Dicey finances: British firms rack up £2.6bn in overdue VAT

16 July 2014 -

Late payments force firms to struggle for tax-bill cash – leaving them £100m deeper in arrears than they were last year

Jermaine Haughton

UK companies owe £2.6 billion to HMRC in overdue value-added tax (VAT), according to a new study by finance provider LDF – that’s a £100million increase on the bill for 2012.

In particular, the method of calculating the amount of VAT a company is entitled to pay has proved hazardous for firms. VAT costs are billed every three months, and are judged by the sums billed on a company’s invoices, rather than the amount of money received during the period. As such, if firms face payment delays from clients and customers, it could leave them struggling to find the cash to pay their VAT bills and spawn dangerous backlogs.

In the assessment of LDF managing director Peter Alderson, the global economic crash eight years ago and changes to the rate of VAT are key factors behind the downwards spiral. “The increase in VAT to 20% has been a real tipping point,” he said. “More and more businesses are facing VAT bills with trepidation.”

He stressed: “The recession saw many fall behind with their VAT payments, and the recent economic upturn has done little to ease the burden. Some are still dealing with a backlog of unpaid VAT and other tax bills while scrambling to source funding for upcoming tax bills.”

Struggling bosses’ efforts to fulfil payments have not been helped by the 2011 abandonment of the Time to Pay scheme, which allowed firms to defer VAT payments in the wake of the credit crunch. 

Alderson explained: “The situation won’t improve quickly unless customers start paying faster. Late-paying customers cause huge cash-flow problems even for successful and fast growing businesses. Previously, businesses could rely on borrowing from the bank to fill the gap. But since the recession, this has become increasingly difficult to find. That has left many businesses – especially smaller ones – in real difficulty.”

In addition, many businesses’ plates are full with a number of pressing financial burdens – such as the impending 31 July tax deadline for sole traders and partners. With that in mind, VAT is likely to slip down the priority list for the next two weeks, as companies dig deep to cover half of their estimated annual tax liability on profits in advance, based on the previous year’s revenue.

Alderson said that the upcoming deadline “is piling on the pressure. These days, businesses are determined to pay on time whatever the difficulty, because costs spiral so quickly when HMRC starts imposing fines and interest charges on overdue bills.”

LDF’s research suggests that financial pressures are forcing businesses to be more creative in borrowing money to cover their upcoming tax liabilities – particularly those with unpredictable cash flow. Alderson concluded that HMRC’s spread-payments facility could help by “offering businesses flexibility and the opportunity to regain control over their tax flow”.

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