Many businesses are facing unpaid VAT bills this year thanks to the recession leaving many customer payments outstanding, it was recently reported.
Thanks to the 2008 recession, many businesses have been left hanging as customers fail to pay debts owed from service charges and goods. As a result, many are now facing huge bills from the UK tax office as they struggle to regain their footing in the VAT field.
HM Revenue & Customs (HMRC) has reported that the amount of VAT overdue in 2013 increased by £100 million to £2.6 billion from the year before. The figures came from the firm LDF, which provides finance for business.
Small to medium businesses are only required to pay VAT after their customers have paid for services, but businesses with an income of over £1.35 million are made to pay their VAT as soon as a customer has been invoiced.
This means that businesses whose customers do not pay straight away may struggle to pay VAT on a quarterly basis, as is expected, making them vulnerable to the debts and overdue charges that missed payments can bring.
Peter Alderson, managing director for LDF, explained:
[quote]The recession saw many fall behind with their VAT payments and the recent economic upturn has done little to ease the burden.
“Some are still dealing with a backlog of unpaid VAT and other tax bills while scrambling to source funding for upcoming tax bills.”[/quote]
VAT is a type of ‘reflexive’ or indirect tax, paid automatically when we pay for consumer services or items. It is in addition to income tax and national insurance and is one of the Government’s largest sources of income.
For businesses, VAT is calculated based on the amounts of a company invoices it issues to customers, rather than the amounts it has actually received from customers.
When the recession first hit in 2008, HMRC allowed eligible businesses to put payments on hold until their financial situation improved. This was named the ‘Time to Pay’ scheme, which the tax office later started to wind down in 2011.
The closure of the Time to Pay scheme meant that many businesses continued to suffer from cash flow problems due to unpaid customer accounts, which led to financial uncertainty and missed VAT payments.
[quote]Previously businesses could rely on borrowing from the bank to fill the gap, but since the recession this has become increasingly difficult to find,”[/quote]
Peter Alderson said.
[quote]This has left many businesses, especially smaller ones, in real difficulty. Late paying customers cause huge cash flow problems even for successful and fast growing business.”[/quote]