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July 05, 2013

UK firms owe £2.5 billion in overdue VAT

UK businesses currently owe £2.5 billion in overdue VAT to HM Revenue & Customs (HMRC), as businesses continue to struggle to find the cash or bank finance to meet their tax liabilities on time, according to finance provider Syscap.

However, data provided by HMRC to Syscap shows that HMRC has managed to bring the amount of overdue VAT down from £2.7 billion last year – partly through the increased use of distraint (the right to seize business assets) and also by using external debt collection agencies.

HMRC almost doubled its use of distraint to recover VAT last year, using its powers to seize assets 4,746 times. It also more than doubled its spend on external debt collectors to almost £13 million.

According to Syscap, the key difficulty is that many firms have to pay VAT before they have been paid by customers. That's because most businesses are required to pay their VAT bills quarterly for the amounts charged on their invoices (rather than the amounts they have received) over that period.

In addition, unincorporated businesses such as sole traders and large partnerships have to pay half of their estimated annual tax liability on their profits upfront in advance, based on their previous year's revenue.

Philip White, Syscap CEO, said: "To companies under financial pressure, accessing the necessary funds to pay a large tax bill, when they may not even have received payment from customers and clients yet, can be a huge challenge. Even very profitable companies can find their cashflow tightly squeezed if their invoices aren't paid promptly, but unfortunately for them their tax deadlines won't wait. Historically businesses could borrow this money from their banks, but that is increasingly difficult to do."

He added: "If a business does fall into arrears because they can't pay, they're caught between a rock and a hard place because HMRC can impose fines and interest charges and is becoming increasingly draconian in seizing assets in order to recoup the outstanding balance. They even have the power to shut down the business altogether. HMRC used to be relatively forgiving – through its Time to Pay Scheme – but those days are gone."

Syscap reports that more and more businesses are turning to finance solutions to cover tax liabilities. Last year it saw a 60% jump in requests for such funding from professionals such as accountants and law firms. It is now launching a new online service aimed at professional services firms called TaxFunder.