Q. Help! I haven’t put away enough tax to pay my bill by the end of January 2015. What’s your advice to help
me get back on track?
Accountant Susan Hutter says:
Your situation is certainly not an isolated case.
There are many doctor practice owners and sole traders who fall into the same trap of spending the profits and find at the eleventh hour that they have insufficient money to pay their personal tax bill/Corporation Tax bill.
That said, HM Revenue and Customs (HMRC) expects any business owner/sole trader to take responsibility of their finances and will not tolerate thinly-veiled excuses.
If you do not have the ready cash to pay the tax, you should contact HMRC in good time before the due date to see if you can arrange a ‘time to pay’ settlement.
This can be done by yourself or your accountant. Usually, HMRC will want to speak to you as well, although it is generally advisable for your accountant to open the negotiations on your behalf.
If it is a company tax liability, generally speaking, the maximum amount of time HMRC will allow on a time-to-pay arrangement is 12 months.
If it is a personal tax liability, HMRC will usually want the tax to be paid before the next tax due date.
This is usually a maximum of six months. In extreme circumstances, and if you speak to an understanding inspector at the Revenue, you may be able to stretch it further.
Either way, you have to have good reason for running out of money. If you tell HMRC that you have spent your tax funds on an expensive cruise, he will not be impressed.
Examples of the types of reasons that would be acceptable are:
- Ill health, either for yourself or a close relative, which has meant that you have not been able to work as many hours in the practice as normal and therefore have fallen behind with saving for the tax reserve;
- An unexpected business liability has arisen that you had not budgeted for – for instance, your landlord has reviewed your rent at a far higher level than you envisaged and a large amount of back rent had to be paid;
- HMRC is likely to ask you for a personal financial statement to see whether or not there are any assets that you can turn into cash quite quickly, such as ISAs and/or stocks and shares.
Also, it may ask if it is possible that you could raise an extra mortgage on your main residence or other property.
Generally, you have a good chance of achieving a time to pay arrangement if this is your first ‘offence’. This means, up until now, you have paid all your taxes, including PAYE, in time and have not asked for an arrangement within, say, the last three years.
Sometimes, HMRC will be prepared to give you some extra time to pay – although interest will be mounting up. It very much depends on how you negotiate and the reasons for not being able to meet the liability.
If you trade through a limited company, the main tax liability will be corporation tax. In these circumstances, you are not personally liable for this tax.
HMRC will therefore look at the company’s assets to see whether or not anything can be sold to raise the money.
They may also ask you if you are able to raise the money personally. However, they cannot force you to do this unless you owe money to your company.
It is unlikely that they will close the business down if there are not enough assets in the company to pay the tax, as this means they may never receive the money. HMRC does tend to be quite pragmatic about these matters.
Assuming that a time-to-pay arrangement is granted, you will pay the tax in equal instalments over the time allotted and HMRC usually requests a direct debit to cover this.
If you default on the payments, the arrangement will be automatically cancelled and HMRC will proceed to collect the balance.
The interest on late payment, currently 3% a year, will be charged together with the final instalment.
Obviously, it is best to avoid the above conundrum if at all possible, as, apart from anything else, it is a stressful position to be in.
To avoid getting into the same tax pickle next year, you may want to consider setting up a monthly direct debit in a separate bank account – which you cannot dip into for personal spending.
Ultimately, you will have peace of mind and know that the money left over is yours to spend freely.
Susan Hutter (right) is a specialist accountant for the medical profession at Shelley Stock Hutter LLP