When running a business, it is normal for market fluctuations and external factors to result in periods of financial pressure, which sometimes means there is not sufficient money in the bank to cover all running costs.
In an ideal world every business would make PAYE payments, VAT payments, corporation tax payments and meet all fiscal obligations on time. However, when this is not possible, it is wise to make sure your company avoids unnecessary penalties, talking with your accountant and communicating with HMRC.
If you do need to make tax payments after deadlines, it might not indicate terminal problems but your company will start to accrue interest on what is due to HMRC.
Generally speaking, on overdue PAYE payments daily interest is accrued after the due date of the payment. This interest amount varies from 1% to 4% depending on the number of payment defaults in the tax year, beginning at 1% after a second default on payment.
Late payment penalties are charged if full payments are not met on time and then after six months an additional 5% is applied to unpaid amounts.
Further to the interest on late payments for PAYE, keep in mind that corporation tax which is paid after due dates also accrues interest.
When your accountant submits your company tax returns – up to nine months after the company year-end - you then have to make payment of corporation tax for the previous year. Clearly companies have to plan ahead and keep a percentage of profits aside to pay this tax, although sometimes that can be difficult to do, especially when you do not know how much profit your company has made. That’s why those nine months are so important.
There are penalties for late filling of tax returns and separately there is interest charged on overdue corporation tax.
If you cannot meet the full corporation tax liability you can make a smaller payment on account before the deadline and then after that you’ll be charged interest on the outstanding amount daily until you pay it off. As of the 6th January 2023 late payment interest is 6% annually (though this is calculated daily on the amount your company owes). This is up from 7th January 2022 when the rate was 2.75% and this is due to the higher Bank of England base rate.
There are also interest charges applied when VAT is not paid on time as of January 2023.
HMRC has advised that they will ‘charge VAT registered businesses late payment interest from the first day their payment is overdue until it is paid in full’.
For VAT accounting periods before the end of December 2022 there were VAT default surcharges, but that is now changing, with penalties and new interest charges being put in place.
For VAT payments now made over 15 days after they were due companies will be required to make a late payment penalty. Meanwhile, late payment interest is applied to outstanding VAT amounts from the first overdue day right up until full payment is made, with the interest amount being linked to the base rate of the Bank of England, plus 2.5%.
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