will receive a Notice of Requirement which will detail how much you must pay and when.
A HMRC security bond is best imagined as a deposit which protects HMRC in case your business is unable to keep up with its tax responsibilities. The idea is that if you fail to pay the tax you owe, HMRC will use your security bond to settle this balance. Security bonds can be requested for a number of different taxes, however, they are more prevalent when it comes to VAT.
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If you need to provide a security bond to HMRC, you will be issued with a Notice of Requirement which will detail how much you must pay and by when. This Notice of Requirement will also detail whether you are being asked to give security for VAT, PAYE, NI or a combination of all three tax obligations.
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It is not usual protocol for a VAT, PAYE, or NI security bond to be requested from new start-ups; instead a security bond will only be asked for if HMRC has strong reason to believe you may struggle to keep on top of your liabilities.
This tends to only be the case when a company has been set up by directors who have previously had a company liquidated, or a company which has been sold out of administration. Therefore if you are considering purchasing a company out of liquidation, you should calculate the likely cost of this security bond into your figures before completing on the deal.
In some cases, a Notice of Requirement will be issued to an existing company which is already registered for VAT. This would only happen if the director has fallen behind on their tax obligations and HMRC are concerned for the long-term prospects of the company. As long as you have kept up with your payments to HMRC you do not need to be concerned about this happening.
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If you have been asked to provide a security bond via a Notice of Requirement letter, you will need to pay this as soon as you register for VAT. Remember, however, that you do not need to register for VAT until your turnover of ‘taxable supplies’ reaches the threshold at which VAT becomes payable. As of the 2023-2024 tax year is currently set at £85,000 during a 12 month period. This 12 month period does not follow the calendar or tax year, instead it is a rolling period which can begin at any point of the year.
It is only once your earnings trigger the threshold that you become liable to provide the security bond. This means you can start up your company and begin trading without having to pay immediately. This gives you the chance to build up a reserve of cash through your earnings which can then be used to pay the bond.
In the majority of cases, the security bond is paid by way of a cash payment, although it is possible to issue a bank guarantee for the amount if you can get this agreed.
Typically, HMRC will look at your previous company and calculate 4 to 6 months VAT payments, and use this amount as the level of the security bond required. If you are issued with a Notice of Requirement, you are required by law to pay. If you cannot afford this, or you are unable or simply refuse to pay, you must cease trading immediately. It is a criminal offence to ignore a request for a security bond and the penalties are high. You could face a £20,000 fine for each invoice you issue.
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The security bond will typically be held for between 12 and 24 months. During this time your tax affairs will be closely monitored to ensure you are not paying late, or falling behind. As long as you have kept up to date with your obligations towards VAT, then your bond will be returned to you in full.
If you have received a Notice of Requirement, or are having difficulty meeting your HMRC obligations, you should seek expert advice as a matter of urgency. Real Business Rescue can offer you a free no-obligation appointment at your nearest office. During the meeting you will be able to understand the various business rescue and recovery options and our team of licensed insolvency practitioners will be able to recommend the most appropriate one for you and your business.
Further Reading on Understanding HMRC security bonds for VAT, PAYE, and NI
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