Avoiding the temptation to tinker with tax
13/06/2007

When a business is struggling and cashflow is tight, it can be dangerously easy to use cash set aside for VAT and PAYE or NI to fund trading, warns a business turnaround specialist.

This is a risky strategy although it is often done with the intention of catching up in subsequent months. However, if the business continues to underperform, the amounts can escalate.

Mike Lee, a director at Corporate Strategies, which is part of UK Top 30 accountancy and advisory group DTE, comments: “In general, it is true to say that the first to be paid are employees and suppliers, otherwise a company couldn’t function.

“However, by not paying your VAT and PAYE/NI, all that is being achieved is the postponement of certain payments in order to trade through some difficulties.”

This invariably leads to grief further down the line when businesses discover that trading results haven’t improved or if a problems hasn’t been properly resolved and they don’t have the cash left over to pay the tax bills. Often, a business will not communicate the issues properly to H M Revenue & Customs who are usually left with no other remedy but to pay personal visits, impose distraint actions or, ultimately, commence winding up proceedings. Approaches, however, do vary from tax office to tax office in terms the severity of actions taken.

Mike Lee goes on: “Some SMEs are particularly vulnerable to the tax arrears pitfall because they don’t have a finance director or an in-house accountant or if they operate in complicated industries. The directors of an SME sometimes don’t know they are struggling until they are deep into the mire of tax arrears.

“Businesses that are apparently performing well can also fall into the tax arrears trap. Overtrading puts pressure on cashflow as growing turnover and an expanding workforce will generally increase VAT and PAYE liabilities.

“No one sets out to get into tax arrears – it generally happens, sometimes out desperation, as a result of inadequate financial discipline. This inadequacy needs to be addressed for a business to survive and flourish.”

Mike Lee adds: “The best solution is to prevent the problem in the first place through sound financial controls and management tools. Yet even when a company finds itself in significant arrears, there are ways of turning the situation around by presenting a realistic and well-thought out plan to the tax authorities. The first and most critical step is therefore effectively communicating with HM Revenue & Customs, because if you don’t do this, they may be less sympathetic to your predicament.”

Corporate Strategies, through its specialist division, Crown Strategies, has helped more than 400 companies to sensibly restructure the payment of arrears in VAT, PAYE and national insurance contributions, corporation tax, self-assessment tax and landfill tax as part of a broader turnaround strategy. Our experience includes dealing with a wide range of individuals and officials, such as bailiffs, HM Revenue and Customs inspectors, creditors, and winding-up petitioners.

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