PAYE Arrears – What happens when my company has HMRC debts?

What to do when your company falls behind in paying PAYE

Under the Pay As You Earn (PAYE) system, employers must establish an official payroll scheme to record details of employee payments, covering salary, wages, bonuses, and statutory sick pay.

As an employer, it is your duty to gather the accurate income tax and National Insurance Contributions directly from your employees’ wages and promptly submit this sum to HMRC within the specified timeframe.

Failure to pay on time or providing an incomplete amount may result in a warning or financial penalty issued by HMRC. The responsibility for tax and NIC collection, as well as accountability for any non-payment, lies solely with you, the employer, rather than your employee.

 

Notifying HMRC when you become an employer

Even if you’re the only director of a limited company, in numerous instances, you must still register as an employer. This is because you are likely to be considered an employee of your own company. This registration enables you to receive a regular salary from your business. Upon registration, HMRC will dispatch a ‘starter pack’ containing a distinctive reference number. You should quote this number when making payments and refer to it for any payroll-related queries.

 

The Real Time Information (RTI) system and Full Payment Submissions (FPS)

The Real Time Information system, known as RTI, mandates the submission of employee payment details to HMRC each time you pay them. This submission should occur promptly when the payment is made, regardless of whether it’s a weekly or monthly cycle. The submission is carried out using what is termed a Full Payment Submission (FPS).

If you fail to submit your FPS punctually, your company will incur a fine. The penalties are determined by the number of employees in your company, as outlined below:

• 1 to 9 employees – £100 monthly penalty
• 10 to 49 employees – £200 monthly penalty
• 50 to 249 employees – £300 monthly penalty
• 250 or more employees – £400 monthly penalty

Being more than 3 months overdue in submitting your FPS will result in an extra fine of 5% of the National Insurance Contribution amount that should have been reported.

Failing to submit the FPS entirely leaves HMRC with no choice but to estimate the liable amount based on your prior submissions. You not only have to settle this estimated amount but are also obligated to pay additional penalties, which will be added to your outstanding balance.

 

Falling into arrears with PAYE and penalty charges

While the initial late payment of PAYE in a tax year incurs no fine, consecutive delays in making payments punctually attract financial penalties. Additionally, interest is applied daily to the outstanding amount.

Penalties are computed as a percentage of the amount due and escalate based on the frequency of late payments within a tax year. The existing penalty rates are as follows:

• 1-3 late payments = 1% surcharge
• 4-6 late payments = 2%
• 7-9 late payments = 3%
• More than 10 defaults = 4%

Even if you make a partial payment, you won’t avoid these supplementary penalties.

• 5% of any outstanding amount after six months
• An additional 5% for any remaining balance after 12 months

As evident, falling behind with HMRC can quickly lead to a downward spiral, even if the initial debt was modest. 

Further guidance on actions to take when unable to meet your PAYE obligations can be found here.

 

What are your options if you have HMRC debts including PAYE arrears?

HMRC is persistent in pursuing owed funds, and it’s crucial to reach out to them at the earliest indication of potential late payment. By doing so, you exhibit responsibility and clarify that you are not intentionally avoiding payment.

Several options are available if you’re facing challenges in paying HMRC, one of which is their Time to Pay (TTP) arrangement. However, this is a feasible solution only if your cash flow difficulties are temporary and require a bit more time to meet your tax obligations entirely.

If HMRC perceives your cash flow problems as more severe, they may take immediate action to recover the outstanding amount by initiating winding-up proceedings against your business. Seeking the assistance of an insolvency practitioner is essential for companies in financial distress, providing insight into the severity of the situation and the available options.

 

How does a Time to Pay (TTP) arrangement work?

The Time to Pay scheme was initially introduced by the government to aid businesses struggling with their taxes during the recession. This scheme typically grants businesses an extended period, ranging from six to 12 months, to settle their HMRC arrears.

While Time to Pay arrangements can be a lifeline for companies lagging behind in HMRC obligations, not all businesses qualify for the scheme. It’s essential to demonstrate the ability to clear the entire backlog of HMRC arrears and meet current and future tax obligations within a 12-month timeframe.

This requires the capacity to offer a monthly amount sufficient to settle the debt while ensuring the company has ample funds to meet other liabilities and sustain operations. If HMRC doubts this capability, they have the right to reject the request for additional time to pay.

Before submitting a Time to Pay request to HMRC, an insolvency professional should review and assess your company’s finances to ensure the proposed monthly amount is sustainable and won’t adversely impact your business in the long run. Having a history of timely and full payments to HMRC enhances the chances of successful negotiation; repeated instances of late payments or failure to meet tax responsibilities can significantly hinder the approval of a payment plan.

You present your Time to Pay (TTP) proposal directly to HMRC, and it should be accompanied by:

• Financial reports and forecasts covering the next six months
• A strategy outlining how you intend to cut expenses to generate additional cash
• An explanation of the circumstances that have led to your cash flow challenges

 

The guidance from professional advisors holds significant sway, and we can present a compelling case on your behalf. If the proposal is approved, you can sidestep entering formal insolvency and halt any ongoing or intended legal actions against you.

 

What are some other possible options to deal with PAYE debt? 

(I). Invoice factoring

If your PAYE arrears stem from an erratic cash flow caused by customers consistently delaying payments, it might be beneficial to investigate whether a form of invoice financing could help. This financing option grants you immediate access to a predetermined percentage of your outstanding invoices. Once you have an invoice finance facility established, funds can be accessed as soon as an invoice is issued. This offers a degree of certainty regarding when money will flow into your business, rather than being dependent on customers paying you promptly.

(II). Asset finance

Some businesses may be low on cash but possess valuable assets. In such cases, exploring asset financing could be an option. This involves leveraging the value of assets your company already owns, such as machinery, vehicles, and investments, to secure a loan. Since company assets serve as collateral for the borrowing, failing to meet agreed monthly repayments puts them at risk, and losing a crucial asset could pose severe challenges, potentially hindering your ability to continue trading. It is crucial to think thoroughly and seek expert advice before entering into such an agreement.

(III). Formal insolvency options

If your company faces demands for payment from other creditors in addition to HMRC, and you see no way out, you may need to contemplate a formal insolvency procedure. The choice of procedure depends on your assessment of your company’s future viability.

If you are committed to rescuing your company and believe there is a realistic chance of success, you might consider a Company Voluntary Arrangement (CVA). This legally binding agreement between a company and its creditors allows the company to renegotiate the terms of its existing borrowings and other financial obligations. This typically involves reduced monthly repayments, and some debt may be completely forgiven. In cases where the company leases premises, a CVA often includes negotiations over the current lease terms, potentially leading to a lower monthly rental amount or an opportunity for the business to vacate the property early.

If a company’s financial problems are beyond rescue, voluntarily initiating a formal liquidation process known as a Creditors’ Voluntary Liquidation (CVL) may be the only viable option.

Regardless of the outcome—rescue or closure—a licensed insolvency practitioner must guide any formal insolvency process. An insolvency practitioner can expertly evaluate your situation and present possible pathways for your company.

Read More :

• What are my options when I cannot pay the VAT
• What are the penalties for paying VAT late
• HMRC Bailiffs: What Are Their Rights
• What Happens If Your Limited Company Cannot Pay
• Can business HMRC tax debts be written off

 

How we can help with HMRC arrears

For the last 30 years, Vanguard Insolvency has been assisting company directors in navigating the most challenging financial issues. With over 70 licensed insolvency practitioners working across our nationwide offices, we offer expert assistance and advice to directors throughout the country. Begin the process by contacting our team and scheduling a free, no-obligation consultation today.