What are your options if you’re struggling to pay your VAT bill?

If you’ve fallen into arrears with VAT, you’ll face penalties and fines from HMRC – a situation which compounds any existing cash flow problems you’re already experiencing. It’s crucial to contact HMRC as soon as you’re aware that you won’t be able to pay, as this demonstrates your willingness and determination to deal with the issue.

Although HMRC are known to act quickly to recover their debt, they also provide a degree of support to businesses experiencing temporary cash flow issues, and who have a good record of payment.

An HMRC Time to Pay (TTP) arrangement is just one option that could help you recover your financial footing, so let’s look at this and other potential avenues to improve your cash flow and get back on track, whether you’re a sole trader or limited company director.

HMRC Time to Pay

A Time to Pay arrangement offers you an extended period of time in which to pay your VAT arrears - typically 3-6 months – but depending on your circumstances, you may be able to negotiate for up to 12 months.

Although you’ll need to continue paying your ongoing tax bills as they fall due, some of the pressure of being in debt to HMRC will be reduced with a Time to Pay arrangement. A key element in its success, however, is negotiating an affordable repayment amount, as if you fail to meet the TTP terms HMRC are likely to demand the total arrears in full. 

It can be useful to receive professional accountancy assistance in relation to calculating a reasonable instalment plan, and also in presenting it to HMRC along with supporting evidence of your ability to maintain the repayments.

HMRC will need to know why you can’t pay your VAT bill, and how you’re going to improve cash flow so that the problem can be rectified. Sometimes this simply involves freeing up more working capital by cutting costs, collecting your own debts more efficiently, or finding a source of alternative finance.

Additional finance

If your business is experiencing cash flow issues your bank is unlikely to approve further borrowing, but there are sources of alternative funding that might suit your business better. Alternative finance can offer flexibility, reduced administration, and isn’t necessarily dependent on a good credit score.

It often represents a lifeline for companies and sole trader businesses that are struggling with debt, so what forms of alternative funding might be available?

Invoice finance

Factoring and invoice discounting offers you a regular stream of working capital throughout the month, and is based on the value of your sales invoices. A typical invoice finance agreement involves around 85% of each invoice being advanced by the funding company, with the remaining amount, minus fees, being available when your customer has paid in full. You can outsource your entire credit control function to a factor if you wish, or retain control in-house.

Merchant cash advance

This is an innovative method of funding, and can be a good solution for sole traders in need of additional working capital. The level of finance offered is based on predicted future credit card and debit card sales, with the financier receiving a pre-agreed percentage of each sale.

Merchant cash advances may be beneficial for businesses with few assets, but that deal with a high volume of card sales. Additionally, a good credit rating isn’t needed, as it doesn’t form part of the eligibility criteria.

Asset-based borrowing

If your business owns a number of high value assets, it may be possible to leverage their value on a sale and rent-back basis with an asset-based lender. You retain the right to use each asset as normal, whilst benefiting from a cash lump sum that could be used to pay your VAT arrears and other debts.

Voluntary arrangements

Company Voluntary Arrangements (CVAs) and sole trader Individual Voluntary Arrangements (IVAs) are formal agreements between a company or sole trader and their creditors.

A single, affordable monthly repayment is negotiated by a licensed insolvency practitioner, allowing you respite from often relentless creditor pressure, and the opportunity trade your way out of difficulty.

If you’re experiencing cash flow problems and have fallen into arrears with HMRC, Handpicked Accountants can provide reliable referrals for fully-qualified accountants in your area.

An experienced accountant will support your business day-to-day, providing the professional guidance you need when cash flow is an issue. If insolvency is a particular concern, they may also refer you to a licensed insolvency practitioner to receive specialist advice.

We base our accountant recommendations on longstanding professional relationships, as well as practical knowledge of working practices and expertise. Contact one of our expert team for more information.