For many SMEs January is a time when the December quarter VAT due date looms.
But, what exactly is a VAT bill, what are the consequences of missing a VAT payment deadline and how can you fund a tax bill and cope with HMRC arrears?
Value-added tax or VAT is a consumption tax levied in the UK, administered, and collected by HM Revenues and Customs, primarily through the Value-Added Tax Act 1994.
A company pays VAT to HMRC by calculating the amount of VAT charged to customers minus any VAT they have paid on their own purchases. Usually through submitting a VAT return to HM Revenue and Custom’s every 3 months. This period is also known as an ‘accounting period’. All goods and services are either VAT-rated or VAT-exempt. VAT-exempt items include rent, private education, health services, postal services, finance and insurance, and gambling.
A business must register for VAT once the sales exceed £67,000 (as of 1st April 2008,) in a year, however you can also make a voluntary registration before hitting this threshold.
There are currently three rates of VAT: standard (20%), reduced (5%) and zero (0%). In addition, some goods and services are exempt from VAT or are outside the VAT system. A business must submit a VAT return even if they have no VAT to pay before the VAT payment deadline.
What happens when the VAT payment deadline is missed?
HMRC has escalated business winding-up orders and liquidations. Given the inconsistent nature of the way tax is chased, businesses are frequently left waiting until reminder letters are sent, but it's wise to have a plan in place long before any contact is made by HMRC — for example, a business overdraft alternative that can be dipped into in times of need.
HMRC can record a ‘default’ if they don’t receive a VAT bill on time or even in some cases demand ‘full’ payment. They may allow you to enter a 12 month ‘surcharge period’ to help manage a default however be warned if a business defaults again within this period, an extra fee may be payable on top of the existing surcharge VAT amount outstanding.
If you're preparing for your quarterly VAT return and owe VAT to HMRC, plan ahead to ensure there is sufficient cash in the business if you owe such payments. If things don't go to plan, don't worry — VAT financing is a dependable source of cash.
Financial assistance options
In January, businesses can experience all of the above — quarterly VAT bills and rent are due, staff have been paid early, and customers are paying invoices late because everyone goes on holiday over Christmas. There's a range of finance options that can help however, whether it's a short-term business loan, an overdraft alternative, or another type of cashflow finance.
At Nucleus, our services combine the expertise of a traditional bank with the agility of an alternative lender and we are committed to helping our clients’ businesses grow and don’t hide any unexpected fees in the small print.
Get in touch with one of our experts to discuss how we can help your business ahead of the VAT payment deadline.