PAYE stands for Pay As You Earn and refers to automatic deduction of tax from employee pay and handover of those funds to HMRC. These taxes and monies are National Insurance, income tax and other deductions, which are held in trust by HMRC on behalf of the company and their employees. The money does not belong to the business.
Usually, HMRC collects this money by direct debit each month and they are quickly able to detect what payments are due, the amounts to be deducted and whether a company is falling behind on payments.
If your company falls into arrears with PAYE payments, you should contact your accountant and ask them to liaise with HMRC about the available options. Or if you have the time and expertise of course you can contact HMRC yourself to explain the situation and explore the possibilities.
Usually, workable solutions can be implemented with HMRC, allowing for late payments from businesses with interest imposed over predetermined time frames. Certain penalties may be imposed, but you may be given some wiggle room if you commit to making minimum payments or contributions on time.
It's worth noting that being unable to make PAYE payments is unfortunately a fairly common occurrence for UK companies.
With the ever-rising costs of running a business, higher interest rates and inflation, supply chain issues, staff shortages, the Covid 19 pandemic and the adaptation to the post Brexit era, many UK companies have had significant challenges in recent years.
Over time, the profitability of a company can change dramatically. When the deadlines arrive for your company's tax liability, you may find that while you made significant profits in a certain period and had enough money saved to make PAYE payments each month, your company has since seen declining profitability. Now the funds may not be there to cover PAYE payments.
You need not go into panic mode if you find your business temporarily faced with this type of scenario. For directors of companies in PAYE arrears, there are several options.
Keep in mind though that PAYE rules may differ slightly in England, Scotland and Wales, whilst there are different rules for smaller and large business. There are also differences in the rules for current or closed tax years. The first step is to make payments when you can, even if they are late, as you start to incur extra costs in interest.
Daily interest starts to accrue on outstanding PAYE payments from the due date of the payment. According to the number of previous payment defaults in the tax year to date the interest charged varies from 1% to 4%, commencing from 1% after the second payment default. There are late payment charges applied when full payments are not made in a timely manner and then beyond the six month mark an additional 5% in interest is added on the remaining unpaid amounts.
So, you must contact HMRC if you find your company falling behind on PAYE payments. If you can demonstrate that you still have a functioning business and have a decent tax compliance history, HMRC might agree to a Time To Pay Arrangement and allow you six months to make the arrears payments
Another possibility is to enter into a Company Voluntary Arrangement if a longer-term solution is required. Businesses can take the route of borrowing money to make PAYE payments, though these loans may need to be secured against the personal assets of the company directors.
The last option for meeting outstanding PAYE obligations would be liquidation. However, this would result in a cessation to business operations for the company.
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