Christmas is a busy time for many small businesses. Paying wages early, an expensive Christmas party, and the increased chance of being paid late by your customers all mean you might find yourself in pain in the first few weeks of the New Year. And just as people make resolutions for themselves at the start of the year, many businesses get ready to hit the ground running in January. It’s not an ideal time, then, to be hit with a big tax bill. But this is exactly what happens to a huge number of businesses in the UK — whether it’s PAYE, VAT, or even corporation tax that’s due, a lot of different quarterly or annual bills can come up in January.
So what can business owners do to avoid a financial hangover caused by their January tax bill?
We’re not going to suggest raw eggs, hair of the dog, or a cold shower — but here’s a few ways you can shake it off and get your business’s New Year’s resolution back on track.
What are the implications if you don’t pay your tax bill?
It’s risky business to delay paying tax you owe. Last year, they ordered 3,000 businesses to shut down because of late tax bill payments. Of course, in some cases, businesses receive a slap on the wrist. This might tempt you to take your chances, but it’s really not worth the risk, and here’s why:
If HMRC take enforcement action because you haven’t paid your tax bill, it can cause your business serious problems. They might take you to court, pass your debt on to a debt-collection agency, or even close down your business. None of those options are good — and it doesn’t matter if you can’t or won’t pay.
So the best thing you can do is pay the bill as quickly as you can. If you don’t have enough working capital to do it, or paying the bill in full would leave you in a tight spot in terms of cashflow, short-term finance might be a good idea. If you’re really struggling, talk to HMRC!
Be honest with HMRC
It sounds obvious, but keeping the lines of communication open is really important in times like this. It’s no use running around trying to get the funds together to pay if HMRC don’t know — they could take enforcement action in the meantime. So make sure you’re honest and open with them, and they know that although you can’t pay now, you’re making plans to do so.
Bear in mind that if HMRC agree for you to delay payment or pay in installments, you’ll still have to pay interest and late fees. In other words, coming to an agreement with HMRC might save you from enforcement action, but will still leave you worse off than paying the bill in full before it’s due.
If you need any more convincing that it’s a bad idea to delay paying HMRC, bear in mind that many lenders will turn you down for finance if you have an outstanding tax bill, which limits your options even further. Overall, you need to be proactive and make a plan — with an overdue bill from HMRC, the absolute worst thing you can do is nothing.
What can you do about it?
If you don’t have the working capital to pay your tax bill outright, you might consider getting short-term finance to see you through the first few weeks of the New Year. At times like this, your accountant could prove very useful — talk to them to figure out an action plan, and see if there is any wiggle room on your balance sheet.
As we’ve seen, if at all possible the best thing you can do is pay the bill in full as soon as you can. If doing that leaves you without much working capital left over, think about what would happen in an emergency. And if there’s no way you can pay it, look at all your options — talk to HMRC, and think about approaching finance providers if you need to bridge the gap. Here are some of the options worth considering:
If you don’t need a huge amount to make up the difference, a cashflow facility similar to a bank overdraft makes sense. Lenders differ in exactly what they offer, but generally you’ll agree a maximum limit, borrow up to it whenever you need to, and only pay interest on what you use — useful for short-term hiccups like a big tax bill after Christmas!
Short term loans
Term loans aren’t as fashionable as peer-to-peer lending (or so-called ‘marketplace lending’) at the moment, but could be perfect for getting you through a few weeks or a few months of temporary difficulty. They’re suitable for a wide range of businesses, although you will need some kind of security or a robust trading history.
If your firm trades on credit, January can be particularly bad for late-paid invoices from clients. With invoice finance you can get an advance of cash before your client has paid, so you don’t have to be left hanging. That means you can pay your bills on time, even if your customer isn’t doing the same!
Tax bills catch everyone by surprise — believe it or not, even accountancy firms can get a nasty surprise from HMRC in January. It’s always going to be hard to come up with a lump sum, particularly for the larger quarterly or bi-annual payments, so be prepared and have a plan. If it doesn’t work out perfectly, there’s a range of alternative finance that can help.