Mark McLaughlin highlights some of the dangers for small business owners who do not keep up-to-date with their tax obligations.
Small and home-based businesses have much to contend with. In addition to the challenges of starting up, growing and running a business, there are various legal and regulatory obligations to comply with (e.g. employment law, health and safety, etc). On top of all that, the small business owner must send in tax returns and remember to pay their tax bills on time!
Business owners (and taxpayers in general) need to be aware of important dates on the tax calendar. Missing them can have unfortunate, sometimes disastrous consequences. Entrepreneurs busy running their businesses will often be tempted to put off dealing with their tax affairs. This can result in a spiralling pattern of delayed tax payments, interest and surcharges, eventually resulting in the tax authorities taking recovery action. This action can involve anything from telephone calls or visits to the business premises by the tax collector, to seizing assets or winding up the business. The financial burden of tax arrears can lead to business failures in the most serious cases, and even personal bankruptcy.
The situation is unlikely to get any easier in the future for taxpayers whose tax affairs have a regular tendency to slip into arrears. For example:
* From 2008, the normal deadline for submitting ‘paper’ tax returns to HM Revenue & Customs (i.e. returns not submitted over the internet) is being brought forward from the following 31 January to 31 October each year. Penalties are automatically imposed for tax returns filed late, in addition to possible interest and surcharges if taxes are paid late (i.e. normally 31 January following the tax year).
* The Government is proposing to radically reform law and practice on the collection of tax debts. These proposals, if enacted, would give the Revenue increased powers including direct attachment of tax debts to taxpayers’ assets. This has caused some concern and controversy in the press. The Revenue’s suggestion is that they should be able to secure a taxpayer’s bank or building society accounts by “freezing” the amount of the tax debt. They would also be able to place a legal charge over land and buildings, but would continue to pursue collection of the unpaid tax while the charge was in place.
Of course, the problem of debt is not restricted to tax arrears. Consumer debt in general is a major cause for concern. As UK debt levels soar and more households find themselves in financial difficulty, many people turn to the likes of debt management & financial solution companies for help. In 2005, I was approached by one such company, which wished to specialise in tax debt management. This service was subsequently launched earlier this year. ‘Tax Debts’ is specifically aimed at people who are genuinely unable to pay their tax liabilities by the due date. The service broadly involves dealing with the tax authorities on the taxpayer’s behalf, and helping to bring their tax affairs up-to-date, if necessary.
The initial approach of the tax authorities is, not surprisingly, that tax is payable on the due date. Consequently, they cannot officially recognise or endorse a service that assists late payers. However, they do recognise that in some cases taxpayers may be genuinely unable to meet their commitments. They will often take a sympathetic view in such cases, provided that steps are taken to put the matter right and prevent any recurrence of the problem if possible.
In one case recent case dealt with by TaxDebts, the taxpayer (Miss Y) had an outstanding income tax liability of £3,028. She had previously been self-employed, but unfortunately had to close the business due to financial difficulties. TaxDebts submitted an Income and Expenditure statement to HM Revenue & Customs (HMRC). Despite the fact that Miss Y had not managed to maintain any previous payment arrangements with HMRC, an offer was accepted to spread her tax debt over a period of six months. Happily, Miss Y paid all her tax instalments on time. HMRC subsequently accepted an offer to pay a subsequent tax liability over a further six-month period.
HMRC (and TaxDebts) are keen to separate the “can’t pay” taxpayers from those who “won’t pay”.. The latter category can expect a rough ride from the tax authority, particular if the proposed new powers are enacted as mentioned earlier.
Prevention, not cure
How can small business owners prevent tax debt problems arising in the first place?
Here are one or two suggestions to avoid owing arrears to HM Revenue & Customs:
* Do not ignore the problem – the old adage that “prevention is better than cure” has never been truer than in the context of tax debt control, and the problem is unlikely to disappear without addressing it.
* Register for tax on time – taxpayers such as the newly self-employed are required to register with the Revenue, but many fail to do so. Some consider that by delaying telling the Revenue, they can defer their tax bills – maybe indefinitely! However, failing to disclose taxable income can result in penalties as well as interest and surcharges, and even prosecution in more serious cases. These problems can be easily avoided by notifying the Revenue when required.
* Keep up-to-date – Deal with self-assessment returns (and VAT returns, if applicable), and on time. Apart from imposing interest, penalties and surcharges for late filing, the Revenue can also decide how much tax an individual should pay for a tax year. If there is tax outstanding for earlier years, the Revenue will not generally consider allowing time to pay unless all outstanding tax returns have been submitted within an agreed timeframe.
* Put money aside for the tax bill – opening a separate ‘tax account’ with a bank or building society and saving on a regular (e.g. monthly) basis should help ease the pain when a tax bill lands on your doormat! Self-employed individuals should also remember to pay any flat-rate Class 2 National Insurance contributions due – this amounts to less than a few pounds a week.
* Face tax problems early on – taxpayers who find that they are genuinely unable to pay their tax bill when it falls due should not wait for the Revenue to take action to collect the debt. It is normally better to confront the issue beforehand. For example, if the Revenue is contacted and time to pay is successfully negotiated a sufficient time before surcharges are imposed (usually on 28 February after the tax year in question), any surcharges can be suspended on the tax paid late. The Revenue are likely to be more receptive and sympathetic towards temporary cashflow difficulties if the taxpayer tries to resolve the problem early on.
Finally, the tax system is seemingly becoming more complex. Proof of this lies in the ever-increasing volume of tax legislation. Preparing incorrect tax returns and accounts can result in additional tax, interest and penalties, which were not budgeted for. Prevention is generally better than cure. Sometimes taxpayers are reluctant to seek expert help because they are worried how much it will cost in professional fees. However, saving fees is often a false economy, because the cost of ‘getting it wrong’ can far exceed professional fees.
When all else fails and tax debts remain a problem, specialist debt management help from a firm such as Tax Debts should hopefully put the tax affairs of business owners and other taxpayers on the right track. Good luck!